Long road ahead in school funding case

A trial in the case of William Penn School District v. Pennsylvania Department of Education has been tentatively scheduled for the summer of 2020.  A lawsuit over K-12 school funding provided by the state was filed by six school districts and several statewide associations in 2014.

As we noted in a Policy Brief last year, Commonwealth Court dismissed the case in April 2015 upon which it was appealed to the state Supreme Court.  Last fall that court ordered the case back to Commonwealth Court for plaintiffs “to substantiate and elucidate the classification at issue and to establish the nature of the right to education, if any” which could possibly set up a judicial-legislative conflict over determining state subsidies for K-12 education.

According to the docket sheet for the case, fact discovery is to be completed by October 2019, responses, motions and replies by March 2020 and then the trial scheduled for sometime in the summer of that year.

We noted in the 2017 Brief that the process will be “messy, drawn-out and expensive” and with the tentative schedule there is at least an idea of just how drawn out it will be. Parties to the case could spend months diving into the issue of the state and local funding mix and how that produces different per-pupil funding levels.  Even with the tentative date there has to be time for the court to deliberate and there possibly could be a return trip to the Supreme Court depending on the verdict.

If the Commonwealth Court decision comes in 2021, by that point six, possibly seven, years of newly appropriated basic education funding will likely have been distributed through the student weighted funding formula enacted by the General Assembly in Act 35 of 2016.  That formula has been pointed to by legislative defendants named in the case as proof the state has made strides in addressing the claims of petitioners.

With a decision that might eventually order equalized spending across 500 districts there would have to be significant reductions for districts that raise revenue above the state average, largely arising from local property taxes.

 

Pa. near the bottom on pension health

Changes are coming to pension benefits for newly-hired state employees in less than a month and for public school employees later in 2019 due to Act 5 of 2017.  That legislation was enacted to try and improve the health of the state’s two plans, the State Employees Retirement System (SERS) and the Public School Employees Retirement System (PSERS).  Those changes will create three new pension plans, all with a defined contribution component to them, for new hires.

An analysis by the Pew Charitable Trusts on state pension health shows that, when ranked by the aggregate funded ratio (assets divided by liabilities) for state-level pension plans, Pennsylvania is ranked 44th out of 50 with a 53 percent funded ratio for SERS and PSERS.  The U.S. average was 66 percent funded.  Neighboring New Jersey came in last with an aggregate funded ratio of 31 percent for seven state-level plans, with all but one in the 30 percent or lower funded range.

A look at Pennsylvania’s plans from 2000 forward shows that 2003, when assets were $80.2 billion and liabilities were $80.5 billion, was the last year that could be considered at equilibrium.  After that Pennsylvania’s annual required contribution (percent of the actuarially recommended payment that employers contributed) began to decline from over 100 percent to the 30 and 40 percent range and the gap began to widen.  This was traceable to state legislation passed in 2001 and 2003.

Wisconsin, with one state-level plan, the Wisconsin Retirement System, was ranked first in the Pew analysis.  Over its 16 year data snapshot the gap between assets and liabilities never occurred like it did in Pennsylvania.  Wisconsin regularly made 100 percent or more of its annual required contribution.

The system’s funded ratio is 99 percent, which, if projections hold and all goes according to plan, is a level SERS and PSERS will attain sometime in 2040.  In the meantime the legislative reforms will not eliminate the fiscal and budgetary pressures caused by huge unfunded liabilities in the current pension plans.

 

 

Where does Pa. rank on property taxes?

The state’s Independent Fiscal Office (IFO) just released “State and Local Taxes: A Comparison Across States” which utilizes data from the Census Bureau, Internal Revenue Service and Bureau of Economic Analysis to produce state rankings of various taxes-to-personal income, which the study defines as “tax burden.” Rankings are produced for income and sales taxes, corporate taxes, fuel taxes and so on.

The ranking of property tax burden places Pennsylvania 24th with a ratio of 2.94 percent. That is below the U.S. average (3.10 percent) and U.S. weighted average (3.20 percent) according to the study. The state-by-state tax burden ranks from a high of 5.55 percent in New Hampshire to a low of 1.46 percent in Alabama.

