Districts bracing for pension fund hit

From the BCCT. Speak of the devil...here's the school board budget increase mechanism warming up.

Districts bracing for pension fund hit
By GARY WECKSELBLATT

The devastating downward spiral of the stock market may be sickening to stomach but it’s not likely to burden taxpayers with dramatically higher payments to the public school pension system — until the 2010-11 school year.

When the Public School Employees’ Retirement System board meets Dec.12 to determine the taxpayers’ contribution for 2009-10, it will use its investment-performance numbers through June 30, when the fund was flush with $62.7 billion after a setback of only 2.8 percent through the last fiscal year.

But since that time, the S&P 500 index, often used as a baseline for comparison with pension funds, has dropped 40 percent, meaning the PSERS pension fund has likely dropped more than $20 billion.

“I don’t know how you make up for the tens of billions of dollars that aren’t there,” said Jack Myers, business manager for the Bensalem School District. “One has to assume the recession will eventually be over and there will be some sort of rebound.”

PSERS, which assumes an annual return of 8.5 percent for its pension fund, is the 14th largest defined benefit pension fund in the country. It has 264,000 active school employees and 168,000 retirees. Members contribute between 5.25 to 7.5 percent of their salary to help fund their retirement.

During this past year, school districts budgeted 4.76 percent of teacher salaries for the pension fund. That was down from 7.13 percent in 2007-08.

In a letter to school districts last December, John Godlewski, the state department of education’s former director of budget and fiscal management, recommended that districts disregard the lower number and set aside money at the 7.13 percent rate in preparation for future increases.

He called the 2012-13 school year “a pension contribution crisis unless the state takes action soon.”

Changes to PSERS’ funding formulas through state legislation in 2002 and 2004 lowered the employer contribution rate for several years before it is projected to increase sharply to 11.23 percent in fiscal year 2012-13.

The employer contribution rate is an actuarially determined rate that is the percentage of payroll the school employers are required to pay into the state’s pension fund so it has enough money to pay retirees. The Commonwealth reimburses the school districts for approximately half of the employer contribution rate.

Godlewski said the DOE was “optimistic that comprehensive pension reform legislation … can be enacted before July 2008.”

It never was.

Sylvia Lenz, business administrator for the Quakertown School District, said “Our concern has been that the rate is too low. Why is that not being taken care of now?”

Part of the problem might be the state’s own budget problems. Should it legislate to raise the districts’ contribution, it would be on the hook for more money as it compensates the schools.

Robert Reichert, director of business affairs for Hatboro-Horsham, said his district took the advice of Godlewski to set aside more money for pension contributions.

“We wanted to avoid a one-year spike in the rate that would hurt taxpayers,” he said. “I’m a proponent of the leveling strategy.”

These warnings were made well before the pension fund ended the fiscal year down 2.8 percent and before the subsequent market carnage.

Asked if she’d consider putting away more money this year in preparation for a potential catastrophe a year from now, Lenz said “Our auditors have said they’re not comfortable with us doing that.” Districts are limited to carrying no more than an 8 percent fund balance.

In the four years before this year’s 2.8 percent loss, PSERS’ returns had been “phenomenal,” according to spokeswoman Evelyn Tatkovski, earning 19.67 percent, 12.87 percent, 15.26 percent, and 22.93 percent.

“Rest assured that your pension benefit is safe,” he stated. “Your pension benefit is guaranteed by law and will not be affected by the downturn in the financial markets. As a member of a defined benefit pension plan, like PSERS, your pension benefit is based on your final average salary and years of service. The ups and downs of the investment markets do not impact your pension benefit.”

The words may not provide solace to taxpayers, who at some point will need to dig deeper to replenish losses to the public sec tor while their private accounts have been badly damaged.

And it’s not just the bear market taxpayers will be on the hook for. There are also spiking electric rates, increasing medical insurance premiums and volatile fuel prices impacting school district budgets.

“It’s a combination of things that’s very challenging,” Myers said. “I can’t imagine the revenue picture getting brighter time soon.

“The big story is likely to be a year from now.”