Teacher pension costs are expected to jump by more than 30 percent next year, worrying school districts that have already cut programs and positions.
The Teachers Retirement System announced Oct. 26 that the amount districts must contribute to the pension fund is increasing from 11.8 percent of total teacher payroll to between 15.5 percent and 16.5 percent for the 2013-14 school year. John Cardillo, spokesman for the retirement system, said the increase is necessary because the state’s investments only had a 2.8 percent rate of return, instead of the 8 percent goal.
The final contribution figure is calculated in July. State officials use a five-year rolling average to calculate the amount districts must contribute. The investments lost money in 2007-08 and 2008-09 as the recession was hitting, and the stock market crashed, with the Dow Jones industrial average reaching a low of 6,547 in March 2009.
The good news is one of those bad years will drop off from the calculation next year, according to Cardillo. “We’ll be in better shape,” he said.
However, he said he was not sure what would happen to the rate because there are other factors. Teacher salaries have gone up, which results in higher pensions because they are calculated based on a three-year average.
Schenectady City School District Superintendent Laurence Spring said the increase in the pension contribution rate would cost the district another $2 million in pension costs alone. The district’s payroll for people in the retirement system, which also includes administrators and management, is roughly $40 million. It spent about $8.5 million on its contribution to pensions in 2011-12.
Spring said the district is already being shortchanged its fair share of state aid. Under the state’s settlement of a lawsuit brought by the Campaign for Fiscal Equity, schools were supposed to receive millions more in education aid. Because of the recession, however, legislators delayed implementation of the additional aid.
Spring said the district is only getting 54 percent of the aid it was due to receive — roughly $135 million. Most of the districts are getting between 70 and 79 percent of the funding they were due.
Schenectady also has the 13th highest concentration of children in poverty in the country.
“On top of that, to be hit by a $2 million increase in our retirement bill, it certainly makes an incredibly difficult budgeting scenario that much more difficult,” he said.
After Tuesday’s elections, Spring said the district will be lobbying elected officials for more aid.
The rise in pension rates would add about $1 million to the Burnt Hills-Ballston Lake Central School District’s budget, according to Superintendent Patrick McGrath. The district spends about $20 million in salaries for teachers and administrators.
“It’s going to be something that every school district is going to wrestle with. It’s a built-in cost,” he said.
Loss of funding
During the past few years, districts have grappled with reductions in state aid and the loss of federal stimulus funds. This is just one piece of the puzzle. There are still uncertainties about how much state aid districts will receive this year, according to McGrath.
McGrath added that just because the state property tax cap excludes a certain portion of pension costs from counting towards the cap doesn’t mean the public is necessarily going to support budgets with larger tax levy increases.
Shenendehowa Central School District spokeswoman Kelly DeFeciani said the district could see an increase of between $1.8 million and $2.3 million in the 2013-14 budget.
On his blog, Robert Lowry, deputy director of the New York Council of School Superintendents, said the pension increase was the equivalent of giving employees a raise of between 3.6 percent and 4.6 percent, on top of raises they have already been given. This is happening at the same time that Gov. Andrew Cuomo is telling school districts not to expect any further mandate relief.
The New York State Association of School Business Officials is calling on legislators to fix the tax cap to allow more of the increase in pension costs to be excluded from the calculation. Executive Director Michael Borges said under the current formula, if the increase in the percentage contribution is more than 2 percent, districts can exclude that from the tax cap.
“The problem is that the tax cap only excludes a certain percentage of the increase in the rate, as opposed to the increase in the school district [budget],” Borges said.
Using a hypothetical example of a school district with a $25 million budget and teacher salaries of $17.5 million, the association estimated there would be an increase of between $694,000 and $873,000 because of the new contribution rates. However, only between $296,000 and $475,810 can be excluded from the cap.
Another change the school business officials want is to allow districts to set up reserve funds for contributions to the Teachers Retirement System. They are allowed to establish such funds for payments to the Employees Retirement System, which covers other school staff.
“It’s one of these things there’s no real reason for,” Borges said. “Here’s a great example of why school districts should have a TRS fund. If they’d been allowed to save money over time in these reserve funds, they would be better able to address these huge spikes in pension costs.”
The state has created Tier V and Tier VI, which will require employees to contribute more to their pensions and save the state hundreds of billions of dollars. However, Borges said action is needed now.
“State policymakers need to act quickly to address these skyrocketing pension costs. We are mortgaging our future (children’s education) to pay for our past mistakes (pension sweeteners),” he said in a news release.
New York State United Teachers, the state’s largest teachers union said it would support changing the tax cap formula to provide relief from pension costs. Spokesman Carl Korn said next year should be the last year the stock market crash of 2008 is pulling down pension returns and leading to increased contribution rates.
“It’s certainly realistic to see it drop by several percentage points next year,” he said.
Korn pointed out that during the booming economy of the late 1990s, there was a six-year period when school districts were contributing 1.4 percent or less of payroll into the pension fund and teachers were contributing 3 percent. More recently, there have been double-digit contribution rates because of the Great Recession.
“This is an unfortunate result of Wall Street’s recklessness, which crashed the economy and resulted in higher costs for taxpayers,” he said.
Rising pension costs are just one factor facing schools. Districts received $1.1 billion less in state aid compared with the 2008-09 school year, according to Korn.
“That contributed to a loss of 35,000 educators helping kids in classrooms across the state over the last four years,” he said. “When you add in the effects of an undemocratic tax cap that allows 40 percent of the community to dictate to a majority how much you spend on local schools, it puts districts in a bind.”