Professor: Schools approaching bankruptcy

“The number of (school) districts approaching bankruptcy is going to increase drastically in the next few years,” a Penn State education professor warns.

By state law, districts are not permitted to go bankrupt. Revenues must equal or exceed expenditures.

“School districts are letting people go to reduce (Public School Employees’ Retirement System) costs,” professor William Hartman said. “And they have cut programs impacting educational opportunities for kids. It’s happening all across the commonwealth, and it’s going to reach epidemic proportions in the next five years at least.”

Gov. Tom Corbett failed to get the Legislature to buy into the type of pension reform he supports as part of the annual budget negotiations. On Thursday, he used his line-item veto on the state budget bill to put pressure on legislators.

Hartman is working on a project, not funded by any special interest group in education, to estimate when school districts will go bankrupt.

Employer contribution rates are scheduled to rise to more than 30 percent of payroll to pay the defined benefit that employees have paid their share for. Hartman noted two things: One, districts are only half way to that highest point of the employer contribution rate. And two, “This is not a spike. Once it gets to the top, it plateaus there for 20-plus years. … It’s a real problem.”

The problem was created by legislative decisions from 2001 to 2003 to increase retirement benefit without requiring higher contribution rates.

“A serious mistake on the part of Legislature,” Hartman said.

Public school employees – as well as state workers – are under defined benefit plans, in which employees are promised pension benefit of a certain amount. If the contributions and interest income are not sufficient to fill the promises, taxpayers are responsible making up the difference.

Defined benefit plans are preferred by public sector employees. Elected state officials might also like defined benefit plans because they give them the ability to make promises on the campaign trail.

“Politicians don’t want to cut spending because that loses them votes. And they don’t want to raise taxes because that loses them votes. They like to make promises; that wins them votes. And that’s why the defined benefit plan is so toxic, because it lets politicians make promises and not pay for them,” state Rep. John McGinnis, R-Altoona, said.

The unfunded pension liability Pennsylvania faces is, according to the state, about $50 billion.

McGinnis has proposed a bill he said gives a more accurate picture of the true taxpayer liability, which he said is two or three times $50 billion.

Whatever the unfunded liability is, neither the governor, Senate nor House leadership have any way of addressing it, McGinnis said. McGinnis believes the state should switch new employees to defined contribution plan in the vein of a 401(k).

The pension reform Corbett supports, a bill revised by Rep. Mike Tobash, R-Schuylkill, is touted as a hybrid of defined benefit and defined contribution plans that would reduce pension system costs.

But to McGinnis, the hybrid plan is a gimmick that opens opportunities for legislators to continue making promises without paying.

Under the hybrid plan, future employees would have their defined benefit ended once they earn a salary of $50,000. And annually, the cap would increase, following assumptions that districts bargain 1 percent raises because of inflation.

McGinnis anticipates the salary cap where employees’ defined benefit end will be a moving target for politicians who will want to accelerate how high the cap goes. Or the Legislature may determine the defined benefit should be raised with a cost-of-living adjustment as in the past.

“A pure defined contribution plan is different. The employer (state and school district) and employee pay into it and that’s the end of it. Whatever benefit are gained are gained.

“With regard to pension, Gov. Corbett does not know what he’s talking about,” McGinnis, said. “I don’t think the House and Senate leadership know what they are doing either. Real reform comes from two things: One, paying off the unfunded liability we have within 20 years, and two, to put every employee possible into a pure defined contribution plan.”

Critics of starting new employees in a defined contribution plan point out that fewer people will be paying into the current system that needs to be funded.

“That may make the unfunded liability worse at first,” Hartman said.

On ideology, including his own tea party ideology, possibly getting in the way of the Legislature achieving reform, McGinnis said: “That’s not relevant to this issue. Forget your ideology. Payments are not being made. Promises were made, benefit were earned. They weren’t paid for. I think it can be done without a state tax increase, but it would require significant cuts in areas of the budget.”

He’d rather see cuts in other areas of the state budget to pay the pension bill. “But if a tax increase gets votes, that’s one way to do it, too.”

“But I think Pennsylvanians are overtaxed, and that’s where ideology comes in,” he said.

McGinnis has presented his plan in Republican caucus that increases state funding for pensions by 2.5 times the current amount. School districts would have to make similar increases – by cutting $2,000 per student or raising taxes $2,000 per student.

School districts are limping along from the loss of $1 billion federal stimulus dollars inserted by Gov. Ed Rendell’s administration into state education subsidies. And they are squeezed financially in two ways, Hartman said. The state revenue picture is well below estimates for this year and next year, and their local ability to raise taxes is limited by law.

The options school districts have to deal with this monumental pension crisis are not great, Hartman said.

“Districts have to look at reducing expenditures,” he said. That includes bargaining with employee unions to shift the cost of health care to employees who had historically received fully paid health benefit.

“In the private sector, that happened 10-15 years ago. The public sector is now going through that painful change in bargaining,” he said.

But schools have unfunded mandates coming from federal government, too. The new federal health care law requires schools to provide health care to part-time employees. Schools in Blair County have shown a way around that by outsourcing services including substitute teaching to private companies responsible for employee benefit.

Salaries are another target. Whether it’s bargaining no raises or not hiring people to replace retirees, both are measures districts are taking to reduce pension costs.

“It’s a two-edged sword. It saves school district’s money, but the local economy loses,” Hartman said.

Since 2011, communities in the state are collectively down 20,000 jobs in education, Hartman said. Those are professional, working class jobs including librarians and teachers.

But even with those changes, the dynamics are such that expenses are increasing faster than revenues. During the past two or three years, districts have been using up their reserve fund balances.

“The well is running dry,” Hartman said.

Hartman has provided budgetary projections and planning assistance to Pennsylvania school districts for six years. At first, he was like Paul Revere for school districts, he said, warning that deficits were coming. Some districts bought into it. Now districts finding those deficits to be true, and Hartman’s budget planning model is now about how to deal with it, or as Hartman said, “to plan their best course for survival.”

Hartman has studied more than 20 percent of districts in central Pennsylvania and statewide.

“And it’s not just poor districts that are in trouble,” he said. “It’s some wealthy districts, too.”

Mirror Staff Writer Russ O’Reilly is at 946-7435.