Upon my return I went through some of the newspaper articles I had missed. The following article from the Tribune-Review was published on Christmas Day:
Financial meltdown seeps to districts
By Rick Wills
TRIBUNE-REVIEW
Thursday, December 25, 2008Public schools are feeling the squeeze from the financial chaos and instability that have clouded the future of everyone from the Big Three automakers to people nearing retirement.
Schools' revenue from earned income taxes has dropped in some cases, while real estate transfer tax revenue already is down 27 percent this year in Pennsylvania. Some school districts have reported abrupt jumps in tax delinquencies.
To make matters worse, returns on the handful of fixed-income investments that school districts are allowed have dropped from about 5 percent one year ago to less than 1 percent in many cases.
It is pervasive. Tax revenue is down across the board," said Jay Hines, executive director of the Pennsylvania Association of School Business Officials. "And state revenue shortfalls are a leading indicator of what will happen with schools and local governments."No one expects state funding of schools to increase from last year.
"If the state flat-funds us -- and everyone thinks they will -- that's another hole in our budget," said Jeff Kline, business manager for the Hampton School District.
In Hampton, tax delinquencies already are on the rise, Kline said. The district anticipates that revenue from earned income taxes could fall as much as 10 percent this year.
"We were not impacted until the last two or three months," Kline said.
The district expects to lose between $300,000 and $400,000 because of falling income from the district's investments, which now yield less than 2 percent.
"It is a rough budget for this year," said Kline, who said his district might eventually have to look at a variety of cost-cutting steps.
In North Hills School District, mercantile and business privilege tax revenues are down slightly this school year. District business manager David Hall expects the outlook to worsen.
"We have four car dealerships in the district. And if General Motors' sales are down 40 percent, I can assume the car dealers are not doing well," Hall said.
The biggest part of any school districts' funds come from property taxes, a matter about which Hall is not especially worried.
"The same rule that keeps assessments from going up in Allegheny County also keeps them from going down," he said.
Even in the event of foreclosure, banks that take over properties generally continue to pay property taxes, said David Davare, director of research services for the Pennsylvania School Board Association.
"Banks will pay taxes to protect themselves," Davare said.
Communities with a large commercial base are more insulated in the short term but could be at risk in the long term if the economy continues to spiral downward.
"That will have an impact," Davare said.
So far, the biggest impact the recession has had on Pennsylvania schools is in the postponement of construction projects, Davare said. Four of the state's 501 school districts have postponed major construction projects, while six others have decided to go ahead.
An extended economic slump could force districts to make painful cuts, Davare said.
"They will have to look at the extras and maybe make some hard decisions. But we still have an obligation to educate every child that shows up," he said.
Keystone Oaks business manager Gwen Walker prepares for the worst, no matter the economic times.
"We always budget very conservatively and do not anticipate a high rate of return on investments. We learned that lesson in the late 1990s," Walker said.
Rick Wills can be reached at rwills@tribweb.com or 724-779-7123.
There was a second article published in The Almanac that went further into detail on effect the economy is having on the Pennsylvania State budget. The State is dipping into its rainy day fund to help balance the budget:
State dives headfirst into tight economyThe State flat-funding our budget next year would clearly have an impact on us. While we do not get as much funding from the State as many other Districts in Pennsylvania, it will make it more difficult to pass a balanced budget.
By Bob Williams Staff Writer
December 30, 2008
The year 2008 may be remembered as the year the national economy imploded after many years of liberal lending by banks, and irresponsible borrowing by tens of millions of Americans from sea to shining sea. As of Dec. 9, there were 41 states facing budget shortfalls, Pennsylvania among them. But it could be worse, say Pennsylvania lawmakers and Gov. Ed Rendell (D). California, for example, is on the verge of fiscal collapse which could have a ripple effect throughout the U.S. in 2009. California this week eliminated $3.8 billion worth of construction on schools, roads and other public works projects.
Gov. Arnold Schwarzenegger (R) said California will run out of cash in February 2009, facing an 18-month deficit of over $40 billion.
