The Growing Need to Address the Pennsylvania School System Funding Shortfall and the PSERS Crisis

By: Jeffrey T. Sultanik, Esquire, Chair of the Education Law Group, Fox Rothschild LLP

A majority of school districts in the Commonwealth of Pennsylvania have been severely impacted as the result of the Great Recession. Many school districts that have a substantive commercial tax base are experiencing declining real estate tax revenues as the result of declining values and numerous real estate assessment appeals. Districts are also experiencing little or no transfer tax revenue as the result of no real estate exchanges and limited growth; static or eroding earned income tax revenue; no real expansion in the tax base; and a Commonwealth of Pennsylvania that is literally “broke” because it had to use stimulus monies to support the basic education subsidy for the 2009-2010 fiscal year. Recognizing that the State will be in a precarious situation as the result of using ARRA funds for the 2009-2010 and 2010-2011 school years, Governor Rendell in his recent budget message created a fund for the purposes of building up the State’s coffers to deal with the funding shortfall that will necessarily take place as the result of the missing ARRA funds for the 2011-2012 tax year.

All of the statistics are coupled with the PSERS’ crisis (Pennsylvania School Employees’ Retirement System). For nearly 100 years, the PSERS has been a stable and secure pension program that provided public school employees with a stable and secure retirement. The PSERS’ program provides for unparalleled retirement security for State public school employees by providing a lifetime guarantee of retirement income based upon an average of the three highest years’ salary of the teacher that would be multiplied by a 2.5% per year service rate times the years of school service times an early retirement factor. The program is in the nature of a defined benefit versus a defined contribution pension plan.

As a result of a 25% increase in benefits that took place in 2001 and legislation prompted to defer school employers’ obligations for making contributions in the 2001-2003 time period as the result of Enron losses in the fund, school districts did indeed benefit from a contribution respite. However, the recent economic cataclysm has created a crisis of unprecedented proportions for school entities in the Commonwealth of Pennsylvania.

Based upon a projected 8.5% rate of return on investments, it is expected that the employer contribution rate will increase as follows from 2008-2009 through 2014-2015:

2008-2009

4.76%

2009-2010

4.78%

2010-2011

8.4%

2011-2012

10.7%

2012-2013

29.55%

2013-2014

32.45%

2014-2015

33.95%

These numbers clearly have the potential of bankrupting every school entity in the Commonwealth of Pennsylvania. Though it is true that the Commonwealth of Pennsylvania currently reimburses school districts for one-half of the PSERS’ rate, one has to question how long the Commonwealth of Pennsylvania will continue to fund the 50% share given the State’s economic problem.

To date, the Commonwealth of Pennsylvania State Legislature has not effectively addressed this issue. Indeed, one can seriously speculate that the reason that the State has not dealt with this issue is that State legislators are also the beneficiaries of a similar State program.

Unless the PSERS’ issue is successfully addressed, I cannot see how school districts can enter into any longer term arrangements with teachers’ unions given the cataclysm that exists around the corner.

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