2001 - The Beginning of the End

This is a tale of Pennsylvania politics, a federal education bill and two national tragedies that came together to create a Perfect Storm. A storm that is pushing public education in Pennsylvania into a precarious position. This is not about school boards, teachers unions or school reform. This is not about public, private or charter schools. This is about politics. Both political parties are complicit. And, unfortunately, this situation is not unique to Pennsylvania.

Warning... This is a rather dense and dark blogpost, but well worth the read if you want to understand how we got into this mess.

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GOOD TIMES (1990 - 2000) 

Prior to 2001, public education in Pennsylvania, though floundering academically, was financially solvent. The economy was strong, tax revenues were up and state pension funds were in better shape than at any point in their history. 

There are two state pension funds - PSERS (Pennsylvania Public School Employees Retirement System) and SERS (State Employees Retirement System). PSERS was founded in 1917 to provide public school employees with a pension plan. SERS was founded in 1921 to provide state employees including those at state universities, judges and elected officials with a pension plan. The basic facts of these pensions prior to 2001 were:

• 10 years to be vested.
• Contribution levels of 6.5% by the employee.
• Contributions by the local district/employer and the state were determined by the state legislature.
• Full retirement was 35 years served, minimum age 55.  
• Payout used a formula based on 2% for each year served.

Both PSERS and SERS are defined benefit plans. This means that an employee's pension is based on years served and salary earned, not on the investment value of the annuity.

Annual Pension Payment = (# of years served) X (2%) X (Average of top three year salaries)

For example, a teacher who worked for 35 years and had an average of $76,000 for his/her three top yearly salaries would receive $53,200 (35 X .02 X 76,000) annually for life. Retiring prior to 35 years would cause penalties that would substantially decrease the annual pension.

In the year 2000, the financial condition of the two state pension plans was outstanding. There were two reasons for this.

First, the baby boomer teachers (a statistically large population born between 1946 and 1964) were contributing into the retirement system, but were too young to retire. Their anticipated retirement dates would be between 2002 and 2020. Thus there were more total employees currently employed and more pension revenues as a result.

Second, the United States economy was booming due to the rapid growth of information technology. During the decade starting in 1990 and ending in 2000, the Federal debt went from a -$221.2 Billion deficit to a $236.4 Billion surplus! The economy was booming and our country was not at war. Stock markets were strong and pension fund investments were increasing at a record pace.

PSERS - 1995 - 2000 

If you look at the chart above a few numbers stand out. First, the PSERS funding ratio in 2000 was 125%. This meant that PSERS had more assets than liabilities. A funding ratio above 100% indicates that the pension or annuity is able to cover all payments it is obligated to make. This was great news.

Notice that in 1995, the combined state/district contribution was 16.6%.  In 1996, the state contribution went to 0%, although the state agreed to rebate a minimum of 50% of the district contribution back to the district. This odd bit of bookkeeping meant that the state and local district were each paying half of the contribution. In the next 5 years the District/State contributions decreased from 16.6% to 4.6% annually. The state and the districts were taking advantage of the good economy by cutting their contributions to the pension funds.

Pension plans are predicated on the fact that steady investments during both good and bad economic times are necessary to make sure that the fund remains 100% funded. The 1990's was an exceptional economic time. Hindsight (and competent pension management) suggests that a steady contribution during the booming economy in the 1990's would offset what might and did occur in the Great Recession in 2008. By cutting back on their contribution, the state was able to save money in the short term. This is good politics because it limits immediate tax increases and funds needy projects. This is bad economics since it begins to put the long term value of the pension at risk. The pension plan should be a hands off, stand alone financial activity. Note that no matter what the status of the economy, the employees contribution was consistent during this time.

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Federal Testing, Greed and a Terrorist Attack (2001 - 2007) 

Three events occurred in 2001 that dramatically changed the public education outlook for Pennsylvania, both academically and economically.

