The School District of Philadelphia's financial woes
became a national story last week when the New York Times featured a piece on the district's efforts to borrow $50 million to make up a significant funding shortfall that actually threatened the start of the school year. In that piece the reporters attributed the district's problems to a range of issues, including rising pension costs and cuts to state education aid, but the piece also noted that it was unclear exactly what the system owed on pensions.
However, a research piece earlier this year (
mentioned in this June PSI blog item) by the Thomas Fordham Institute paints a grim picture of the burden that pensions are having on the school system, a burden that will grow sharply in coming years without reform.
The tale of Philly's schools' pension woes is an all-too-familiar one. When the stock market was performing well in the 1990s, the PSERS system (Public School Employees' Retirement System) used the opportunity to give school districts and the state, which contributes more than half of pension costs for schools around Pennsylvania, a pension holiday. After the market slumped in 2000 and remained in trouble for the next several years, the system kept up the illusion that it was well funded by using smoothing techniques which blended the recent performance of the fund with prior years when the market was doing well. That allowed the system to keep funding demands from school districts low (near zero in 2002, for instance) even as the liabilities in the system grew larger.
In 2003, the state legislature saw that the funding formulas the system used to determine annual contributions from the state and districts would cause annual taxpayer contributions to soar in coming years because of poor system performance. So they did what so many others did at that time: they punted. Assuming that an economic recovery would ultimately fix the system, the legislature put in place a new funding formula that kept contributions into the system unusually low.
Instead of a recovery, of course, we got a financial nightmare starting in 2008. In an underwhelming bid for reform, in 2010 the legislature reduced benefits for new hires, but that didn't address the underfunding of the system thanks to liabilities for current workers. Still looking for a way out of rising contributions, the legislature also capped contribution rates for school districts at 5 percent of payroll, well below what was necessary to fix the system. Meanwhile, the system's funding level slipped to 66 percent, and was projected to fall to as low as 56 percent by 2018 thanks to continued low contribution rates.
In its research report, the Fordham Foundation uses the PSERS system's projections of future contribution rates to estimate what Philadelphia's school system will need to pay in coming years to adequately cover its obligations within the state's teacher pension funds. It estimates a rapid increase in district contributions from $32 million in 2011 to $139 million annually by 2020, assuming that the state continues to increase its share of funding for Philly's teacher pensions. But that's a big assumption because the burden on the state will grow, too. The total bill for annual pension contributions to the Philly school district by 2020 will be $349 million, meaning that the state will have to kick in $210 million annually by 2020 (it's currently spending $73 million as its share of Philly pensions).
These are all big numbers, especially for a school system that is currently insolvent and is already asking the state for $180 million in emergency aid just for this year.
All of this has to be considered within the state's
failed efforts at pension reform earlier this year.
We marvel at how Illinois legislators managed to eschew true reform despite their crisis situation with pensions. But you have to wonder if
Pennsylvania's legislature and district officials in places like Philly are much better.
It's also worth noting that in the Times story a parent complains about funding at "a bare minimum." But the Philly schools are hardly underfunded and their teachers hardly underpaid, as this chart on per pupil spending and teacher salaries from the district's
own budget documents make clear. How they prioritize their spending is another issue altogether.
