Prioritizing the Problem of Underfunded State Pension Systems

October 13, 2014

By Rachel White

Amidst a growing funding crisis, the School District of Philadelphia’s (SDP) state-imposed governing body, the School Reform Commission (SRC), unilaterally voted to cancel its current teacher contract this week. This latest development adds to the national discussion taking place related to state governments’ attempts to “fix” school districts in fiscal distress. Perhaps unsurprisingly, teachers – who make up approximately 40 percent of SDPs total expenditures – have been an integral part of this money-saving conversation with American Federation of Teachers president, Randi Weingarten, calling this a “war on teachers.” However, the contract cancelling is just one part of Philadelphia’s financial battle that is not tied so much to the current teacher union members but, rather, the retired Philadelphia Federation of Teachers (PFT) members and the state’s previously underfunded pension system promises.

Philly’s Fiscal Woes

The School District of Philadelphia, the eighth largest school system in the United States, has struggled both academically and financially for decades. In 2001, the State of Pennsylvania took control of the SDP due to “a total breakdown in administration as well as scandalously low test scores and graduation rates.”

Photo Courtesy of Kat

Photo Courtesy of Kat

These academic issues were just the tip of the iceberg. According to former SDP CFO Mike Masch, after the Obama Administration’s temporary federal stimulus funding ended in FY2011-12, the state increased Pennsylvania Basic Education Funding to “make up” for the approximately 60 percent of the discontinued federal stimulus. At the same time, the state was required to increase funding by $191 million for the state retirement system. On the surface, state funding increased substantially; however, the increase in state funding also meant an increase in district spending since districts were required to match the increased teacher retirement funding dollar for dollar.

Since FY2011-12, the state has contributed an additional $417 million to the teacher retirement system, which also must be matched by districts. A study by The Thomas B. Fordham Foundation shows that the total cost of retiree payments for SDP will climb from $32 million in 2011 to $139 million by 2020 as long as the state continues to increase its contribution to the state retirement system. If the state halts all increases to the retirement system, the burden will increase. What does this mean for students?

Per Pupil Costs of Pensions

If the district chooses to make budget cuts to pay for the increased pension obligation based on a typical district’s spending pattern, 56 percent ($78 million) of the impact would fall on instruction costs in 2020. On a per-pupil basis this corresponds to a rise in retirement costs of $192 per pupil in 2011 to $944 per pupil in 2020 (again, this is a best-case scenario for SDP being that it assumes state reimbursements will rise as scheduled).

Is There a Solution?

Given these looming obligations to SDP’s PFT retirees (in addition to other school funding issues that are not discussed here such the Pennsylvania Funding formula), the SRC has repeatedly been forced to make difficult cuts to the district: in 2011, nearly 17 percent of the district’s workforce was cut; in 2013, almost 10 percent of the district’s 240 schools were closed. In 2014, nearly 3,700 layoff notices were mailed and the district decided to no longer offer subsidized transportation passes to high school students who live within two miles of school.

Philadelphia is not alone in this uphill battle to get out of debt while increasing its contribution to the state’s Public School Employees’ Retirement System (SERS). Hundreds of districts here in Michigan are experiencing the same squeeze (see here and here). The Pew Charitable Trusts blamed policymakers for “failing to make annual payments for pension systems as levels recommended by their own actuaries; expanding benefits and offering cost-of-living increases without fully considering their long-term price tag or determining how to pay for them; and providing retiree health care without adequately funding it.”

As states such as Michigan and Pennsylvania experience public school enrollment decline (here and here), fewer public school teachers are employed, which means fewer teachers are paying into the states’ pension systems. Additionally, many districts in these states are enticing the oldest, highest-paid teachers to retire to save money (here and here) which means that even more people are drawing from the system. How policymakers in Michigan and Pennsylvania are going to address these issues remains to be seen. However, one thing is certain: if the current policy around SERS obligations does not change, fewer education dollars will be allocated to the education of students.

 

Rachel White — whitera3@msu.edu