Debra Erdley

Seven years after Pennsylvania lawmakers awarded themselves a 50 percent pension boost and granted a 25 percent increase to thousands of state and school workers, officials are struggling to remedy problems they created in two of the nation's most prosperous pension funds.

Members of Gov. Ed Rendell's administration and public school officials say that if lawmakers fail to act soon, taxpayers will feel a huge tax bite in 2012, when they have to pay for a rate increase created to offset the impact of the pension boost.

Budget Secretary Michael Masch said taxpayer contributions to the state employee and school pension systems -- totalling $1.1 billion a year -- could spike by nearly $900 million in 2012 if either fund has a single year without gains or falls short of 8.5 percent returns in other years.

That works out to about $70 a year more in taxes for every Pennsylvanian.

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The two Pennsylvania pension funds, considered among the nation's top-performing public pensions, have been "shooting the lights out" in terms of returns recently, said Keith Brainard of the National Association of State Retirement Administrators.

But souring markets are beginning to take a toll.

The Pennsylvania School Employees Retirement System, which earned a 22.9 percent return in the year ending June 30, 2007, will post year-to-date losses of 2 percent later this week when it announces third quarter returns between zero and minus 5 percent, a fund spokeswoman said.

The school pension fund is financed by employee contributions and employer contributions which are split between the state and local school districts. The state employees pension fund is financed by employee contributions and state tax dollars. Although the two funds provided information for the Masch study, neither has taken a position on his recommendations.

Masch, who is leaving Harrisburg to direct the Philadelphia public schools, recommended a series of small increases over the next several years so neither fund will require a steep increase in contributions in 2012.

"The prudent course of action is to change the rules governing commonwealth contributions now to reduce the chance of a spike," he said.

Tom Gentzel, executive director of the Pennsylvania School Boards Association, sits on the board of the school pension fund. He said the looming spike in pension fund contributions is a huge problem for schools.

"Our only problem with (Masch's proposal) is that we didn't get it nine months ago," Gentzel said, adding that his organization wants to review the benefit system.

"A generation ago, it was taxpayers who had these benefits who were asked to support the system. Now you have taxpayers who don't have those types of benefits paying higher taxes to support them for public employees."

School officials who must rely on property taxes for their pension fund contributions are urging lawmakers to hold contribution rates for next year at this year's level -- 7.13 percent of payroll -- rather than lower it to 4 percent, which last year's pension profits suggest would be adequate.

"Allowing the rate to go down so it can go back up is bad public policy," said Jay Himes, executive director of the Pennsylvania Association of School Budget Officers.

He would like to see lawmakers adopt Masch's recommendations.

State Rep. Steven Nickol, R-York, minority chairman of the House Finance Committee, said that is increasingly unlikely. The House Appropriations Committee has removed money from the budget that would have been used for larger pension fund contributions and used it elsewhere, he said.

Nickol, who is a member of the State Employees Retirement System board, voted against the 2001 raise, and has repeatedly urged lawmakers to address the looming spike.

"We would not be in this situation if it were just for the economic downturn," Nickol said. "The General Assembly gave us a huge retirement raise. It was really the action of the General Assembly. Then when the market went south, they reamortized the obligation so school districts wouldn't be overwhelmed."

Had lawmakers not reamortized pension obligations -- a move akin to refinancing a mortgage for a longer period of time and adding a balloon payment at the end -- actuaries estimated school districts would be paying 15 percent of their payroll to the pension fund by now.

Brainard called the move "monkeying" with the system. But he said the upside was that taxpayers got a break on pension contributions for several years.

"But that came at a long-term cost," he added.

State and school retirees who receive cost of living adjustments -- or COLAs -- at the Legislature's discretion, and last received a raise in 2002, might be caught in the middle.

A House bill with 155 cosponsors would grant a COLA at a cost of $10 billion -- or $500 million a year over 20 years -- to the pension funds. But Masch recommended lawmakers shelve it until they address the pension rate spike.

State Rep. David Levdansky, D-Forward, chairman of the House Finance Committee, vowed to halt action on the COLA until lawmakers address the spike.

"No bill is going to move until this rate spike is addressed," Levdansky said. "My next priority will be to work on a COLA for long-term retirees."