For most Pennsylvania homeowners, the connection between school district pensions and their property tax bill is probably not obvious, but it should be. ;Depending upon the school district that you live in, anywhere from 15 to 25 percent of the school district budget goes to pay for those pensions, which prior to the pension reform of 2017 are absolutely “cadillac” defined benefit pension plans.
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Pennsylvania has made a promise that is constitutionally guaranteed to hundreds of thousands of public school employees and retirees through the Public School Employees’ Retirement System (PSERS).
Unfortunately, every pension promise has another side, which is that someone must fund it. That someone is the taxpayer at the state level and the property owner at the school district level.
Many of the Pennsylvanians bearing the burden to finance PSERS, and state employees and retirees as well through the SERS system, have no defined-benefit pension themselves. They rely upon Social Security, personal savings, IRAs, and 401(k) plans. When their investments decline, they generally absorb the loss themselves.
Yet through the current state taxes and school property taxes, they also help bear the financial consequences when Pennsylvania’s public school pension system experiences investment losses, funding deficiencies, or increases in pension obligations.
In reality, government has a stewardship responsibility on both sides of the pension promise. The employee deserves the benefit that was promised. The taxpayer deserves to know what that promise costs, what risks are being taken with the assets supporting it, and when extraordinary costs imposed to repair past deficiencies will finally end.
Pennsylvania’s pension problem, meaning its unfunded liability, was not caused by one person, one political party, one legislature, or PSERS. It developed through a combination of events.
In 2001, Pennsylvania enacted Act 9, substantially increasing pension benefits. Soon afterward came major investment market losses following the technology bubble. Several years later, the financial crisis of 2008 produced another devastating market decline in pension values.
During the same time, Pennsylvania contributed less to PSERS than actuarially required, partly due to the magnitude of the losses and the Commonwealth’s own budget disaster taking place because of the two recessions as well as the massive decrease in asset values due to market losses.
The effects compounded, resulting in the massive unfunded pension obligations that we see today.
Act 120 of 2010 established a path toward dramatically higher employer contributions. The concept of the employer contribution rate, the rate of the payroll that must be remitted for pensions, became a prominent budget issue for the state and the local school districts. Gov. Shapiro, as a legislator, co-sponsored this bill and obviously voted for it.
For example, for fiscal year 2025–26, PSERS’s employer contribution rate is approximately 34 percent of payroll, which is easily misunderstood. Only about 5.45 percentage points of the employer contribution rate represents the employer normal-cost component. Approximately 27.5 percentage points are associated with the unfunded accrued liability and the amortization of the unfunded liability.
In other words, more than 80 percent of the current pension-related employer contribution rate is associated with paying down legacy unfunded obligations rather than the normal employer cost of benefits currently being earned.
Pennsylvania isn’t simply paying for today’s pensions. It is still paying for yesterday’s pension debt. The Commonwealth finances a substantial portion of school-employer pension contributions, while school employers finance the remainder.
School districts have multiple revenue sources, so it would be inaccurate to claim that every pension dollar comes directly from property taxes. But property taxes are the principal locally controlled revenue source for most school districts. When pension costs consume billions of dollars that might otherwise be available for teachers, special education, transportation, buildings, and other educational expenses, the pressure ultimately reaches the local taxpayer. This is the connection the public rarely sees.
When investments perform well, assets grow, and future funding requirements can improve. When investments perform poorly, promised pension benefits do not simply decline. The deficiency becomes an unfunded liability.
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Someone eventually has to finance it, and that someone is the taxpayer and the property owner. Renters also pay in that rents are increased to cover the costs of those pension obligations.
If the unfunded liability is real enough that taxpayers must spend decades paying it down, shouldn’t the savings be equally real when the debt is finally extinguished?
That question is not theoretical. Earlier PSERS actuarial projections showed employer contribution rates remaining extraordinarily high through the mid-2030s. Then something remarkable happened. One projection showed the employer contribution rate falling from more than 42 percent of payroll in 2035 to approximately 25 percent in 2036 and continuing downward thereafter.
More recent PSERS stress testing still anticipates a major reduction after the large Act 120 “fresh-start” amortization base is paid off in 2035 under its central assumptions. That is the expected consequence of accomplishing what taxpayers were told these extraordinary contributions were intended to accomplish: paying off the legacy pension debt.
If the debt is paid, the extraordinary cost associated with paying the debt should decline. But that creates an important public policy question today: What happens to the resulting decline in costs?
Imagine that the legacy liability declines, and the required employer contribution begins falling dramatically, as was originally projected for 2036. A future governor and General Assembly would suddenly have substantial fiscal capacity available without the appearance of raising taxes. Transparency is critical.
There is another reason to address this issue now rather than wait until 2035. Under severe adverse scenarios, elevated contribution rates can persist for decades.
Now imagine a major recession. Financial markets decline, reducing pension assets, and the unfunded liability increases. Yet pension benefits must still be paid. That recession will place extraordinary pressure on the Commonwealth budget, school districts, and taxpayers precisely when all three are least capable of absorbing it.
This is where pension policy intersects with the annual state budget. PSERS determines an actuarially required employer contribution. School districts incur pension obligations based upon that contribution rate. The Commonwealth reimburses school employers for a substantial share. Those are interconnected economic transactions, but they occur in different organizations and different budgets.
That separation creates the opportunity for confusion. A future Commonwealth budget could change the timing of pension reimbursements, finance obligations through another revenue source, defer payments, or create pension obligations outside the traditional employer contribution mechanism.
Pennsylvania’s new cost-of-living adjustment for certain longtime retirees illustrates why this matters. The question is how transparently government finances the promise. The new obligation uses a separate gaming revenue funding mechanism rather than simply flowing through the traditional employer contribution structure, but the cost did not disappear. It moved.
Pennsylvania pension policy therefore involves three legitimate interests: government, employees, and taxpayers. Those interests should be aligned. That may require greater statutory transparency.
Pennsylvania made an explicit promise to its public-school employees. Pennsylvania also made an implicit promise to taxpayers when it required them to finance decades of extraordinary pension contributions:
Many of those taxpayers have no guaranteed pension themselves. They bear the investment risk in their own retirement savings while simultaneously helping bear the funding consequences when a public pension system experiences investment shortfalls.
A pension promise creates two obligations: one to the employee who earned the benefit and another to the taxpayer who must finance it. Good stewardship requires having the courage to protect both.
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Image via Pxhere.