By comparison, Pennsylvania is in good shape. As of Dec. 9, state revenues were $658 million behind estimates with current trending projecting a $1.6 billion shortfall by June 2009.
In response, Rendell and the state legislature have moved to approve a wish list of some $500 million in budget cuts. More cuts will follow, legislators say. A tax increase is not on the agenda--yet. Cuts proposed include the following: • $464 million from the already announced budget cuts and other cost-saving measures, including a wage freeze for more than 13,600 non-union employees and the elimination of this year's cost-of-living adjustment for the governor and cabinet members; a hiring freeze; and the curtailment of out-of-state travel; • $36 million in budget cuts by the General Assembly and other independent agencies - reductions that have yet to be identified by those entities; • $375 million from a portion of the commonwealth's $750 million Rainy Day Fund - which will safeguard the remaining half of the Rainy Day Fund to meet future economic challenges; • $174 million in income from the Marcellus Shale natural gas drilling leases•; $450 million in anticipated federal fiscal relief; and • $101 million in unused funds left over in state accounts from prior-year budgets.
"In Pennsylvania, general fund revenue collections from July through November were $657.9 million - or 6.8 percent - lower than estimated," Rendell said. "During the same period, motor license fund revenues were $112.5 million - or 9.8 percent - lower than estimated.
"Now that that rainy day is here, we will be able to draw on the funds we have prudently put aside to help us balance the budget. To continue its pattern of fiscal prudence, the commonwealth plans to use only half of the Rainy Day Fund - $375 million - to balance the 2008-09 budget," Rendell said.
While not confirmed, Rendell said President-elect Barack Obama has earmarked $450 million to Pennsylvania as part of his proposed federal stimulus package.
The reason actual revenues are down by $657.9 million with projections of a $1.6 billion deficit is that Pennsylvania budgets run from July 1 to June 30 of the following year. Pennsylvania's last budget was approved in July 2008. The $657.9 million represents the losses through December 2008. If the current trends continue through June 2009 and no cuts are approved, the deficit will be $1.6 billion by June 2009.
Finally, there was a third article published in the Post-Gazette that looked into the PSERS contribution rate increase coming in a few years. I posted an entry on my website on December 18th. The full article is below:
Payments to school retirement system set to soarTuesday, December 30, 2008North Hills School District over the years has built up a healthy $10.2 million fund balance, but officials won't go on a spending spree any time soon.
David Hall, director of finance and operations, said he expects to need at least some of that money to deal with ballooning payments to the state Public School Employees' Retirement System, forecast to begin in 2012-13.
School districts and the state, which share the employer pension costs, haven't contributed enough money to cover PSERS' liabilities, particularly as financial markets have declined.
As a result, PSERS has an unfunded liability of $8.4 billion, its actuaries, Buck Consultants, told the agency's board this month.
That shortfall is forecast to come to a head in 2012-13, when the rate of retirement contributions by school districts and the state are expected to more than triple.
"The chickens come home to roost eventually," Mr. Hall said.
The burden of coming up with the money will fall on taxpayers, both local and state, making the problem a critical one for school boards and state officials who already are struggling with tight budgets.
This month, PSERS approved an employer contribution rate of 4.78 percent of salaries for 2009-10, only slightly above the current rate of 4.76 percent. Of the employer contribution, about half is paid by school districts, charter schools and other public school entities. The state pays the other half.
Employees' contributions are expected to average 7.32 percent of their salaries in 2009-10. The state and PSERS cannot change the employee contribution rate without granting new benefits, so the shortfall ultimately must be made up by schools and the state.
Current estimates call for the employer rate to increase to 16.4 percent of salaries in 2012-13. But by this time next year, based on stock market trends, the estimate for the employer's 2012-13 rate may exceed 20 percent, Jeffrey Clay, PSERS executive director, cautioned the agency's board.
"We are not funding the benefits earned each year, much less paying the unfunded accrued liability of the system," Mr. Clay told the board this month.
"This is the equivalent of having the mortgage and not paying the principal. The principal gets added to the debt and, of course, interest is charged on top of that," he said.