Event 1 - No Child Left Behind (NCLB)

On January 23, 2001 the No Child Left Behind Act was presented to Congress. This bill was a re-authorization of the federal Elementary and Secondary Education Act of 1965 (ESEA). It is important to note that the federal government is not directly responsible for public education in the United States. That responsibility belongs to the 50 individual states. The federal involvement in education began in the 1960's to address issues of civil rights and discrimination with respect to race, handicaps and poverty. The ESEA authorizes funds to support schools to provide free/reduced lunch programs, reading recovery and academic support for poor and disabled students. It is a federal attempt at equity in education. 

In 2001, Congress and the President decided to exert pressure on public schools through a side door. The No Child Left Behind Act called for every school that received Title I funds to administer a common test (managed by the state) and assure that all students were proficient in Reading and Mathematics. This was the first time the federal government actively engaged in school reform. Basically, they were using the Title I monies as leverage for accountability in states and local school districts. They were forcing states and school districts to focus on the discouraging achievement gaps that existed based on poverty and race. The federal government wanted positive learning outcomes as a result of its investment. Senator Edward Kennedy (Democrat) and President George Bush (Republican) collaborated to assure bipartisan passage of the bill.

The NCLB act was signed in 2002 by President Bush. If an individual school or school district did not meet AYP (Adequate Yearly Progress - i.e. achieve the levels of proficiency prescribed by the Act), they would be placed into Warning, then in School Improvement and then in Corrective Action. In theory a school could be closed if they did not raise student achievement to acceptable levels. States ranked their school districts by their scores on the tests and published the results in the media. The feds ranked states by their scores on the tests. Even real estate agents listed local school district test scores on house listings to try and attract families. The pressure to do well was powerful. 

NCLB did not provide additional funding to support schools working with the highest risk students. They assumed the Title I funds were adequate. They simply said "Do Better or Else". To many educators it seemed mean spirited... as if they were picking on schools with high levels of poverty.  

In 2002, the first year of the program, schools had to achieve a relatively low cutoff score (see chart below) - 35% of the students proficient in Mathematics and 45% proficient in Reading. All but the lowest districts would have little problem meeting these initial scores. The benchmarks would slowly increase over the first 6 years of the program to 45% for Mathematics and 54% for Reading. This was a slow growth model that challenged only the poorest and lowest achieving school districts. Since the scores were public, and schools were supposed to achieve 100% proficiency by 2014, there was some consternation among school leadership. Many educators hoped the program would be changed or repealed prior to 2014.

Event 2 - Radical changes to SERS and PSERS 

In the same year that the federal government introduced No Child Left Behind, Pennsylvania changed its pension law in a manner that ultimately would put it at risk in the not so distant future. On May 17, 2001, Governor Tom Ridge signed Act 9 2001 into law. The Act changed two key elements of both pension funds.

First, Act 9 changed the number of years to be vested in the fund from 10 to 5, thus allowing more people to become eligible for a pension at an earlier age.

Second, it raised the pension benefit by 25% for existing teachers and state employees and 50% for existing judges and legislators. 

Original Formula                                                 2% X 35 = 70% of salary
New Formula Teachers & State Employees        2.5% X 35 = 87.5% of salary
Judges and Legislators                                        3% X 35 = 105% of salary

Changing the funding formula for existing members of a pension plan in the middle of their career is not appropriate. The actuarial calculations for the fund were based on a 2% per year payout. Changing the formula negated the existing projections. Although all PSERS and SERS participants would benefit, the group that benefited the most were judges and legislators. Ultimately, this was a grab for money while the fund was doing exceptionally well. And the lowering of the state and district contribution (as previously mentioned) was a political move to balance the budget by taking money from the pension plan.   

The concept of an annuity is predicated on a constant contribution and a solid investment strategy that provides a defined benefit at full retirement. If you lower your contribution and/or raise the benefit during good times you won't have enough money during hard times. The state legislature did both. They were kicking the can down the road.  It was unethical. But it was not illegal.

Event 3 - September 11, 2001 
The third event occurred the same year on September 11, 2001. A terrorist attack destroyed the Twin Towers in New York, damaged the Pentagon and murdered over 3000 citizens. As a result of this tragedy, our President committed us to a war in Iraq. The war cost over $4 trillion. The President did not provide for the funding of the war in the country's budget. Since the war was not reflected in the budget, the cost of the war simply added to the country's debt. In essence, the United States financed the war. This sent the country's financial markets into a tail spin. The stock market dropped and thus the value of state pension investments dropped as well.