The Allegheny Institute produced a somewhat similar measurement of property taxes collected-to-dollar of personal income in 2007 for counties in Southwest Pennsylvania which showed variation from county to county, so there could be property tax burdens at the local level in Pennsylvania that are higher than the overall ratio in the more recent data.  In the measurement from a decade ago the collections ranged from $0.54 cents (Washington County) to $0.97 cents (Westmoreland County).

In terms of property taxes collected, Pennsylvania, in fiscal year 2015-16, collected $18.8 billion. Six states (California, New York, Texas, New Jersey, Illinois and Florida) collected more in that fiscal year.  But the tax burden was lower in California (2.81 percent, 28th overall) and Florida (2.69 percent, 31st overall). New Jersey, New York and Illinois ranked in the top 10.

In a recent Brief we wrote about a separate Tax Foundation analysis of the state’s tax system and that report produced an effective tax rate of property taxes paid as a percentage of owner-occupied housing value. In Pennsylvania the rate was 1.48 percent. The foundation’s report went much more in depth on the shortcomings of the state’s local tax system and made recommendations on assessments and collection methods whereas the IFO report does not.

PPS budget boosts per-pupil spending

In a 2016 Brief we noted “for several years the Pittsburgh Public Schools (PPS) has had total outlays near or above $20,000 per student, ranking it among the highest spending districts in the state.”  For certain, PPS audited finances show general fund expenditures rising from $532.4 million to $598.8 million from 2014 to 2017.  Over the same time frame, enrollment fell from 25,504 to 23,711.  With expenditures climbing 12 percent and enrollment falling 7 percent the per-pupil amount rose 21 percent to stand at $25,254.

Based on the 2019 preliminary budget not much will change. PPS’ general fund expenditures are $643.7 million, which is 3 percent greater than what was budgeted for 2018 ($625.1 million).  If PPS enrollment listed currently on the Future Ready PA Index site as well as the PPS Facts at a Glance page is accurate (22,370 students) per-pupil general fund expenditures this coming year will be $28,774.

When examining expenditures by function, $390.6 million (61 percent) is accounted for by instruction, an increase from $372.9 million this year.  Instructional support and support services are also increasing while debt service will decline by $4.5 million to $44.7 million.  When measured by object, salaries and benefits, special education and charter schools are projected to increase in 2019.

On the revenue side, local, state and other sources will raise $615.4 million.  There will be a $28.3 million transfer from the fund balance to cover the expenditure amount.  There are no planned increases to the rates of the three main taxes levied by PPS (property, wage and deed transfer) but the budget expects local sources to grow in 2019 with $9.5 million of the increase coming from property tax receipts.

Without a reassessment or a millage hike, PPS has to be counting on new construction and improvements or is going to be very active in appeals to raise that much money.  State sources are not expected to grow significantly ($267.3 million to $268.8 million) with the largest dollar increase ($2.4 million) for retirement contributions.

While the budget does not mention “insolvency” as previous ones did, how can Pittsburgh Public Schools continue to see rising expenses, falling enrollment and produce lackluster results and not be in a critical situation?

 

 

Municipalities to cooperate on fire service?

Pennsylvania has plenty of volunteer fire companies.  As of 2018 there are 1,837 companies with 94 percent of them staffed by volunteers. However, there has been a decrease in the number of volunteers in the past few decades.  According to one estimate the number of volunteers stands at around 50,000, much lower than the 300,000 volunteers in the 1970s.  Time commitments to other activities and jobs, an increase in required training and fundraising are cited as core reasons for the decline.

In an effort to try and boost volunteer ranks, the state in 2016 approved Act 172 to enable municipalities to offer a tax credit for wage or real estate taxes paid by active volunteers of fire companies. This incentive is now offered by South Strabane Township in Washington County, which the township’s board of supervisors approved in October.

