What Was the Pennsylvania Legislature Thinking When it Passed Act 210-46 Directing PSERS to Recertify the Employer Contribution Rate From 8.22 Percent to 5.64 Percent?

October 2010Alerts Education Alert

We have been talking about the funding crisis for paying the school district’s share of pension contributions for some time now.

For too many reasons, our existing PSERS system is admittedly unaffordable and instead of addressing the root causes of the problem (i.e., a too rich defined benefit pension plan), our Pennsylvania Legislature directed the Public School Employees’ Retirement Board to change the projected employer contribution rate of 8.22 percent for the 2010-2011 school year to 5.64 percent in Act 210-46.

The PSERS Board has been created to have the fiduciary responsibility to maintain a properly funded pension plan as required under the law and based upon the obligations of the plan concluded that for the 2010-2011 school year the contribution rate should be 8.22 percent.

Our State Legislature should frankly be ashamed of itself by changing that rate from 8.22 percent to 5.64 percent, which effectively creates an underfunded obligation for upcoming fiscal years.

As the result of this inane action, the projected contribution rates moving forward (assuming an 8.5 percent return of investment) are as follows:

2008-2009 4.76%
2009-2010 4.8%
2010-2011 8.22% changed to 5.64% by the Act of the State Legislature
2011-2012 10.70%
2012-2013 29.55%
2013-2014 32.45%
2014-2015 33.95%

Though it might sound politically popular for the State Legislature to lower the PSERS contribution rate, from a purely fiscal and accounting standpoint, the action was irresponsible. In fact, I have not heard one justification to support why the State Legislature did this, other than trying to stem the outcry on the amount of contributions that will need to be made to fund a pension system that not only benefits our public school employees and state employees, but also the legislators who vote on the system.

I am fully aware of the challenges that it will take to reform and cure the PSERS issue. The fact is if our State Legislature does not address this issue, the system will collapse under its own weight. When I say the “system,” I am not only talking about PSERS, but the educational system as we know it. Our taxpayers in the Commonwealth of Pennsylvania and our school districts cannot continue to afford to pay its upcoming obligations on the PSERS program.I am certain that the State Legislature will come forward with other “brilliant” ideas, such as reamortizing the debt and spreading on the costs of the pension program to our children and grandchildren. We simply cannot continue to afford to do this.

In the private sector, many industries that have stayed solvent have properly addressed their defined benefit pension plan.

The PSBA proposal is certainly a good early step in that direction, but it simply is not enough. What PSERS needs to do is to grandfather certain individuals already in the pension program and provide them their pension benefits as part of the program. The non-grandfathered individuals would have to be subject to a new and less costly defined contribution plan.

I am mindful that there is case law that indicates that there may be some protection for existing PSERS participants, but I am not convinced that legal position will stand. That issue needs to be squarely addressed by our State Legislature, and we simply have to fashion a system that we can afford to fund in the future.

What has been done very frequently under the National Labor Relations Act and in accordance with law is to freeze participants in a pension plan as of a date certain. In other words, all of the contributed benefits to date will eventually result in what their ultimate pension amount would be. As for future accruals, they could be on a defined contribution basis.

This issue needs to be resolved and politically palatable solutions of simply lowering the PSERS Board’s contribution rate is the most unacceptable way to deal with a financial crisis that our State Legislature does not seem to want to address.

What were they thinking?

If you have questions about this Alert, please contact Jeffrey T. Sultanik or any member of Fox Rothschild’s Education Practice.