PSERS and AYP - 2001 - 2007

Note in the chart above, within the first 5 years after these three events- passage of No Child Left Behind, the modification to the PSERS/SERS pension formula and September 11 terrorist attack, the pension funding ratio dropped from 123% to 81%. Now the fund had more liabilities than assets. Yet no one seemed too concerned. State employees were happy with their higher pension rate. There was no noticeable increase in the employee contribution. The local district contribution was low so district's did not complain.   

Between 2001 and 2007, even though we were at war, it was a rather quiet time domestically. Our country's economy seemed to be on the mend. The stock market recovered, home sales were booming, property values were skyrocketing and our president was confident we were moving forward. Although at war, our president told us to "go shopping", to "get down to Disney World in Florida," to "take your families and enjoy life, the way we want it to be enjoyed." 

From an education perspective, NCLB was not overwhelming since the cut off scores were rather low. Just like with the pensions, we seemed to be kicking the academic can down the road, assuming someone would repeal the federal law when they realized it would be impossible to hit 100% proficiency.  

The future did not look that bad.

THE BEGINNING OF THE END (2008 - 2018) 

In December, 2007 the global economic bubble burst. The world was devastated by the Great Recession. The recession caused massive unemployment, the default of a number of investment banks, large numbers of home foreclosures and an economy that was stalled. The stock market plummeted and both savings and investments were significantly deflated. 

From a pension perspective, the Great Recession was devastating. Imagine the effect this had on Pennsylvania pension funds that in 2001 increased its benefit, decreased its contribution and had an increasing number of retirees (the baby boomers.) Both large and small retirement plans that were invested in the Stock Market almost immediately lost 1/3 of their value. Look at what happened to the PSERS funding ratio during the recession that began in late 2007 (2015-18 are PSER's projections.)

PSERS FUNDING RATIO BY YEAR

Pennsylvania's legislature was slow to act. With such a poor economy, overall tax revenue was down. There was little money to pump into the pension fund. The question was how to stop the pension fund from becoming so undervalued that it would not be solvent. Two laws, one federal and one state, addressed some of the immediate concerns.

Federal Emergency Funding - In 2009, Congress passed and President Obama signed the American Recovery and Reinvestment Act (ARRA). ARRA addressed the recession by creating and saving jobs, spurring economic activity, bailing out major manufacturers (General Motors and Chrysler) and investing in long-term growth. ARRA provided Pennsylvania with a large influx of money ($33.8 billion.)  Approximately $2.3 billion from the total was allocated for public schools. The ARRA funds were allocated during 2009 and 2010. 

The question was how should the state of Pennsylvania use these funds. Under Governor Rendell, the state decreased its basic subsidy to school districts at the same time that they gave the districts ARRA funds. So during 2009 and 2010 it appeared that state funding levels had increased. Actually, the state level decreased and the ARRA more than made up the decrease. After the ARRA funding went away in 2011, districts revenues were significantly down. Note in the graph below, 6 years after the Great Recession began (2014), local districts still were not at their 2008 level of funding. And that did not take into account increases in the district pension contributions to PSERS. The year the federal funds went away was the first of Governor Corbett's administration. He walked into a mess. And it didn't help that Governor Corbett was not considered a "public education advocate."

Decreasing state funding, ARRA funding and Pension Costs

More Changes to the Pension Fund: In an initial attempt to address the pension crisis, the state passed Act 120 of 2010. This put new teachers and state employees back at the 2% a year benefit rate. It also raised the number of years to be vested back to 10. Unfortunately, this would only affect pensions 35 years down the road.

In addition, in 2011, simultaneously with the loss of federal ARRA funding, the state announced a program of harsh pension contribution increases that districts (and the state) would have to comply with over a ten year period.  

