How worried should we be about the future of school pensions in Pennsylvania?

The state owes roughly $37 billion to school employees that it currently doesn’t have. That should be a cause for concern, right?

Actually, the school pension system is on a positive trajectory and in a much better place than it was in 2010.

A few years ago, the state passed a law which significantly increased its yearly contributions. However, the years of lackluster contributions from the state have been the biggest factor in the money that’s owed to more than 200,000 current retirees. In the chart below, you can see the Legislature has not put in enough money to keep the system fully funded. It’s come up more than $17 billion short.

Source: Pennsylvania Public School Employees' Retirement System

Source: Pennsylvania Public School Employees' Retirement System

 

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The pension system gets approximately 70 percent of its money from its investments, which haven’t performed as well as expected. Because of the 2008-09 recession, in part, investment returns have fallen more than $11 billion short of their target.

Teachers, however, have always paid roughly the same amount into their pensions.

This month, PublicSource has been writing about how rising pension costs have been affecting school districts across Pennsylvania and causing property taxes to go up in some districts. That’s been great for the pension system, but bad for homeowners. Some Allegheny County school districts have raised property taxes every year — like in South Fayette Township School District — while others, like Pine-Richland School District, have rarely increased taxes.

The flip side of those pension costs — which have been doubling every two years for school districts — is that the pension system is going to turn the corner shortly. The school pension system is expected to bottom out at 56.1 percent funded in the 2017-18 school year. That means for every dollar the state has to pay retirees, it will owe about $1.79.

Currently, at 60 percent funded, the school pension system has $57 billion in assets, but owes nearly $95 billion to current and future retirees.

Once it turns the corner, the system is projected to be 71 percent funded a decade from now. The amount required from the state and school districts will begin to level off just a few years from now. As those rising costs begin to slow, it will be a reprieve on many school districts, which could lead to a slowing of property tax increases.

Reach Eric Holmberg at 412-515-0064 or at eholmberg@publicsource.org. Follow him on Twitter @holmberges.