By Rick Staedtler
Jun 14, 2018 Editor’s note: Because the pension crisis is such a critical issue in Pennsylvania, we dispensed with our usual word limit for today’s guest opinion.
As school directors finalize their 2018-2019 budgets, much attention is understandably focused on teacher salaries. A cursory examination of preliminary budgets shows equal or greater attention should be placed on the staggering employee benefit ratios in public education versus those in the private sector.
In Council Rock, for example, teacher and support staff benefits approximated 61 percent of salaries for the fiscal year ended June 30, 2017. At Pennsbury and Neshaminy the ratio approximated 58 percent. According to the Bureau of Labor Statistics, the Pew Trust and other sources the ratio for all U.S. employees ranges between 30-44 percent. Why are the benefits for teachers and support staffs so costly?
The simple answer is pension costs. Almost all Pennsylvania public school employees belong to the Public School Employees Retirement System. Teacher pension benefits are funded roughly 50 percent by the state and 50 percent by local school districts and are guaranteed by the state, i.e., taxpayers. For fiscal 2018 the pension contribution rate is a mind-boggling 32.57 percent or almost 33 cents for each dollar of wages.
Compare that with the average private sector employer retirement cost. The Bureau of Labor Statistics reports that while 78 percent of public sector employees enjoy pension plans, only 13 percent of private sector employees have them.
The average private sector employer pays a 3-4 percent matching 401(k) contribution and bears no market risk thereafter. That risk passes to the employee.
Many teacher organizations falsely blamed the current pension crisis solely on the 2008-09 stock market crash and state and districts’ failure to make timely contributions. A succinct review of stock market gains, employer contributions and unfunded net pension liabilities of PSERS for the period July 1, 2014, to June 30, 2017, shows that PSERS’s unfunded net pension liability increased 27 percent despite record employer contributions and a 26 percent stock market gain.
Unfunded net is recorded as follows: for July 1, 2014, pension liability was $35.1 billion with a Dow Jones average of 16,852. For June 30, 2015, the contribution rate was 25.84 percent, pension liability was $37.3 billion with a Dow Jones average of 17,596. For June 30, 2016, the contribution rate was 30.03 percent, pension liability was $42.7 bilion and the Dow Jones average was 17,694. Lastly, for June 30, 2017, the contribution rate was 32.57 percent, pension liability was $44.5 billion and the Dow Jones average was 21,287.
School district shares of the liability are huge. Locally, the unfunded net pension liabilities of the three districts increased 25 percent in the same two-year period ended June 30, 2017: Council Rock’s unfunded net pension liability was $331.5 mllion on July 1, 2015; $358.9 million on June 30, 2016; and $409.7 million on June 30, 2017. Neshaminy’s unfunded net pension liability was nearly $229.4 million on July 1, 2015; nearly $252 million on June 30, 2016; and $289.5 million on June 30, 2017. Pennsbury’s unfunded net pension liability was $276.7 million on July 1, 2015; $309.9 milion on June 30, 2016; and $346.7 million on June 30, 2017.
The obvious question is why are unfunded net pension liabilities increasing significantly despite a booming stock market and record employer contributions. The answer should be obvious: The huge pension benefits paid teachers are unsustainable.
At Council Rock most 40-year teachers with an MA will retire with a six-figure pension for life, including many retiring at 62-63. At 66 or 67 they will receive another $20,000-$22,000 in Social Security so that they will be collecting more in retirement than in their peak salary years. By contrast, the average retiree will collect $32,000 to $40,000 in both retirement and Social Security or no more than a third of what the average 40-year Council Rock teacher with an MA can expect. The salary of a classroom teacher with a masters degree plus 30 additional college credits is $110,743 for the of maximum of 5 classes a day with each class limited to 45 minutes for five days a week for the school year .
PSERS assumes a 7.25 percent investment return year after year. A small failure to achieve this earnings rate increases the unfunded net pension liability disproportionately. At Council Rock, for example, a 1 percent decrease in earnings to 6.25 percent increases Council Rock’s unfunded net pension liability 22 percent from $409.7 million to $501.2 million or over a half-billion dollars just for one district’s share of the net pension liability. Who is ultimately liable for any such increases? Taxpayers, of course. They must not only bear the losses in their own 401(k) accounts but also fund the failures in the teacher pension accounts.
Many erroneously believe the pension reform of 2017 solved the pension crisis. Not even remotely. It merely slowed the bleeding slightly. First, it is not effective until July 1, 2019. Second, it is only mandatory for new employees.
The best reform would be to freeze the current teacher pension plan prospectively (not retroactively) and replace it with matching 401(k) plans and contributions like the private sector, reducing the market risk for taxpayers. That at least stops the bleeding. The state Legislature has the authority but not the will to do this.
In 2015, Gov. Wolf vetoed pension reform that would have accomplished much (not all) of what we needed. If he is re-elected, meaningful pension reform is dead: He received massive teacher and teachers’ union contributions last election cycle. Even if a Republican is elected, reform is not assured. Last election cycle virtually all Democrats received teachers’ union contributions and so did a few Republicans — especially in Bucks — perhaps just enough to defeat real reform.
Rick Staedtler, Holland, is a CPA and 22-year Army veteran, including service in Vietnam.