Pennsylvania Teachers' Plan Will Blow Up In 2012

Grim data from numbers of states keeps pouring in. Let's take a look at the latest from Texas and Pennsylvania.

Central Pennsylvania News is reporting Taxpayers' pension tab starts spike.

Pennsylvania's school districts will see their retirement costs increase by more than 70 percent next year as the first symptoms of the state's public pension crisis begin to be felt.

The Public School Employees' Retirement System trustees on Friday approved an employer contribution rate of 8.22 percent for the 2010-11 budget year, a 12-year high for the system and a 72 percent jump from the 4.78 percent contribution rate in place now.

That means taxpayers will have to spend $1.1 billion next school year for teachers' pensions, or almost $500 million more than this year. State and local education officials said the worst part is that next year's increase is just a fraction of an anticipated leap to record public contributions by 2012, when the state and local tab is projected to exceed $4 billion.

The taxpayers' tab -- known as the employer contribution rate -- floats according to the investment earnings. The rate is that share of a district's payroll taxpayers must put up to meet future pension obligations. That cost is split between the state and school districts, but it's all paid by taxpayers.

School officials have been bracing for the 2012 rate spike, driven in large part by benefit changes passed by the General Assembly and approved by then-Gov. Tom Ridge in 2001, after several years of historic bull markets, that would leave most career teachers and state workers retiring at full salary.

But thanks in part to historically bad returns in investment markets last year, the cost climb has started earlier and might be getting steeper. PSERS lost 26.5 percent on its investment portfolio for the year ending June 30, believed to be its worst one-year result ever.

In one glimmer of good news, PSERS' investments have started to rebound, posting a 9.2 percent gain this summer. Still, Melva Vogler, the PSERS board chairwoman, appealed to all districts Friday to do their best to continue to plan ahead.

"At this point, the fund cannot realistically earn its way out of the projected rate spike," she said.

Sales Tax Revenue Plunge In Texas

The American Statesman is reporting Texas State sales tax revenue plunge persists.

Texas collected $1.7 billion in sales taxes last month, down 14.4 percent from November 2008. It was the tenth month in a row of year-over-year declines and the sixth consecutive month of double-digit percentage drops.

State Comptroller Susan Combs said Friday that collections were down in all categories, including retailing, oil and gas production and construction.

Although there are some signs nationally that consumers are starting to spend a little more, Combs has said the sales tax picture will remain bleak for several more months.

Unwarranted Sales Tax Optimism

Susan Combs is an incredible optimist. The best Texas can hope for is stabilization at some low level. Year-over-year comparisons will start getting better, but only because comparisons will get progressively easier for a while.

The actual amount of tax revenue collected will improve much more slowly than Combs thinks, even if there is no double-dip recession.

Pension Plan Targets Incredibly Optimistic

Inquiring minds are reading about Texas Teacher's Fund targets and actual returns in Texas teachers fund losses will reverberate for years.

The worst of the past year's financial upheaval might be over, but the fund that provides retirement benefits to Texas teachers will feel the effects for many years, actuaries said Friday.

"There is virtually no way that this state can give ... a permanent increase to your retirees in the foreseeable future," said Michael Carter, an outside actuary for the Teacher Retirement System of Texas.

"The depth of what the markets have done in this decade will be felt for probably at least 20 years, and it will impact what this system will be able to do," Carter said, referring to the most recent market decline and the losses that followed the technology industry bust in 2001-02.

Over the past 10 years, the fund's average earnings were 3.3 percent, compared with an expected return of 8 percent.

It was sobering news for the board of the $94 billion pension fund and its 1.3 million retired and active members.

It was also a clear signal that the state — and perhaps active members — will probably need to ante up more in 2011, and the Legislature might have to reduce benefits for future retirees.

Getting the fund back to its 2008 level would require a one-year return of 38 percent or an annual 11 percent return for 10 years, the actuaries said.

The only other ways to bolster the long-term condition of the fund are to increase the rate of contributions, which come from both the state and the teachers, or to reduce future benefits.

It will be up to the Legislature when it convenes again in 2011 to determine what approach to take.

Ted Melina-Raab of the Texas chapter of the American Federation of Teachers said the teachers he represents will want to see the state pony up first before they are asked to contribute more.

"They want to see a significant commitment by the state and one that they can trust will continue," Melina-Raab said.

Teachers' Union Begs For Taxpayer Handouts

The Texas teacher's union wants the state (aka taxpayers) to pony up for ridiculous plan targets. What should happen is plan targets and payouts should drop and/or teacher contributions should rise.

With 10-year treasuries yielding 3.55% there is no reasonably safe way to assume 8% returns. The only way to get 8% is to take a lot of risk. If teachers want that risk, then teachers, not taxpayers should take the hit when risk blows sky high again (which it will).

An 11% return for the next 10 years is simply not going to happen. Nor is a 38% one-year return followed by a string of 8% returns.

All of these plan assumptions were put in place in the biggest credit expansion and PE expansion in history. They simply are not valid. The Teachers' association will be lucky to get 6% a year for the next ten years, very lucky in fact.

The odds of another huge stock market dip in 2010 or 2011 are huge. The odds of another recession in the next 10 years are also huge. Heck, the odds of double-dip recession in 2010 or 2011 are very substantial.

Fundamentally, a huge wave of boomer retirement is coming up, and those retirees will be drawing down funds and lowering lifestyles, not contributing and consuming more. Moreover, global wage arbitrage still has not played out and there is huge downward pressure on wages and jobs.

Structurally, unemployment will remain high for a decade. And finally, consumer attitudes towards debt and risk have reached a secular peak and have turned.

That is not a backdrop for a huge bull market in equities. Pension plans better figure this out and act accordingly or they are going to dig themselves an even deeper hole.

Pennsylvania Teachers' Plan Will Blow Sky High In 2012

The Pennsylvania Teachers' Trustees just approved a taxpayer contribution spike to 8.22% from 4.78%, a hike of $500 million to $1.1 billion.

In 2012 the taxpayer tab is expected to exceed $4 billion. If you get the idea this will blow sky high in 2012, you are correct.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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