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Rising pension costs are part of why Erie schools are going broke

By   /   March 9, 2016  /   News  /   No Comments

Part 2 of 5 in the series Erie's Ailing Schools

Aside from a troubled economy and the denuded tax base that goes with it, the structural deficit choking the life out of the Erie School District has two major contributors. 

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PENSION NIGHTMARE: The Erie School District is on the verge of bankruptcy because of a structural deficit tied to rising pension costs and charter school tuition.

Chief among the pile of expenses facing the district are skyrocketing pension payments and a change in the way the state reimburses districts for students who switch to charter schools. Like many districts across Pennsylvania, these two factors have contributed mightily to Erie’s budget deficit, which officials estimate anywhere between $3 million and $9 million, depending on how much state funding it qualifies for over the next two years.

“We probably won’t be able to make payroll in two to three years,” Erie Superintendent Jay Badams told Watchdog.

Erie’s worst-case projections forecast a $9 million budget, assuming it receives no new funding for 2015-16 and only moderate 2 percent increases in subsequent years. If that’s the case, Erie Public Schools will be forced to eliminate 125 full-time positions to strip away $8.9 million.

Pennsylvania schools are operating without a 2015-16 budget, which was due last summer, and with an even more uncertain 2016-17 spending plan, the district has had to make plans for next year in the dark, not knowing how much it will actually get to spend. In Erie’s case, how much funding is approved in Harrisburg will factor significantly in the district’s ongoing financial challenges.

But no matter how much aid comes from the state, Erie schools are saddled with a structural deficit that’s tied to massive, mandatory increases in pension payments and to the absence of state reimbursements for charter school students.

As more students opt to leave traditional district schools for charters, the district is required to pay those costs, which used to be reimbursed by the state. The line item was removed from the state budget by former Gov. Tom Corbett in 2014. More than 16 percent of Erie students choose to attend charter schools, putting the annual costs at around $20 million.

In Pennsylvania, when a student leaves a traditional district school for a public charter school, only 70 percent of the funding the district receives per student follows the student to the charter. The remaining 30 percent, known as “stranded costs,” must be covered by the district to maintain debt service and facility costs, essentially sticking the school with paying for an empty — and unfunded — seat.

A bipartisan education funding formula devised last year would reinstate the reimbursement line item to the budget, but that change and other school funding reforms are caught in political gridlock while the 2015-16 state spending plan is argued over by the Republican legislature and Democratic Gov. Tom Wolf.

“It was so well done, I thought,” Badams said of the funding formula that addresses poverty, English language learners, special education and charter school enrollment. “When they came out with a formula, they listened to us.”

But the formula was never ratified and Pennsylvania schools have been operating without a budget through a nine-month impasse.

Absent state reimbursement, charter school payments represent about 11 percent of all new costs facing Western Pennsylvania school districts.

Related: Erie School District on the brink of disaster

But Erie’s bigger financial problem is the rising cost of pension payments.

Last year, more than 22 percent of Pennsylvania schools’ new spending was slotted for pensions. Districts were required to increase pension contributions from 16.93 percent in 2014 to more than 21 percent last year.

The Erie School District spends almost 10 percent of its $180 million budget on pensions and in just a year, its pension contributions jumped from $13 million to more than $16 million because of a combination of the pension fund’s poor performance on Wall Street, statewide increases in benefits, and contribution reductions in 2008 and 2010.

As it confronts these fiscal challenges, Erie has not been able to negotiate a new teachers’ contract in two years. Erie teachers haven’t gotten a raise in that time, and last month they gave their union permission to call a strike if a new deal can’t be made.

The pension problem is not limited to Erie. The School District of Philadelphia is also encumbered by a structural deficit tied to rising pension costs. Since 2008, Philly pension payments have tripled.

The Pennsylvania Public School Employees’ Retirement System is one of the state’s two largest retirement funds, and rising pension costs are just another way that decisions in Harrisburg have directly affected students in Erie classrooms. Every dollar spent on a retired teacher is one that isn’t spent on one still in the classroom.

Over the last five years, Erie Public Schools eliminated more than 200 jobs, closed three schools, cut central administration in half and froze employee salaries. Excluding pension costs, per-pupil spending is less than it was in 2008-09.

“The governor is committed to working with the legislature to honestly eliminate Pennsylvania’s deficit and make investments in education, and if we do not choose this path, the consequences will be immediate: a deficit that grows to more than $2.3 billion and further damaging cuts to education,” Department of Education Spokesman Casey Smith said in a statement to Watchdog. 

Parts of Wolf’s latest budget proposal were met with boos from the Republican-controlled House, signaling another protracted budget battle.

“The governor didn’t even offer a vision,” Republican House Speaker Mike Turzai said. “He didn’t even put forth the details with respect to his budget. There was no vision. Unfortunately, there was just fear mongering.”

And so, Erie is on the verge of running out of money. If that happens, the district will be taken over by the state, and that would be an even greater burden on Pennsylvania taxpayers.

“We feel,” Badams said, “that we’ve done just about everything that we can do.”

Part of 5 in the series Erie's Ailing Schools


Evan was formerly a Pennsylvania-based education reporter for Watchdog.org.