Pension History 101

Grab a cup of coffee – you want to be wide-awake for this class. It’s time to delve into the history of the “pension crisis” that is now upon us. As you have no doubt noticed, pensions have become a key issue in the education funding debate, with Gov. Corbett arguing that he has increased funding to school districts by increasing the state’s share of pension contributions. Since school districts by law must match those contributions, as they increase their own pension payments they are seeing an actual depletion of funds available for educational purposes; districts argue that, combined with the state’s other cuts to public education, schools are really millions in the hole.

However you want to slice that debate, we need to understand more about how pensions are paid and who makes those decisions to fully appreciate the magnitude of the current problem. Stick with us, this is really important stuff. For today’s history lesson, we turn to the inestimable work of Paul Foster, a Yinzer Nation parent with a penchant for numbers and government policy.

The state operates two pension funds: the State Employee Retirement System (SERS) and the Public School Employee Retirement System (PSERS). Each fund is separate, with its own board and regulations, and each fund sets its contribution mandate (how much and who has to pay into the system) based on actuarial forecasts and following laws passed by the State Legislature. From here forward we will just look at PSERS, since that is the system most directly affecting public K-12 education funding.

In addition to the state, school districts and employees must also make contributions to the fund. School districts are the “employers” here, but by law, the state shares the employer burden 50-50. However, the state alone decides what that total burden will be. Starting in 1995, Pennsylvania began decreasing the amount it contributed to PSERS. The following chart indicates the trend for PSERS by graphing the history of total contributions to PSERS from all sources (state, school district, and employee):

From 1999-2010, the Legislature implemented a variety of changes to the fund: increasing the benefits paid out, changing the rules for employer (school district/state) contributions to reduce the employer (school district/state) burden, and altering the rules for smoothing the variation in contributions due to the variations in the fund’s stock market performance.

The state contribution became variable – if the fund’s investments in the stock market did well, the state’s contribution could shrink. If the fund’s performance was poor, the state stretched out the smoothing period over which the market loss would be covered by increased contributions. The following chart shows the state’s contribution to the pension fund compared to total contributions:

Note that during this period, the employee contribution burden either remained steady or increased. All of the declines in contributions were due to declining state contributions. State contributions began to decline under Gov. Casey, continued to drop under Gov. Ridge, and almost hit zero under Gov. Schweiker. In addition, the state raised payout benefits in 2001 but made no provision for additional contributions to fund the additional benefits. Although the employer contributions (paid by school districts and the state) rose again slightly under Gov. Rendell, the contribution level never recovered to the level it had maintained in previous decades.

Remember, local school boards are required to match state contributions dollar for dollar. When the state contribution was lowered, each local school board automatically saw a budget windfall from its decreased obligation. Some of those windfalls were better spent than others. Most boards used the windfalls to support increasing costs in programs without being forced to raise taxes. Given the quality of financial data they were supplied, most boards undoubtedly believed they were spending prudently.

But as Paul Foster says, here’s where you better sit down. By 2001, we had a recipe for disaster with more retired schoolteachers in the pension system than actual teachers working. Pennsylvania started seeing a dramatic spike in payouts to beneficiaries compared to actual employer and employee contributions. As you can see from the following graph, employee contributions (listed as “Member Contributions”) have increased steadily for the past thirty years, and since 2000, have actually exceeded employer contributions.

Note that these are dollar amounts with the last 3 zeros missing, so 500,000 is $500 million, and the number that looks like $5 million at the top is $5 billion.

Here’s the kicker: all of this was foreseeable, and was foreseen. Pension funds routinely hire actuaries and accountants to make forecasts on payouts. The fund supplies these experts with the age and earning history of their members along with the contributions and rules by which each member’s pension will be calculated on retirement. The actuaries then use mortality statistics, census numbers, demographics trends, and expected retirement dates to calculate a payout stream for each cohort of retirees. The work is tedious, but especially for public employees, who overwhelmingly tend to stay with one employer throughout their career (or at most switch schools within the state), the predictions are very accurate.

