Public braces for pension-fund bill

In a sort of “OK news/bad news” announcement, the state agency that oversees the teacher pension fund reported an impressive 9.18 percent return on investments from July through September.

But that came after a precipitous drop of 26.4 percent during the four previous quarters – a loss of nearly $20 billion from a fund that, two years ago, topped $67 billion.

The huge prior losses coupled with the comparatively scant recent gain will make real what many had predicted all year: a big jump in the amount school districts must pay into the pension fund starting July 1.

How that hits taxpayer pocketbooks depends on the district. The contribution rate hike – from 4.78 percent of payroll to 8.22 percent – has been long-anticipated. In fact, when the Public School Employee’s Retirement System announced the 4.78 rate last year, it added the suggestion that districts set aside extra cash to help cushion this year’s increase.

If your district took that advice, you might not see much of a jolt on your property tax bill.

If your district didn’t budget this year with an eye on a big pension contribution increase next summer, the school board might be faced with the need for a substantial tax hike. In fact, the board might have to exceed the tax hike limit set annually by the state under the law known as Act 1.

Ordinarily, districts can exceed that limit only with voter approval in the primary election. Act 1 was a move by the state Legislature to rein in school district tax hikes and give voters a bigger say in the process. But this case might prove to be an exception, quite literally.

Erratic returns

Districts have been paying into a pension fund for decades. The fund is run – quite successfully by many market standards – by PSERS, which uses three sources of income to pay defined pension benefits to educators: a fixed employee contribution, a variable contribution split between the state and school districts and the return on invested funds.

Because the employee contribution and benefits are fixed, any shortfall in investment must be made up by the state and district contributions. Conversely, when the investment market booms, the district contribution can drop while the employee rate remains the same (currently about 7.3 percent).

The district contribution rate has historically been as high as nearly 20 percent and as low as nearly 0.5 percent. In the last 12 years it has varied from 8.76 percent in 1997-98 to 1.09 percent in 2001-02. It’s important to note that the state reimburses about half that for most districts.

The low contribution rates during the early years of this decade -- made possible by a booming stock market -- convinced state lawmakers they could increase pension benefits without cost to taxpayers. The market collapsed shortly after the increase, and contribution rates jumped to make up for the investment losses.

As losses mounted, there was talk of increasing the rate above 20 percent, but the state forestalled that spike by spreading the cost over several years with smaller increases that would precede a big hike in 2012-13. As investment returns improved, the projected spike in the contribution rate declined.

Then the market took an even bigger crash last year, and the rate for 2012-13 is now projected at 29.22 percent of payroll, a six-fold increase from this year’s rate.

Amid all this, in 2006, the state passed Act 1, promising to use money from legalized gambling to lower property taxes for homeowners and farm owners. As part of that law, the state set a limit on how much districts can raise taxes each year, using a complex formula for each district that, locally, generally allows increases of 3 to 5 percent. To exceed that limit, the district must get voter approval in the spring primary.

The tax limit can be exceeded without voter approval for several reasons if the state agrees. One exception: If the pension contribution rate increase is greater than the school district’s tax limit index, taxes can be increased to pay for the difference without voter approval.

With the announcement of the rate increase, school district business managers were left scrambling to figure out how it affects next year’s budgets. They need to figure it out fast. By law, budgets aren’t due until June 30, but Act 1 requires school boards to either pass a resolution in the next two months promising not to increase taxes beyond the state limit, or pass a preliminary budget in the next two months and begin the process of a referendum or appeal to the state for exceptions to the referendum.

The tax effect

Neither the state nor PSERS provides a breakdown of the projected cost of the pension spike to each district, but here are three examples.

Dallas Business Manager Grant Palfey said he had planned on an increase in the contribution rate from 4.78 percent to 5.06 percent, which would cost the district $359,486 next year. The newly announced rate of 8.22 percent will cost nearly $580,000.

If the projected 2012 increase to 29.22 percent sticks, Dallas’s total contribution would explode to a bit more than $2 million. That’s in a district with a budget approaching $30 million.

Wilkes-Barre Area’s contribution is about $1.9 million, Business Manager Leonard Pryzwara said (the state reimburses about half the payment to each district). He hasn’t calculated what the new total will be, but if the dollar amount rises at the same rate as the percentage (1.7 times higher than the current rate), the contribution will top $3.2 million next year.

In 2012-13, it would soar to well above $11 million. The district’s total budget is nearly $98 million, though when the budget was passed in May, Pryzwara noted it included provisions to build a cushion of about $1 million that would go toward the predicted pension hike that is now a reality.

“We have some reserves in anticipation of it,” Pryzwara said. “Some school districts didn’t budget anything.”

Business Consultant Tom Melone told the Wyoming Area School Board last week that next year’s increase will push the district’s share up about $230,000, nudging the total contribution above $1 million

Even districts that did create reserves for the looming spike face a grim future with the projected contribution rates. Not only is the rate set to top 29 percent in a few years, current estimates predict it to exceed and stay above 30 percent into 2020.

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Taxpayers’ hit depends on district

Erratic returns

The tax effect

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