EPLC Education Notebook
Friday, February 5, 2010
Content in this edition:
The EPLC Education Notebook(current and past editions) also is available by visiting the EPLC website at www.eplc.org/ednotebook.html.
The House Appropriations Committee held a budget hearing with representatives of state pension systems on Wednesday, February 3. Both the Pennsylvania School Employees’ Retirement System (PSERS) and the State Employees’ Retirement System (SERS) are facing large unfunded liabilities – $15 billion and $3.8 billion, respectively – caused by a combination of downturns in investment earnings, costs associated with previous liability deferrals, previous benefits increases, and underfunding by the state and school districts in past years. As a result, PSERS’ employer contribution rate (shared by the state and school entities) will increase from the current 4.78% to 8.22% in FY 2010-2011 and is projected to rise to 29.22% in 2012-13 and remain near that level for years to come.
In order to address these unfunded liabilities and the impending rate hike, proposals for both short-term and long-term repairs were discussed. According to PSERS, there are only three ways to address current funding issues: increase funding, decrease costs, or defer liabilities. One possibility discussed was issuing pension obligation bonds. The bonds would take the place of the state’s required contribution rate, but could be risky if returns from the investment are less than funding the cost of the debt. A second possibility was to eliminate the option for retirees to withdraw their contributions upon their retirement.
To address long-term funding issues, it was suggested that the state could consider making changes to the benefits provided to retirees (though these would only apply to new employees; the state cannot reduce benefits for current school employees or annuitants). Currently, Pennsylvania school and state employees are a part of a defined benefits plan. Under this plan, retirees are guaranteed a certain level of benefit and the employer bears the investment risk. The state could consider shifting to a defined contributions plan where the retiree would not have a guaranteed benefit and would bear more personal risk based on their investment decisions. The possibility of switching from a defined benefits structure to a defined contributions structure was addressed, however it was noted that some states have switched to defined contributions plans but then ultimately returned to a defined benefits plan.
Finally, a question was raised about the funding of cost-of-living-adjustments (COLAs) for retirees. One solution proposed to address the funding of COLAs was to invest the dollars retained by eliminating the option for retirees to withdraw their contributions early and use it to fund the COLAs. Another option proposed was to prefund COLAs.
This remains a critical issue for state government and school entities that the Governor and Legislature will have to address as early as this year and not later than next.
U.S. DEPARTMENT OF EDUCATION
Following the State of the Union address last week, President Barack Obama released his budget request for Fiscal Year 2011. While the President’s proposed budget freezes non-security discretionary spending overall, the administration has requested $50.7 billion in discretionary appropriations for education, an increase of $4.5 billion over the last fiscal year. This figure includes $1 billion in additional funding when Congress completes the Elementary and Secondary Education Act (ESEA) reauthorization consistent with the President’s proposed reforms. The President’s 2011 “cradle to college” budget is intended to build upon the achievements of the American Recovery and Reinvestment Act (ARRA), support a comprehensive reauthorization of ESEA and begin the work necessary to meet the President’s goal of restoring America to first in the world in college graduation rates by 2020.
In particular, the K-12 education budget request was guided by several key principles, including a strong emphasis on recognizing and rewarding success; focusing investments on fewer, more effective programs; and, setting clearer goals for federal programs while giving states and school districts more flexibility to meet those goals. The Obama budget consolidates 38 K-12 programs into 11 new programs that emphasize competitive funding, accountability, flexibility for states and school districts and an evidence-based approach to results. Other federal funding and program highlights include:
PDE is accepting session proposals for the 2010 Governor’s Conference on Higher Education. Proposals must be relevant to this year’s conference theme “Rising to the 2020 Challenge” and one of the following tracks: preparing for success in higher education; succeeding in higher education; and, foundations for institutional success. Session proposals are due by midnight on Monday, March 1. For more details on how to submit a session proposal and more information about the conference, see www.pahigheredconference.com/proposals.html.
The Pennsylvania House and Senate return to session on Monday, February 8.
For information on these and other upcoming events, see www.eplc.org/calendar.html.
The EPLC Education Notebook (current and past editions) also is available by visiting the EPLC website at www.eplc.org/ednotebook.html.