“Iceberg Right Ahead!”…The PSERS Crisis!

Like that ill-fated voyage of 1912 — another disaster of epic proportion is on the horizon. Although this time, the “call to action” has already been sounded in advance of the collision. The real question is… “Will history be repeated?”

The year 2012 will mark the 100th anniversary of the sinking of the RMS Titanic. Ironically, it will also mark the year for one of the greatest challenges to public education in Pennsylvania — maybe even sending this grand system of “unsinkable” social ideology down into the dark depths of the unknown as well.

The PSERS/SERS crisis has received much publicity and media attention lately. I expect this will increase as more stakeholders take an interest — at least from a property tax perspective — and continue to learn more about the real issues.

Thankfully, the continued recession has heighten the need for governmental agencies to finally “wake-up” and review their long-term financial situations. Okay, I said that partly in jest. While some school districts may have chosen to simply ignore this warning, our school board and administrative team have been analyzing and discussing this issue for the past 2 years. We also passed a Board resolution urging our legislative representatives to take action on this important issue.

As our state’s political machine grinds away, opponents from both sides of the PSERS crisis will continue their intense debate and finger-pointing. And a slew of organizations and lobbyists will make their cases to under-informed politicians — many of whom are running for the lifeboats themselves. This issue is certainly not news to them! Just keep you ears tuned to how many times the word “students” is mentioned in these debates.

Through a proactive approach to fiscal planning, Northwestern Lehigh will certainly not be the first “ship” to meet this fate — although every stakeholder and school district are “passengers of the same class” on this collision course with the PSERS iceberg.

I have chosen not to ignore the warning — nor will I abandon my “navigational responsibility” to which I was elected. Like the many members of your district’s school boards, we need your help! Now is the time to get informed and get involved. You can truly help to make a difference…and preserve the future of public education for our children!

An illustration of the PSERS crisis in Lehigh County School Districts

Research and data provided by Pennsylvania School Boards Association

The Pennsylvania School Boards Association (PSBA) recently highlighted this information to school board members in a weekly update entitled “The PSERS Pension Crisis and Act 1 Exceptions”. Inevitably, this issue will be continue to be one of the top financial concerns as budget season is in full swing for most school districts. Below is an excerpt from this email:

Can the pension referendum exception be used to help deal with the pension crisis?

PSBA has had several questions over the last month regarding the referendum exception in Act 1 that deals with pension payments by school districts. More specifically, the questions ask if this referendum exception can be used during the current pension crisis.

Subsections 333(f) and 333(j) of Act 1 allow for referendum exceptions and their use. Subsection (f) says that a school district may, without seeking voter approval, increase the rate of a tax levied for the support of the public schools by more than the index if all the following apply:

• (1) The revenue raised by the allowable increase under the index is insufficient to balance the proposed budget due to one or more of the expenditures listed as exceptions
• (2) The revenue generated by increasing the tax by more than the index will be used to pay for any of the exceptions.

Subsection 333(j) goes on to describe the procedure for applying for and receiving approval for the exception.  This subsection also provides that a district seeking this or any other exception must publish in a newspaper of general circulation and on the district’s publicly accessible Internet site, notice of its intent to seek department approval at least one week prior to submitting its request for approval to the department. For 2010, the date for the required public notice is Feb. 25 (the notice itself has to be submitted to PDE by March 4).

The act goes on to describe nine separate referendum exceptions. In a separate subsection, 333(n), entitled “Treatment of certain required payments,” The act says that “the provisions of subsections (f) and (j) shall apply to a school district’s share of payments to the Public School Employees’ Retirement System as required…if the increase in the actual dollar amount of estimated payments between the current year and the upcoming year is greater than the index (emphasis added). The dollar amount to which subsection (f) applies shall equal that portion of the increase which exceeds the product of the index and the actual dollar value of payments for the current year.”

The words in bold are important because subsection (j) contains language that stipulates that PDE must determine which year’s expenses are being used to determine whether or not exception applications are accepted. Typically, there is a two-year lag in which year’s expenses are used for the sake of approving exception applications. For example, for referendum exceptions being sought from PDE for the 2010-11 school year, district expenses from 2007-08 will be compared to the district’s 2008-09 expenses. However, language in 333(j) (4) is clear that the PDE determination does not apply to the pension exception. Consequently, if your school district’s mandated 2010-11 employer contribution to PSERS is greater than the product of its new Act 1 index times the current (2009-10) PSERS payment you can apply for an exception for the amount that exceeds this calculation.

Example:  ABCD school district’s 2010-2011 Act 1 index is 3.5%. Its current PSERS payment is $500,000. The district’s PSERS payment for 2010-2011 is increasing by $300,000 to $800,000. Because the increase in the 2010-11 payment exceeds a 3.5% increase over its 2009-10 payment, the district would be eligible to apply for an exception. The amount of the exception would be determined as follows: 3.5% x $500,000 = $17,500. Thus, the district would be liable for paying $17,500 of the $300,000 increase. If the wavier application was approved, the district could increase taxes to cover the remaining balance of the increase, which would be $282,500.

Subsection 333(j) requires the application for this exception to be approved by PDE.

PDE must approve a district’s application for the exception if: 1) the school district qualifies; and 2) the sum of the dollar amount of the exception(s) for which the school district would be sufficient to balance its budget. PDE’s decision must be given to the school district by March 24, 2010. If PDE denies the request, the district has 5 days to put a question on the ballot asking the public to increase taxes to cover the additional expense.

Is the pension exception the best way to handle the additional expenses incurred due to the pension crisis?

While the Act 1 pension exception can be utilized by eligible school districts, most school board members we have talked to do not think it is the best way to handle the additional expenses created by the pension crisis.  A referendum exception only means that you can increase taxes, and almost no school board member wants to increase taxes just to pay for pension increases. Additionally, with the index as low as it is for 2010 and likely the foreseeable future, it may not provide as much relief as it would otherwise. However, without some quick action on the part of the Legislature, many districts may find that they will have to use the exception, or at least part of it, in the 2010-11 budget cycle.

Districts in this situation should heed the deadline mentioned in this alert and follow the procedures outlined in Section 333(j), which can be accessed on the Department of Education’s Web site.  Click here for information on Act 1 and here for information specific to referendum exceptions for fiscal year 2010-11.

Source: Pennsylvania School Board Association (PSBA), Office of Governmental and Member Relations, 2/19/2010