PSBA Analysis of Governor Rendell Education Budget

I received an email today from PSBA's Office of Governmental and Member Relation in regards to the Governor Rendell's budget announcement yesterday. The information below is available on the PSBA website. Full text of the announcement is below:

Rendell presents $29 billion state budget for 2010-11

This week Gov. Edward Rendell presented his $29 billion 2010-11state budget plan to the General Assembly that contains a 6.42% increase in the basic education subsidy and holds most other education programs at level funding or decreased amounts. The governor also proposed a plan to address the expected spike in employer contributions to the pension system, and to create a new reserve fund to be used when the federal stimulus money has ended. In addition, Rendell once again pitched his proposal for a system of statewide healthcare for school employees.

Under the governor's proposal, the Basic Education Subsidy would receive $5.8 billion, an increase of $354.8 million, or 6.42%, over 2009-10. In doing so, Rendell called for the third-year investment in his school funding formula that was developed in response to the state Costing-out Study. The funding formula establishes an adequacy target for each school district and compares the target to each district's actual spending in order to determine the district's adequacy gap. The formula calculates the state share needed to help close that gap in each district.

Most, but not all, other programs under the education portion of the budget plan are level-funded or have a decrease in funding. Here are some of the programs, their proposed funding amounts and how that compares to the current budget:

• Special Education: $1 billion (level)
• School Employees Retirement: $399.7 million (19.51% increase)
• Accountability Block Grants: $271.4 million (level)
• Reimbursement of Charter Schools: $226.9 million (level)
• Early Intervention: $186.1 million (7.23% increase)
• Pre-K Counts: $85.9 million (.55% decrease)
• Career and Technical Education: $62 million (level)
• Educational Assistance Program: $55.3 million (6.43% decrease)
• PA Assessment: $37.6 million (1% decrease)
• School Improvement Grants: $11.3 million (1% decrease)
• Science: It's Elementary: $13.5 million (1% decrease)
• Dual Enrollment Programs: $8 million (level)
• High School Reform: $3.6 million (1% decrease)

The governor acknowledged the impending crisis in the employer contribution rates for the state and school employees pensions systems (SERS and PSERS) that will occur in 2012-13. For PSERS, the state contribution is projected to increase from $758 million in 2011-12 to $1.88 billion in 2012-13. that represents a single-year increase of $1.13 billion. School district contribution costs will spike from $658 million to $1.86 billion.

Rendell has offered a plan that contains two components. The first is "fresh start" that would reamortize liabilities over 30 years. In conjunction with that effort, the state would require an incremental phase-in to higher contributions. Under the plan, in 2010-11, the commonwealth and school district employers would begin to fund the step-up in pension costs by increasing employer contribution rates to PSERS by 1% of payroll. According to the governor's office, this represents an additional employer investment of $200 million, or 24%, over 2009-10 levels. Thereafter, contribution amounts would be scheduled to increase annually by a maximum of 3% of payroll. Any increase of benefits, such as cost-of-living adjustments, would add to the unfunded liability and therefore require additional employer contributions.

The governor noted that no new revenue is required to balance the 2010-11 budget. However, he cautioned that in fiscal year 2012, federal funding totaling more than $2.3 billion will disappear. To address future budgetary challenges, Rendell proposed the creation of a new Stimulus Transition Reserve Fund. All new revenues generated during 2010-11 would be deposited into the new fund to help balance the 2011-12 budget.

To do so, Rendell is calling for a reduction in the Sales and Use Tax rate from 6% to 4%, and the elimination of 74 exemptions for items that currently are not subject to sales tax. The 1% vendor sales tax discount would be eliminated, and tobacco taxes would be extended to include cigars and smokeless tobacco. In addition, the state would institute a new severance tax on natural gas extraction.

The important thing to note here is that the Governor has outlined his plan to address the PSERs funding crisis. He proposes to increase the employer contribution by 1% of payroll in 2010-2011 with increases of up to 3% of payroll thereafter until the pension is fully funded. This stepped approach to funding PSERS would have the effect of pushing out the year that PSERS is fully funded.

This is the accounting magic I wrote about on Tuesday morning. The above approach is not currently allowed but if it is adopted by the Legislature then you can bet it will become legal.

Thanks for reading.

James