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New state school funding formula is a crucial step, but pension crisis looms

Much has been written over the past year about a proposed new education funding formula for Pennsylvania schools. As reported, the new formula would mark an important first step on the road to getting the state’s dysfunctional education funding system back on the right track. Most importantly, the funding formula promises to put school districts throughout the Commonwealth on more equal ground when it comes to education appropriations from the state.

If enacted by the legislature and Gov. Tom Wolf, the new formula will: 1) provide funding based on the average number of students in each district over the past three years; 2) give extra funding for impoverished students and English language learners in each district; 3) consider the number of students attending charter schools in a district to help cover the cost of revenue that follows students to those schools; and 4) factor in median household income, the local tax burden and taxing capacity of each district to help gauge the population’s ability to generate school funding. All of these steps will help ease the tremendous burden that poorer school districts in our region have faced over the past several years because no formula has been in place in the state.

REALTORS® should strongly consider supporting this new formula because it will help eliminate some of the inequities in state funding that have caused property taxes to soar in certain districts, making homes in those localities extremely hard to sell. But even this major reform, worked out over the past year, can’t save school districts and tax payers from major budgetary pain ahead without further heavy lifting by state lawmakers who have been reluctant to make tough choices. First and foremost on the priority list after the funding formula is in place is reform of the state’s public pension system, which threatens to place a heavy burden on taxpayers and deplete funds available for critical long-term investments – including education – if left untouched.

While there is some disagreement regarding what should be done to fix the system, most experts agree that years of large benefit increases, negligent underfunding, and several recessions have left the state's public pension funds in a huge budget hole. It is estimated that the two largest pension systems in the state – covering teachers and other government employees—are underfunded by more than $50 billion dollars.

How serious is this issue? The PA Institute of Certified Public Accountants says that at the state level, taxpayer contributions to pension plans will increase to $3.3 billion, or nearly 10 percent of the budget, by 2020. That’s compared to the $1.7 billion, or 6 percent of the budget, made in contributions this year. According to the CPAs, that rate of debt increase is “fiscally unsustainable and will prove increasingly unacceptable to taxpayers who must either pay increased taxes or forgo other services to pay for these liabilities.”

The effect of the pension crisis on school districts is already being felt. Beginning this month, the annual contribution level for districts to the pension fund will jump to 25.8%, up from 16.9% only two years ago. By 2019-20, that number will skyrocket to 32.2%. The fact that school districts are being asked to pay for more and more of the pension costs has much to do with the growing property tax burden we are feeling at the local level in southeastern PA. And much like the added government spending needed to cover entitlement debt at the federal level in the massive Social Security and Medicare programs, these school pension liabilities are beginning to “crowd out” investments that are needed to ensure a strong work force for the future of the Commonwealth.

What’s needed to fix the system? Many pension and budget experts agree that moving new employees into a defined contribution plan with 401(k)-style benefits would be a good first step. A tougher, more impactful fix might include rolling back benefit formula changes that some experts say helped produce the present-day crisis. Looking to other states that have dealt more effectively with their own pension challenges will also be critical.

As both citizens of the state and small business owners, REALTORS should strongly consider voicing their support for legislators who make the tough choices necessary to put the pension system back on a sustainable path before it’s too late.

 

Posted by: Jamie Ridge on Wednesday, July 22, 2015 at 12:00:00 am
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