Pensions for teachers: Why taxpayers, not educators, will pay more for weak investment returns

For every dollar paid in salaries to Pennsylvania’s 250,000 public school teachers and school staff, the state treasury and local districts pay another 35 cents into the educators’ $60 billion pension fund.

That’s a bigger “employer contribution” to retirement than your boss probably sets aside for you.

The taxpayer surcharge into what is called the PSERS fund used to be zero. At one time, the pension fund was financed mostly by investment profits. But taxpayer help has been rising annually and eating bigger holes in state and school budgets for nearly 20 years now. This year, taxpayers will pour $5 billion into the pension plan.

Putting a happy face on it, Brian Carl, the system’s chief financial officer, told trustees earlier this month that the coming taxpayer bump of $200 million was the second-lowest in the past 10 years (last year’s was less).

But trustee Eric DiTullio, elected to the panel by the school boards that must find the money for these increases, warned the pattern of ever-increasing taxpayer assistance would put “extreme stress on the system” unless PSERS squeezes more profit out of its investments.

Now, $60 billion may sound like a lot. But PSERS’ liabilities for future pensions total over $100 billion, leaving a $40 billion-plus long-term hole. That’s why it costs more each year.

An audit report at the last PSERS board meeting showed its investments have generated an average return 6.38% a year since 2011.

That’s about half what the S&P 500 index of U.S. stocks returned over those same years — and below the fund’s own target.

Of course, PSERS doesn’t mostly invest in stock indexes. Its professional staff, led by chief investment officer Jim Grossman, has convinced the teachers and politicians who dominate the board that betting too much on U.S. stocks would be risky, because stocks sometimes go way down, as they did in 2008-09. (Grossman is Pennsylvania’s highest-paid state employee, making nearly $500,000 a year.)

This distaste for straight stocks is conventional wisdom in the pension business, and it has helped make rich a lot of outside money managers, if not always their clients. It’s why the state puts its money into hedge funds run by billionaires, “private equity” deals and foreign investments that may or may not pay off by the time today’s board members are collecting their own pensions.

Besides relying on rising taxpayer subsidies and disappointing investments, PSERS has a third source of income: teachers, who pay 5 to 10 percent of their income into the pension fund. (That money, too, ultimately comes from taxpayers).

The rate is lowest for newer teachers, whose future pension checks, under changes approved by the last two governors, will be only partly guaranteed. This should eventually slow the growth in pension costs.

In all, school employees divert a little more than $1 billion from their taxpayer-funded paychecks into PSERS each year. It surely is a big hit for some, but just a small fraction of what taxpayers kick in.

The average PSERS pension is about $26,000 a year. But that includes both long-retired teachers who get a fraction of that total, plus more than 800 high-end school retirees each collecting more than $100,000 a year.

When investments perform poorly, some school employees are supposed to share the risk: newly hired teachers are to pay more when PSERS investment returns fall below their target.

The magic number to trigger such increased payments this year was 6.36%. If average returns over the past nine years were to fall below that, the rookie teachers would have had to pony up.

PSERS’ return for those years was ... 6.38%. Just above the threshold. The result is that teachers won’t be paying more. Taxpayers, not teachers, will cover the increase in pension costs.

Teacher reps, as well as the pension fund’s staff, were very happy about that.

“We head into collective bargaining in January. It would have been a factor in contract negotiations if employees would have had to pay more,” said Chris SantaMaria, the Lower Merion history teacher who chairs the fund’s board.

Meaning unions would have tried to negotiate more money from local taxpayers, to cover any increase in the teachers’ payments for their own pensions.

That suggestion provoked a warning from another fund trustee, State Rep. Frank Ryan (R., Lebanon). “Certain members” — he meant teachers —“will be affected by this,” he told his colleagues. “If anyone feels they have a conflict on this, I would encourage you to be very careful” and maybe “recuse yourself.”

But Glen Grell, the former state rep who serves as PSERS executive director, rushed to the teachers’ defense, insisting that those on the PSERS board “are not individually benefited.”

Right, said SantaMaria, teacher and trustee chairman: The four PSERS teacher/trustees are veteran educators and thus are never facing any increase in the first place.

“Everyone’s winning,” insisted Carl, the CFO.

And that’s true, if you ignore that taxpayers pay more when teachers don’t.