Act 1 Limits Start to Bite…And It’s Only the Beginning

When I applied for my position on the board, I responded to the single question on the application, a question about the single biggest challenge with education, with a short discussion of the vise that school boards have been placed within.  On one side are the increasing demands to meet state- and federally-mandated standards (and as an engineer I support standards) along with the knowledge that I lived in a community that had a demonstrated passion for a rich, rigorous, diverse education. 

On the other side was the Act 1 limitation on funding to support the programs that these requirements demanded.  I noted that these conditions placed lay-controlled boards in the inappropriate position of defining educational programs based on fiscal limits rather than the good practices and experiences of our hired, professional administrators.  I noted that this position was unsustainable.  Little did I know how serious the situation would become.

I don’t plan to get too upset on this blog very often, but I do want to make sure you know the facts I’m working from.  Sometimes these facts are angering.  If I have misinterpreted any of this, please set me straight.

Based on published Act I Index information from the Pennsylvania Department of Education, I created the image below that depicts the budget growth indices for Pennsylvania counties for the 2010-2011 fiscal year:

It’s a little rough, but if it doesn’t make you scratch your head, I’m not sure how to make this clearer.  Counties around Philadelphia are being limited to under 3% spending growth, while most of the rest of the state enjoys growth rates of over 3%.

This situation is based on a somewhat complicated set of calculations based, per the web site, around “the average of the percentage increase in the Statewide average weekly wage and the Employment Cost Index.”  The data used to calculate these two values is from 2008, two years ago relative to the year, 2010, when we are applying the values.

For the fiscal year of 2010-2011, the base index is 2.9%.  This base index is the lowest rate possible, but counties with lower incomes relative to their collective market values are given an allowance to grow their school spending by more than the base rate, some nearly 1.5% more (for a total of nearly 4.4%).  Because the underlying indices used to calculate are two years old, we can expect the base index to continue to decline in future years depending on how long the ongoing recession lasts.  This is only the beginning, I fear.

I understand most of this, but I have two comments.  First, Montgomery County is not, I suspect, average with respect to the wage increases or the rise in the cost of living across the state.  Instead, I suspect we are probably enough above the average that 2.9% would be a deflationary value for our area.  Limiting our area to such low growth would appear to be a limit on our ability to provide effective educational programs.

What is also frustrating is that most districts spend upwards of 80% of their tax revenue on labor, generally paid through long-term collective bargaining agreements, and most of these agreements have preset increases of more than 3%.  These salary increases, however warranted, could be a problem for districts, such as those in these ring counties around Philadelphia, who have contracts requiring increases greater than 2.9%.  Unless the residents of these districts approve Act 1-mandated referenda permitting greater revenues (yes, taxes) for the district, severe limits on non-labor expenditures will have to make up the difference in staying under the index, and this is no small feat.

The math is not too hard, so here’s an example.  Keeping this to round numbers and assuming labor costs make up 80% of a district’s expenses, if labor costs go up by 3.5%, then other costs can only rise by 1% to stay under a 3% index.  For every additional 1/10th of 1% that labor goes up, other costs may have to go down by roughly 1/2 of 1%.  These seem like small numbers, but when applied to a district budget, they are not and they are real dollars, real programs.

What will be cut to achieve these budget limits?  Stay tuned.  Labor isn’t the only thing rising, either.

[And as I was preparing this post, our local paper published a nice article on the topic.]

Open Letter on PSERS Reform

Dear Legislators:
At its meeting on Dec. 11, the Board of Trustees of the Pennsylvania School Employees Retirement System released its latest projection of increases in the employer contribution rate paid by school districts and the commonwealth. The rate will increase dramatically from now to 2016 and remain high until 2032.
In the past, the General Assembly has taken action to help school districts and the state to avoid unaffordable increases in the employer contribution rate by changing PSERS valuation methodologies. This has been done mainly by re-amortizing PSERS liabilities over longer periods of time and adjusting other factors. While this remains an option for short-term relief, such actions typically lose their effectiveness once the amortization date approaches. This is because the system has never been fixed to deal with long term increases in cost.
Senator Gene Yaw and Representative Glen Grell will be introducing legislation that would transform the PSERS system from a 100% defined benefit system to one that is a hybrid defined benefits/defined contribution system. Because the defined benefit characteristics under this hybrid plan are reduced under the current plan, the proposal would cut the benefit costs to employers. At the same time, the defined contribution characteristics of the proposal would allow members of the system to invest a portion of their contributions in a manner they see fit. 
The proposed system would continue to provide a viable pension benefit to school employees. An individual retiring after 30 years of service would receive anywhere from 53% to 63% of the final salary, depending on the performance of their investments and how much they contribute to those investments.
The bill would also reduce the projected increases in the school district portion of the employer contribution by capping those increases at the Act 1 index. The commonwealth would pay for the remainder of the increases over the cap.
A long-term solution to the pension issues that face Pennsylvania’s taxpayers and school districts is the one piece that has been missing from all other pension reform measures. Please join Senator Yaw and Representative Grell in supporting this legislation, which would reduce pension system costs for our future generations.
Senator Yaw can be contacted at (717) 787-3280 and Representative Grell can be contacted at (717) 783-2063. If you have further questions about the proposal, please call the Governmental and Member Relations Department at the Pennsylvania School Boards Association at (717) 506-2460, ext. 3325.
James Butt
School Director
Cheltenham Township
[This letter was sent to Senator Leanna Washington and Representative Lawrence Curry and was originally prepared by the Pennsylvania School Board Association.  For additional information, visit their pension reform site.]