PSERS  CONTRIBUTIONS - 1995 - Projected to 2018 

As you can see from the chart above, district contributions would go from 5.6% in 2011 to 30.6% in 2018.

Let's make some sense of this. If a teacher has a salary of $50,000, the teacher would contribute 6.5% to retirement ($3,250). In 2011, at 5.6% the district had to contribute $2,800. In 2014, at 21.4% the district contributed $10,700. And in 2018 they will have to contribute $15,300. This five fold increase in contributions represents a huge burden on school districts. Since the state provides each district with a 50% rebate, the burden is shared by both the local district and the state.

2018 is when the actuaries believe PSERS will bottom out. Not surprisingly, that is when most of the baby boomers will have retired (and many of the older boomers will begin passing away.)

With districts having to pay so much more for pensions, state funding in 2012 below what it was in 2008, and federal ARRA money gone, there was a serious budget crisis in Pennsylvania schools.

At the very same time this fiscal crisis was occurring, the No Child Left Behind Act dictated that local achievement (AYP) must rise to unattainable levels. Note in the table above, from 2010 to 2014, proficiency cut offs increased from 63% to 100% in Reading and 56% to 100% in Mathematics.  Not only was this impossible, but districts had to achieve this with less money as they began bailing out the pension fund. Let's be honest, only bureaucrats in Washington DC would pass a law stating that every child in the country would be proficient in Reading and Math.

Who pays for the damage done by the Perfect Storm?  The Children.  

Why am I calling this a Perfect Storm?  Much of this post is about the pension crisis in Pennsylvania and what caused it. But the most important concern is what affect does this funding crisis have on education, learning and the needs of students. 

At the same time in 2012 that the pension contribution was going up precipitously for districts, so was the benchmark for AYP. The graph below is a strange, yet relevant juxtaposition of economics and academics. One line represents pension costs and the other line represents what percent of the students must be proficient at reading. They are following the same path. Higher costs and higher achievement. It is extremely hard to raise achievement to unprecedented levels when you have to spend unprecedented high levels of money to bail out the pension plan.

Costs Go Up as Academic Outcomes Must Go Up

The federal government gives an ultimatum. Make every student proficient in reading and mathematics by the year 2014. The state government turns to the districts in the same time period and demands they spend more money on pension contributions (at no fault of their own.) And at the same time, the state decreases their basic education subsidy to local schools. So what should a school district do?  

Since district budgets must be balanced, School Boards and Superintendents have two choices - raise taxes or cut costs. In the current political environment in our country and state, no one is about to raise taxes... especially during a recession. So school districts cut costs.  And since they are held accountable by the state and federal government for scores in Reading and Mathematics, you can guess what is cut.  

Cut programs included physical education, the arts, foreign languages and electives. Class sizes increased. Extracurricular programs were cut. Paraprofessionals (teaching assistants) were cut. Athletics such as the football team were not cut, but students in those activities began paying a fee to participate. All efforts went into increasing test scores. 

After 2010 the cut off scores went quickly from 72% to 100%. For the first time AYP was not being reached in middle class districts in the suburbs. This infuriated families who moved to the suburbs to get away from the cities, from poverty and from what they perceived as bad schools. 

Right wing conservatives picked up on this and began trying to discredit public education in general and teachers unions in particular. They blamed the unions, the pensions and the school boards for this terrible situation we were in. They saw this as an opportunity to tear this huge "entitlement program" down. They didn't care that this was a pension grab by a Republican legislature and signed by a Republican Governor. They didn't care that the pension when run legally and competently did what it was supposed to do: provide public employees with a quality retirement. They didn't understand that the goal of a public employee pension was to provide an incentive and reward for seeking a career in public service. The concept was not wrong, the greed of the legislators was. Nor did the federal government have a clue what contortions would occur when a country's education policy is predicated on a punishment based system resulting from high stakes testing.  

That is the Perfect Storm. Politicians working their magic. Mucking around with the pension system for short term budget balancing and selfish personal gain. Messing with public education in a non-supportive, naive and abusive manner. And the students, our children, our future, bearing the brunt of it.

It is always our children who suffer the consequences of our selfishness, our hubris and our greed.