2012 School Tax Hike to Preseve Pension Fund

It seems many industries supported by a unionized work force, most recently the auto industry and who could forget steel, at some point face an unimaginable financial crunch related to the pension. To these two, the number of retired workers in the pension system vs. the investment growth and those supporting it, resulted in a failed program.

Now we learn of a situation wherein the taxpayers will be required to bail out a pension - the teachers.

The Morning Call reports that state lawmakers in Harrisburg have mandated a benefits increase for teachers that will go into effect in 2012 and must be paid for by local school districts (read the article here).

According to the article:

The problem's origin dates to 2001, when lawmakers increased pension benefits for themselves, state workers and school district employees.

Of course we all know what happened to investments in the market - they tanked. Now the PSERS (pension program) needs cash and they are going to get it from taxpayers.

How does the system work? The state required the schools to pay 4.7%, and employees pay in 7.5% according to the article, and "A school employee in the plan who retires at age 60, with 30 years of service and whose top three salaries average out to $70,000, is now eligible for a maximum annual pension of $52,000."

Consider most teachers begin out of college at age 22 so many have closer to 40 years service, and those who jumped into administration or took on extra curricular activities probably have a higher salary than $70,000.

So, revenues from investments are down, employees cannot pay more once they are in the system, raising the amount on new employees only won't fix the problem, so there remain two options - increase the amount the local district contributes or have Harrisburg increase its contributions/make one. Given the budget battle, let's take the 2nd option off the table - it won't happen.

Again, in the article, "Current projections say school districts -- which are required to contribute an amount equal to 4.78 percent of employee salaries to fund the pensions this year -- could be forced to chip in more than 29 percent in 2012."

In Nazareth, we have been putting extra money away in anticipation of this according to the article:

Nazareth Area is one of several school districts that have begun putting money aside in their fund balances in anticipation of the hike.

The district budgeted $2 million in pension payments for 2009-10, the equivalent of 7.13 percent of employee salaries -- more than 2 percent higher than what is required by the state.

It hasn't developed a projection for 2012, but business administrator Bernadine Rishcoff said the district's savings won't completely offset the expected increase.

I can't imagine there are many outside the union system that have a guaranteed pension as most of the private sector has gone the route of the 401(k). Those with them lost significant value during the downturn, probably anywhere from 30-45% of what they had saved during their entire working career. No one wants to see that happen to anyone, but at the same time, the devastating effects of guaranteed pensions have been shown to us time and again.

This issue won't hit until 2012 and it says it will peak in 2014, but what happens in the future? More people enter into the system each day, longer life spans, more people drawing from the system, the teacher pension problems will continue to compound and the local taxpayer simply won't be able to afford to foot the bill, and those that can will do so at the expense of their own retirement savings.