The township is also involved in very preliminary discussions to explore the creation of a multi-municipal fire district with two other municipalities. They are Canton Township, which has volunteer-only service, and the City of Washington, which has paid firefighter service.

The process, should it move forward, would be coordinated by the Department of Community and Economic Development (DCED).  There were 20 successful mergers/consolidations of 49 volunteer fire companies that DCED was involved with from 1997 to 2004, according to a 2005 study on the feasibility of regionalizing fire service in Pennsylvania.  Eight of those involved more than one municipality and the remainder were intra-municipal combinations.

It is quite possible that the same issues that are raised with school district consolidations–cost-sharing, taxes, capital assets and community pride–that we noted in a recent Brief could also be present with the proposed fire company combination in Washington County and across the state.

 

Act 44 lawsuit could affect 44 Port Authority projects

A lawsuit pending in federal district court in Pennsylvania filed by truckers against the Pennsylvania Turnpike Commission over the rates and use of turnpike tolls as directed by Act 44 of 2007 might affect the Port Authority’s capital budget.

The lawsuit argues that by raising tolls year-after-year and handing the money over to the Pennsylvania Department of Transportation (PennDOT) for “non-Turnpike-related state projects” there is “an undue burden on interstate commerce in violation of Article I, Section 8, Clause 3 of the U.S. Constitution” and the plaintiffs are seeking relief.

Act 44, as amended by Act 89, requires the Turnpike Commission to make payments to PennDOT totaling $9.65 billion through 2057. The annual payment is scheduled to decrease from $450 million to $50 million in fiscal year 2022-23.  While the lawsuit is pending the turnpike has not made two quarterly payments to PennDOT and, in turn, the money from the Commission and PennDOT to other entities, including the Port Authority, has been delayed.

The capital budget adopted in June for the Port Authority’s current fiscal year is $145.7 million; $104.9 million of it is provided for by state sources.   The 44 capital projects proposed to be put on hold total $65 million, according to a newspaper article.  An authority committee considered the amendments to the budgets last week and the entire board is supposed to vote in early December. Interestingly the article noted that SEPTA (Philadelphia’s transit agency) does not anticipate putting anything on hold even though it receives subsidies through the Act 44 scheme.

If the truckers’ association wins its suit against the Turnpike Commission that stops or rolls back tolls, the state will once again be looking for alternative sources of revenue to subsidize mass transit.

PSERS financials for 2018

The comprehensive annual financial report for the Public School Employees’ Retirement System (PSERS) for fiscal year 2017-18 was recently published.  PSERS covers public school employees working for the state’s 500 school districts.  The report shows 256,000 active members (about 8 percent are from the Philadelphia and Pittsburgh school districts) and 233,000 retirees and beneficiaries receiving benefits with just over 12,000 retirees added to the rolls in FY 2017-18).

According to the report the funded ratio (assets divided by liabilities) was 56 percent.  If ranked on the distress scale applicable to municipal plans in the state, PSERS would be in the moderately distressed category.

A total of $9.9 billion was added to the plan in FY 2017-18, with employees contributing $1.0 billion, employers (the state and school districts) contributing $4.2 billion and investment income producing $4.7 billion.  Total deductions from the plan were $6.7 billion.  In PSERS’ analysis of the past two decades of contributions, an average 60 percent of the funding has come from investments, 24 percent from the employer and 16 percent from employees.

The employer contribution rate last fiscal year rose to 32.57 percent from the previous year’s 30.3 percent; projections show the rate going up to 36.32 notwithstanding the Act 5 reforms that will affect new hires beginning next July.  No longer will stand-alone defined benefit plans be offered to new employees who will instead select from two hybrid (defined benefit and defined contribution) plans and a defined contribution plan.

As we pointed out in July 2017 “some of the risks associated with investments, longevity changes and inflation are shifted to employees in their defined contribution component. Longer term, the plan becomes more fiscally stable—absent legislative tinkering that reverses the advantages offered the government by the defined contribution component.”  The longer term is likely a decade or so at the very least before the funded ratio begins to rise significantly from its current low level.  By 2030 the projection is for a ratio in the low 70s and by 2040 for a 95 percent ratio.  Until that time expect plenty of school districts that apply for Act 1 exceptions to their property tax limit to cite pension obligations as the reason.