Starting in 2003 and continuing through 2010, the independent audit reports and actuarial projections for the fund began to forecast an upcoming funding crisis: the 2013 “pension spike.” Within three years, every single school district in the state will be paying 25% of its payroll to the pension fund. To put that in perspective, a few years ago, we were only paying about 5% of payroll to the fund. That twenty percentage point increase is the equivalent of eliminating a fifth of your teachers – 1 in every 5!

Every action passed by the Legislature during the past decade made the total cost of the pension spike worse. In fact, it’s no longer a “spike,” which implies a sharp though temporary increase, but rather a tall mountain of burden school districts must climb, only to find a high plateau waiting for them. In other words, this problem isn’t going away, and this is only the beginning. The state has been under-funding the pension system for twenty years, despite numerous warnings, through Democratic and Republican administrations alike.

The only way off this mountain will be through exceptional bi-partisan effort. The good news is that people in every corner of our state care about their schools. We can all agree that well-educated students are critical to Pennsylvania’s future. It’s time for our legislators to get a backbone and dig into the hard work of finding bi-partisan solutions. Because we’re all in this together and we can’t stop until we have secured sustainable and equitable state funding for public education.

5 thoughts on “Pension History 101

  1. Very thoughtful analysis, Paul! Thank you. I wonder what topics the bipartisan efforts that you refer to would include? I also wonder if after the finalization of this year’s state budget (hopefully with an increase), if Yinzercation has a role in helping the public (taxpayers)sift through the issues facing public education with regard to a “bi-partisan” solution? As a collective group of educated taxpayers, we might want to roll up our sleeves and challenge partisan politics on this issue and hold the “powers-that-be” who contribute to this debacle accountable through this public forum? The public deserves a straight-shooting source of information (without the political baggage) as it concerns public school financing,

    • Samantha, I’m happy to dig up whatever information I can find on education funding, it’s sort of a hobby of mine. Thanks for your interest.

      You raise an interesting though very sore point concerning accountability, especially with an election in a couple weeks. Yinzerland is unusually well-represented from both parties in the current Legislature’s leadership: Mike Turzai, Frank Dermody, Dan Frankel, Dick Stevenson, Dave Reed, Joe Markosek, Jay Costa, probably someone else I’m forgetting, maybe Joe Scarnati if you go far enough north.

      Thanks to the power of incumbency, the good news is that they can all be placed at the scene, even back in 2001. Republican and Democratic legislators essentially ran a deficit this past decade that we now have to pay back, and these new legislative stars were there (the old ones have been convicted or are under indictment, but that’s another story).

      The bad news is incumbency is a double-edged sword: they’re all running unopposed, and the opposing party in their district, whether Democratic or Republican, hasn’t even bothered to field a candidate for the primary, so they’ll be unopposed in the fall as well.

      My guess is that they don’t particularly care what we think, but will take appropriate postures to simulate concern. The sad fact is all they have to do is barely go through the motions. No one’s held them accountable before, it’s reasonable for them to assume no one will at next week’s election.

      My guess is they won’t be held accountable in the next one in two years either, even though we’ll be paying something like 10% of the entire General Fund toward SERS and PSERS, raising property taxes and cutting programs like crazy yet again, all to pay back a deficit we never should have had in the first place.

  2. Hi Jessie, just a quick correction to the information I gave you. By 2001, we had a recipe for disaster, with a projection for SERS of more retirees than active employees by 2013, and with PSERS dramatically lowering its ratio of active employees to retirees from 1.8:1 to 1.5:1.

    Sorry about the error, my bad for working on more than one tedious pension project at a time.

  3. Paul,

    I worked in both public education and as a city manager in a distressed municipality. The city always receved a mandated minimum obligation of its contributions to the employee pension fund. Do school districts also receive such a mandated mimimum obligation? If so, why is it being discussed as descretionary? How many years out can a school district smooth out its pension obligations as reported funding liabilities?

    Curt Davis

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