Pension costs continue to burden Philly School District, report says

Though the Philadelphia School District’s finances have improved in recent years, the district is still confronting mounting pension costs that will continue to burden its budget.

That’s the message from a Pew Charitable Trusts report released Wednesday. It details how the district’s contributions to the state-run Pennsylvania School Employees Retirement System (PSERS) have soared — costing the district $154 million last year, up from $28 million eight years earlier.

Those costs have leveled, but are expected to grow over the next decade, the report says. Across Pennsylvania, pensions are one of three main cost drivers often identified by school officials, with the others being special education and payments to charter schools.

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The district’s PSERS costs equaled one-third of its payroll costs in 2018, up from 5% in 2010, according to the report authored by Seth Budick, an officer with the Pew Charitable Trusts’ Philadelphia Research Initiative. Through 2026 — which is as far as PSERS makes projections — the district’s pre-reimbursement contributions are expected to climb to 37% of payroll.

Uri Monson, the district’s chief financial officer, said that “every personnel decision we make” is impacted by pension costs, because hiring a new employee requires a steep payment into the system.

“It permeates everything we do,” Monson said.

The escalating payments are the result of state law, and have been affecting school districts across Pennsylvania. In 2010, lawmakers required districts to ramp up their contributions to the pension system after years of underfunding.

The state reimburses school districts for at least 50% of the pension expenses. For Philadelphia last year, that amounted to $180 million. But the district still had to cover $154 million, which equaled 15% of its payroll and 5% of its $3.4 billion budget.

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The school employees pension system is about 40% short of what it needs to meet future benefit payments. While it used to be fully funded, in 2001, the state expanded benefits for workers, including retroactive increases.

That cost more money, driving the system into debt as employer contributions failed to keep pace. In turn, the system’s funding level rapidly declined, more steeply than its counterparts for teachers in other large urban districts, according to Pew.

Now school districts are making contributions at a rate that PSERS expects will bring the system to full funding by 2042.

But it’s at a high cost — and one that affects district investments in personnel, Monson said. If the district hires a teacher at a salary of $70,000, he said, the cost is really $120,000 when pension and benefits are included. That added cost is driven by the pension system’s unfunded liability.

“For the School District — for all the school districts in the state — we literally have no control over it,” Monson said. “It’s really, really frustrating.”