For school officials in the North Hills, which has an annual budget of about $65 million, the increased share translates into millions of dollars. Currently, the district contributes half of its share of $1.5 million for the PSERS cost, or about $750,000. If the contribution increases to 16 percent of employee salary, Mr. Hall figures the district and state combined share will rise to about $5.8 million, meaning the district's share would be about $2.9 million.
How did the fund get to this position?
The state in 2001 and 2002 enhanced retiree benefits. Then it decided to delay larger contributions to the fund until 2012-13, partly because of stock market volatility in the years following the decision to enhance benefits.
The employer contribution rate dipped as low as 1.09 percent of salaries in 2001-02.
"That was, to me, the epitome of penny-wise and pound-foolish," Quaker Valley Superintendent Joseph Clapper said.
PSERS cannot raise the rate now to allow a more gradual increase because it must follow the rate formula -- which includes averaging five years of investment returns -- set by the Legislature.
The procrastination -- with its specter of massive payments beginning in 2012-13 -- has frustrated some school officials and the 40,000-member Pennsylvania Association of School Retirees.
"Even though we know we are coming up to a cliff, nobody's been willing to address that cliff ahead of time," Mr. Hall said.
Some districts -- including Butler Area, North Hills and Quaker Valley -- have nest eggs or forward-looking budgeting that may soften the blow.
But even if districts have set money aside, the high rate is not expected to be a one-year event. The current PSERS forecast put it above 14 percent for at least five years after the spike hits.
Some are calling for the Legislature to make changes to avoid or minimize any rate spike in 2012-13.
"I think the Legislature needs to take a look at the fundamental nature of the retirement system. We really can't afford this system going forward as structured," said Tom Gentzel, executive director of the Pennsylvania School Boards Association.
Richard Rose, a member of both the PSERS and Bethel Park School District boards, said, "I think something has to be done, but it's out of PSERS' hands to do it."
He suggested the Legislature require schools to follow a state Department of Education recommendation that schools budget more than 7 percent each year for retirement contributions so they can build a reserve to be ready for the rate spike.
Mr. Rose said that PSERS had been doing "very well until the market crashed on us like this. We have to ride out the storm. We are still currently investing money, and hopefully there are some reasonable investments out there today that will put PSERS back in good standing."
Over the last decade, about three-fourths of the pension fund came from investment returns.
In the last school year, PSERS investments fell 2.82 percent, its first negative annual return in more than five years and a significant drop from the 22.93 percent earned in 2006-07.
In a report last summer, the governor's budget office painted a troubling picture of PSERS and the State Employees Retirement System, or SERS, which covers non-school retirees.
SERS will not set its new employer contribution rate until spring. Its current rate is 4 percent, and its last projection for 2012-13 was 5.7 percent.
"Unfortunately, this year's investment climate has made old news out of that number," said SERS spokesman Robert Gentzel. SERS reported its investment returns fell 14.4 percent for the first nine months of this year.
The Association of School Retirees has asked the Internal Revenue Service to review the state's management of PSERS and SERS.
"The escalation of our systems' unfunded accrued liabilities poses a very real danger to the taxpayers of Pennsylvania, who will ultimately be required to contribute much more to our systems in later years to make up for the funds that the systems did not receive from the state and school districts and all that the systems were not able to generate from investment of those contributions," Ureneus V. Kirkwood, president of the retiree association, said in a Dec. 2 letter to IRS Commissioner Douglas Shulman.
Tom Gentzel expects that PSBA will make a proposal early next year to create a plan that would apply to employees hired after a certain date in the future.
"One of the ideas that we've been drawn to is the idea of some kind of a hybrid plan, a combination of a defined benefit and defined contribution," he said.
It may be time to think about such a plan, he said, because a high number of teachers who are from the baby boom era will be retiring in the coming years, resulting in new hires that could enter a new kind of retirement plan.
Joe Smydo can be reached at jsmydo@post-gazette.com or 412-263-1548. Eleanor Chute can be reached at echute@post-gazette.com or 412-263-1955.First published on December 30, 2008 at 12:00 am
Thanks for reading.
James
