Taxpayers may get bitten for shortfall
HARRISBURG – Taxpayers could be asked to pay for blows dealt to the state pension fund for school retirees over the past two years. Suffering from the effects of a recession, the fund lost roughly 9 percent – or $4.5 billion – of its total investments for the fiscal year that ended June 30. The previous fiscal year, 2000-2001, it lost $3.8 billion.
Investments must grow annually by at least 8.5 percent in order to prevent increases in the amount of money school districts must contribute each year to the fund. School districts would have been hit hard this year had the Legislature not acted to delay a large increase.
But next year school districts might not be so lucky. School officials around the state expect to be hit up by pension officials for much more money to make up for the $8.3 billion in losses over the past two years.
And that means local property taxes could soar.
“There’s no question about it,” said Tom McCambridge, finance director of Central Bucks School District in Bucks County. “They’re going to have to be increased to keep pace with this.”
Robert Appel, vice president of Ambridge’s School Board, agreed.
“Unfortunately, that’s exactly what’s going to happen unless they come up with something else,” he said. “There’s nothing we can do about it, and sometimes taxpayers don’t understand it. I don’t know what we’re going to do next year. It’s a dilemma we’re all looking at. It’s a subject that comes up at every one of our meetings.”
The Pennsylvania Public School Employees’ Retirement System provides pension benefits to school employees, including teachers, administrative staff and janitors. PSERS has 240,000 active members and 138,000 retirees and beneficiaries receiving benefits.
Pensions are calculated using a two-tier formula. Pensions are calculated for employees who retired before July 1, 2001, by averaging their three highest salaries and multiplying it by a percentage equal to the number of years worked times two. For example, a 30-year teacher whose final average salary was $80,000 would receive a $48,000 annual pension, calculated as 60 percent (30 years times two) of $80,000.
Employees who retired after July 1, 2001, are eligible to participate in a pension plan that calculates pensions by averaging their three highest salaries and multiplying it by a percentage equal to the number of years worked times 2.5.
For example, a 30-year teacher whose final average salary was $80,000 would receive a $60,000 annual pension, calculated as 75 percent (30 years times 2.5) of $80,000.
School employees and the school districts that employ them are required to make annual contributions to the fund, the rates of which are determined by PSERS’ actuary. School districts this year are contributing 1.15 percent of employees’ salaries, but the state reimburses districts for half the cost. School employees contribute an average of 5.8 percent of their salary.
When the economy is good, there’s less reliance on school districts to fund the pension plan, but when economic times are bad, school districts assume more of the burden.
School districts’ contribution rate was as high as 20 percent in 1985-1986. In the 1990s, the economy boomed and the pension plan made a killing in the stock market. The fund’s assets grew from about $17 billion in 1990 to a peak of about $52 billion in 2000. During that time, the contribution rate gradually declined, going all the way down to 1.09 percent last year.
But a queasy economy, further damaged by corporate scandals such as those at Enron and WorldCom, has caused the fund to lose about 16 percent of its value in the past two years. PSERS lost $59 million as a result of the Enron collapse and $52 million as a result of WorldCom’s failure.
The market value of PSERS’ investments at the end of the most recent fiscal year, on June 30, 2002, was estimated at $43.6 billion.
Because employees’ pensions are guaranteed, the money lost must be made up somewhere.
After losing $3.8 billion in investments in 2000-2001, PSERS officials said the contribution rate would need to increase to 5.64 percent to make up for the losses. Many school districts complained they would have to raise taxes substantially to fund the increase.
The state Legislature responded by passing legislation that changed the way the contribution rate was determined. Instead of using a three-year average of the pension’s losses and gains, a five-year average is now used. This softened the blow of the pension’s dismal market performance in 2000-2001 and allowed the contribution rate to be readjusted to 1.15 this year. But school officials said lawmakers essentially delayed for another year the inevitable: a big hike in school districts’ contribution rates.
The contribution rate was projected to go up to 3.85 percent in 2003-2004 and 9.53 percent in 2004-2005, and that was assuming an 8.5 percent growth in investments in 2001-2002. Since the fund lost 9.3 percent during the 2001-2002 fiscal year, the contribution rate could well exceed the projected 3.85 percent next year. The actual rate will be set in December.
Abington School Board member S. Shirley Weiss said she is outraged by the imminent increase.
“No one can afford this type of increase,” Weiss said.
“It would be prohibitive. As taxpayers, we have to fight this type of increase.
“There has to be a law made where there is a cap.
“I, too, lost money in my pension plan, but nobody is making up for it. So, if your pension plan is invested, that is the risk you take.
“I don’t think taxpayers should have to make up for it.”