Pension reform proposal
Local school officials are taking a dim view of legislation recently approved by the state House to address the looming school pension funding crisis.
House Bill 2497 would give districts some breathing room on pending huge increases in payments into the Public School Employees' Retirement System, they said.
But the legislation wouldn't do enough to alleviate the system's long-term liabilities.
In other words, the pension crisis is still going to hit taxpayers hard in their wallets.
"It's a good first step, but it's not nearly enough for what we need," said Michael Rowen, co-chairman of the School District of Lancaster board's finance and operations committee.
Local lawmakers say the bill is just a start, and they're hoping to accomplish more significant pension reform in the future.
The legislation, approved June 16 by a vote of 192-6, has been sent to the state House Finance Committee for consideration.
The bill would delay and smooth out a proposed jump in pension costs and cut future pension liabilities by reducing benefits for newly hired teachers, administrators and other school employees.
School districts and the state share the cost of contributions into the PSERS system, based on a percentage of each district's total payroll.
This year, that rate is 4.78 percent. In two years, the rate is projected to jump to 29.22 percent and stay at or above that level for the next eight years before gradually dropping below 20 percent in 2033.
The huge increases are necessary to pay for unfunded liabilities that resulted from recent stock market losses, previous underpayments into the fund by school districts and the state and benefits enhancements.
Unless changes are made, the rate spike would boost districts' pension costs nearly sixfold by 2012-13, costing Lancaster County's 17 school districts an extra $59 million, most of which would be borne by taxpayers.
•••
HB 2497 would drop next year's contribution rate as low as 5.64 percent and keep rates below 20 percent for the next four years. Rates would continue to rise, but at a more gradual pace, peaking at 28.91 percent in 30 years.
In addition to re-amortizing PSERS' unfunded liabilities, the legislation would cut pension benefits for new employees by 20 percent — unless they agreed to pay more into the system.
Employees now pay about 7.3 percent of their salaries.
The bill also would increase the standard retirement age from 60 to 65 and the PSERS vesting period from five to 10 years and eliminate a provision that allows employees to withdraw all of their contributions upon retirement.
Those changes are projected to save about $25 billion in future PSERS expenses, but spreading the liabilities over a longer period would cost an additional $52 billion in payments and interest.
School officials say they're glad the state is addressing the pension crisis, but the bill doesn't do enough.
Lawmakers need to consider adding a defined-contribution plan, such as a 401(k), to the existing defined-benefit plan, said Marylynne Kniley, director of finance for Hempfield School District.
School districts and the state now shoulder all the risks if pension fund earnings fare poorly — as they did in 2008 and 2009, when the plan lost nearly $20 billion in value.
"Having some shared risk between the employees and employers would be logical and should reduce costs if it were included," she said in an e-mail.
Kniley also dislikes the proposed reduction in the employer contribution rate next year, saying it would "delay the inevitable and underfund the system for another year."
"While that may offer some temporary relief for all of us in the short term, it is another solution that does not take a long-term view of these issues," she said.
And Kniley said the state should have cut future liabilities even more by increasing the number of hours part-time employees must work to become PSERS members.
School staff members currently must work less than three hours a day to meet the 500-hour minimum, she said.
Cocalico School District Superintendent Bruce Sensenig said HB 2497 "is just shifting the problem down the road in some sense."
Gerald Huesken, superintendent of Conestoga Valley School District, agreed.
"Re-amortization of the current liability over 30 years will help to mitigate the rate spike in 2011-13, but it will increase the cost in the future," he said in an e-mail.
•••
The bill hasn't exactly won over public school advocacy groups, either.
The Pennsylvania School Boards Association and the Pennsylvania Association of School Business Officials declined to endorse HB 2497.
"While the bill reduces the (rate) spike, the price is a rate in excess of 20 percent for schools through 2042," PASBO executive director Jay Himes, said in an e-mail.
"The total cost to schools is enormous."
The PSBA says the state must come up with a new source of revenue to fund pensions.
And both groups say more changes are needed. PSBA favors a new hybrid defined-benefit/defined contribution plan, while PASBO supports pension reductions for all employees, not just new hires, a move that would surely prompt a court challenge.
The bill has, however, won the endorsement of the state's teachers unions, the Pennsylvania State Education Association and the American Federation of Teachers.
Local legislators agree HB 2497 could do more, and they expect to push for more changes after a new governor takes office in January.
"In my opinion, it's a step in the right direction," said state Rep. Scott Boyd of West Lampeter, who tried unsuccessfully to amend the bill to include a defined-contribution component, something he strongly supports.
"This is buying some time, but it still has future employee contribution rates that are not sustainable. I think there's a need for continued discussions and even more changes in the future."
State Rep. Pat Browne of Allentown, chairman of the Senate Finance Committee, said he doesn't expect the bill to come up for a vote in the Senate before the Legislature approves a new budget.
The Senate will consider adding a defined-contribution plan and other changes after analyzing the earnings projections and re-amortization periods proposed in the bill.
"Coming to agreement on this is a serious matter," he said.
"I think if the members (of the Legislature) are serious about the reforms necessary to move our state forward in a positive way regarding pensions, it's definitely possible" to craft a compromise bill that will win approval, he said.
"The important thing is that we get it right."