States throw struggling schools a pension life raft

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Oregon, California, Indiana and Kansas have all proposed budget legislation this year to provide one-time funding to help alleviate the pension burdens for school districts in their states.

While those states’ efforts are not enough to effect a sea change in pension liabilities, their endeavors signal a growing recognition that states need to aid school districts as pension liabilities escalate, said Joshua Grundleger, a Moody’s Investors Service analyst.

“These state contributions, which are not currently intended to be recurring, would modestly reduce the amounts school districts must contribute to the plans over the next couple of years, thereby freeing up existing school district resources for other purposes,” Moody’s analysts wrote in an April 9 report.

The increased contributions in California and Oregon are only lowering the payroll burden of pensions by 1%, said Matthew Butler, a Moody’s vice president and senior analyst.

Though the problem varies on a state-by-state basis, considering such factors as whether the school districts have their own revenue-raising ability, the growing pension burden is a national problem, Butler said.

"The contributions may have a modest credit impact, but the larger story is that more states are recognizing unfunded teacher pensions are a funding challenge for school districts," he said.

Oregon Gov. Kate Brown and the state’s Legislature have been weighing a variety of methods to help reduce the pension burden on school districts.

Oregon legislators are considering a tax on business revenues to support education estimated to bring in $1 billion a year, but the Oregon Business Council warned in a March report that increasing pension costs could eat the majority of the money.

One solution Brown has reportedly been considering is taking $1.4 billion from SAIF, the state workers compensation insurance corporation, to pay down school districts debt from the Oregon Public Employee Retirement System. Nothing has been introduced, however, and the proposal drew the ire of Republicans.

“The Governor’s proposed indiscreet confiscation of SAIF’s reserves is a smash and grab, endangering hardworking Oregon wage earners,” House Republican Leader Rep. Carl Wilson, who represents Grants Pass, said in a statement. “Employees and their families depend on SAIF’s worker compensation plans during the dire times when they are injured and can’t work.”

Brown’s recent efforts have been focused on methods to reduce pension costs for schools as opposed to lowering the overall PERS deficit, estimated at $26 billion. Oregon’s PERS provides retirement benefits for school, and state and local government employees — and Brown had formed a task force last year around the issue.

Her proposals to reduce the pension burden overall include contributing funds to the pension system’s two side accounts that were established in 2018. The side accounts, which allow the state to make either on-behalf or matching-fund contributions to school district pensions, have remained largely unfunded, though the state anticipates making a small $11.5 million deposit in the school district’s fund with fiscal 2019 unclaimed property revenue, Moody’s analysts wrote.

Brown has gone full throttle on educational programs from pre-K through college since releasing her proposed budget in December. She also worked with lawmakers last year to create a program to chip away at the pension liability.

Her budget would dedicate an additional $100 million into the school district’s fund to help schools cover increasing pension costs. But PERS estimates that $1 billion to $1.5 billion in additional contributions are needed for schools over the next biennium.

Another idea floated earlier in the legislative session was to redirect the estimated $724 million “kicker” income tax rebate when taxpayers file their income taxes in 2020. When revenue for the state’s two-year budget cycle exceeds the final revenue forecast by 2%, the state’s unique rebate system is triggered. Individual taxpayers receive a “kicker” rebate credit on their taxes for the following year.

“The proposal, which requires two-thirds legislative approval, would suspend the taxpayer credit in the upcoming fiscal year and redirect the surplus to the pension system’s side accounts, thereby lowering the school district contributions,” Moody’s analysts wrote.

In California, Gov. Gavin Newsom proposed a $2.9 billion payment to the California State Teachers’ Retirement System in his budget. School district contributions have risen steadily from 8.25% in fiscal 2014 to an anticipated 18.1% of payroll in 2020, Moody’s wrote. The state estimates its one-time deposit would reduce school district contributions to 17.1% of payroll in fiscal 2020 and lower estimates by 0.5% from existing projections after fiscal 2021.

Newsom also proposed an equal amount for the California Public Employees’ Retirement System saying when he introduced his $209 billion budget proposal that the most significant thing in the budget was reflected there.

“We are paying down debt — and making sound and significant one-time investments that will maintain our surplus for a number of years,” Newsom said.

Newsom’s budget anticipates the rainy day fund will grow to $15 billion at the close of fiscal 2020, even after accounting for the $3 billion payment to CalSTRS.

Indiana Gov. Eric Holcomb has proposed using $150 million of state reserves to provide districts with some pension relief over the upcoming biennium, Moody’s wrote. The governor’s proposal encourages, but does not require, school districts to use the freed-up money to give teachers raises.

Kansas also recently enacted legislation that allocates $115 million to repay a 2016 pension contribution shortfall to the combined state employee and school plan, the Kansas Public Employees Retirement System.

The budget proposals follow actions by other states over the past few years to increase financial support for school district pensions. Though Oregon, California and Indiana are providing one-time, not ongoing support as some states have, Moody’s analyst wrote that each case reflects “awareness that more state resources are needed to address teacher pension plan costs.”

States that are providing ongoing support include Michigan, which adopted a statute in 2012, that has kept medical benefits from exceeding 27% of payroll, analysts wrote.

“In some cases, like Illinois, the vast majority is already funded at the state level,” Butler said. “There is just a lot of variability as to whether it is considered a school district or state funding burden.”

Though Butler said it is likely more states will help ease the burden on school districts, they also warned in a report published in June 2018, that if states do notor even push on to school districts what they are currently contributing, it could create a credit risk for school districts.

“States remain a major source of school district revenue and will likely play an increasingly important role in managing their growing pension obligations, especially when districts have limited local revenue-raising opportunities,” Butler said.

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