HARRISBURG (TNS) — Pennsylvania’s public schools’ retirement cost crisis is still a raging fire consuming billions of dollars of taxpayer dollars a year, but at least it’s stopped growing.
A Public School Employees Retirement System committee on Thursday moved to charge school districts 35.26% of payroll to fully fund pension system costs in fiscal 2022-23. That percentage, called the employer contribution rate, means the state and school districts together are obligated to pay an extra $35.26 for every $100 of paid salary to cover pension system costs.
In the current budget year, with an employer contribution rate of 34.94%, that equated to just under $5 billion in costs, roughly split between the state and its 500 local school districts.
The new rate will be formally ratified by the full PSERS board Friday.
The best news, PSERS officials told its Budget and Finance Committee members Thursday, is that this raging retirement cot bonfire has already done most of its growing. That’s because the state is now fully covering past and future pension system obligations, and benefits for teachers hired after 2019 have been trimmed.
So while this punishing retirement tax will be affecting state and school district budgets through 2035 when the contribution rate is now expected to peak, future rate increases should be at or below the rate of inflation, Chief Financial Officer Brian Carl said, meaning local school boards should have a little easier time absorbing the costs going forward.
The year-over-year percentage increase in the ECR for 22-23, for example, is less than one percent.
“That’s the best we can do for employers at this point,” Carl said Thursday. “We can’t get the rate to go down but we can get it as flat as possible.”
The pension system is always funded by a three-legged stool that includes payroll contributions from active employees, investment gains on those contributions, and the employer contributions.
Pennsylvania’s pension funding crisis has its roots in benefit changes approved by the state legislature and Gov. Tom Ridge in 2001, when pensions for teachers, state employees and top state officials were increased for those retiring after that year based on several years of bull market investment returns even though the retirement systems’ financial foundation was not built to carry the weight of higher benefits.
That first bad decision was compounded by subsequent moves to essentially mortgage the cost of the new benefits in a way that the state did not fully fund the systems for nearly a decade.
The correction has been underway since 2010, leading to seven straight years of double digit increases in the employer contribution rate that saw it skyrocket from 5.64% in 2011 to 32.57% in 2018. At this point, Carl said, more than 80% of that employer contributions are being use to pay past unfunded liabilities.
The system’s “funded ratio” — or the value of its current assets versus all obligations owed — has stopped sliding as a result, growing from 56.5% in 2018 to 59.6% at present.
It’s important to note that there is no real threat that pension payments owed to retirees will not be paid; but as the unfunded liability grows the onus is on the investment returns and/or tax-funded contributions from state government and local school districts to keep it solvent. That, in turn, eats up scarce tax resources that could be used in other areas, and has steadily driven up property tax rates in most areas of Pennsylvania.
PSERS is the single-biggest public employee pension fund in Pennsylvania and one of the largest in the nation. In fiscal 2020-21, it sent about $6.3 billion in pension payments to about 240,000 former school employees.
