Wednesday, November 21, 2012
Thanks to Pensions, Allentown School District Facing $40 Million Deficit
"What has happened to public education? Why has providing a basic education become so expensive? This is the question facing the Allentown School district as it moves toward the finalization of its budget for the next school year.
"Budget projections indicate in that five short years, with an annual 4% school property tax increase, the district will face a $40 million dollar deficit on a budget of approximately $275 million. What exactly is causing this becomes clear when one studies the numbers. While the district's operating and debt service expenses rise at a rate that roughly matches inflation, the cost of personnel skyrockets. Although a portion of this is due to the escalating costs of health care, the real culprit lies in the retirement benefits paid by the school district on behalf of its covered employees. The reason this increase is so great is because the retirement benefits are in the form of a defined benefit program.
"Defined benefit plans are the most expensive type of retirement program there is. The amount of the retirement benefit remains constant once the employee has retired and is based on payment options and the expected life of the employee at retirement. At one time the standard of pension plans, defined benefit plans are becoming obsolete because of the inherent high cost of the guaranteed payout.
"Much more common today are defined contribution plans. This is a once and done contribution and does not lock the employer in to guaranteeing income after retirement. The standard of the Public Schools Employee Retirement System is the defined benefit program. While this type of benefit is very rare in almost every other economic sector it remains the standard in the public school system? Why?
"Our state and local elected officials are clearly the guilty parties, as they have mandated these benefits not only for themselves but also for the teachers working in the Pennsylvania public school system. The current crisis, which results from their largesse, is a matter that must be dealt with quickly and directly. In the ASD, no reasonable amount of tax increases and staffing cuts can bridge the yawning gap between revenue and expenditures that the fixed pension benefit is imposing on the school district.
"Clearly the state needs to take action. The governor’s office and house and senate leaders need to provide legislative relief from the threat posed to the state’s public school system by defined benefit programs. In addition, public school employees need to become realistic about their expectations for retirement in the current financially challenged and tumultuous economic environment, which experts agree could last into the foreseeable future."