Education funding conflict or harmony on the way?

According to a newspaper article, education advocates are hoping that the results of last week’s gubernatorial election will pave the way for a boost in education spending  in the next few years.

One proponent stated “[the governor] has to create a narrative and a context for a ‘yes’ vote for revenues. He can do it now. I think this election gives him the ability to do that.”  However, a spokesman for the majority party in the General Assembly noted “that simply providing more tax dollars does not necessarily make more scholars.”

Since fiscal year 2015-16, funding for education has increased $1.5 billion from $11.1 billion to $12.6 billion (these figures do not include appropriations to Pennsylvania State System of Higher Education or state-related schools or for higher education financial aid.)  Of the 14 percent increase, half has been accounted for by contributions to the school employees retirement system, PSERS. After that come the boosts to basic education funding, which is driven through the student-weighted formula in Act 35 of 2016 which we wrote about in a Brief this summer.

So maybe there will be political wrangling and deal-making between the Democratic executive and Republican-controlled legislative branches. The article mentioned that school building capital needs may be an area that gets increased attention.  If a decision comes in the William Penn v. Pennsylvania Department of Education lawsuit in the next few years, that could even raise the possibility of an executive-legislative-judicial conflict if the courts try to grant itself a role in determining how to spend basic education dollars.

 

Allegheny County’s mid-year pension performance

At the most recent meeting of Allegheny County’s pension board the members received the investment report for the period ending June 30, 2018.  The report shows that the total fund composite of investments stood at $915.5 million.  That is an increase from $894.1 million on June 30, 2017.  It is slight decrease from the $922 million reported in March.

The largest class of investments for the county are in public equities–U.S., non-U.S. and global–with just about 40 percent of the fund composite invested in these categories.  The remainder is divided between private equity, fixed-income, private real estate, public real assets, hedge funds and cash.  From June to June, the market value of total fixed-income, total private real estate and total public real assets increased in value while the other categories fell.

That is similar to the investment makeup of the City of Pittsburgh’s comprehensive pension trust fund that we wrote about earlier in 2018.  Whereas Pittsburgh’s pension ratio had a substantial upswing due to its pledge of parking taxes to the pension plans ($735 million in total annual payments through 2041) the county has not taken a similar action of that magnitude.

While we have made the recommendation that new public sector hires be placed into defined contribution plans, the reforms that were made by the county five years ago was to make changes to final average salary, overtime calculations, vesting period and length of service time in order to try and achieve savings.  The most recent valuation for the pension system was 55 percent funded with $1.555 billion in liabilities and $857 million in assets.

Port Authority’s 2017 performance

Mass transit performance and financial data for 2017 has been released by the National Transit Database.  The data for the Port Authority of Allegheny County show that, on all modes of transportation (bus, light rail, inclined plane and demand response) annual unlinked trips stood at 63.2 million.  That was a slight decrease from 2016’s total of 63.8 million trips (0.9 percent).

Fare revenues, which transitioned from zone pricing to a single fare, fell from 2016’s total of $101.8 million to $99.8 million (1.9 percent).

On the expenditure side, total operating expenses were $400 million, up from $397 million in 2016 (0.7 percent).  The largest component, salary/wages/benefits, stood at $301 million, up from $290 million in 2016.  The authority’s largest union is in the middle of a four-year contract agreement.

An Institute Brief from May analyzed the bus operating expense per vehicle revenue hour in comparison with other systems (a 62 percent difference).  In 2017 that figure fell for the Port Authority from $189.69 in 2016 to $187.02 (1.4 percent).  The database shows that, year-over-year, bus operating expenses fell slightly, the annual vehicle revenue hours increased as did the number of buses operated in maximum service.  Interestingly, even as the number of annual vehicle revenue hours increased the number of passengers fell slightly from the year earlier level.  It is doubtful that even with this slight decrease that the gap between the authority and the peer group has closed at all.