Center On Regional Politics Bulletin Volume 2, Number 3 | Fall 2013 A MESSAGE FROM THE DIRECTOR PUBLIC PENSIONS, SCHOOL FUNDING, AND ARTS AND CULTURE TOP CORP’S 2014 AGENDA As Temple’s Center on Regional Politics begins its second year, we look forward to working on ways to address two Continued work on reforming and funding public pensions, huge and inter-related challenges that face our region and helping rebuild Pennsylvania’s state education funding the Commonwealth: the rising costs of funding public formula, and identifying options to strengthen the arts and pensions and the increasing strains of adequately and fairly culture sector in Southeastern Pennsylvania top the 2014 funding public education. Polls shows schools are a top agenda for Temple’s Center on Regional Politics (CORP), as concern of voters. approved by its Executive Committee in November. Modest increases in the state’s basic education subsidy in the wake of the recession have been overtaken by even “These issues, all of which involve large public finance larger increases in the costs of funding the Public School challenges and could require the restructuring of delivery Employees’ Retirement System, which has an unfunded systems, have eluded durable solutions for many years,” liability of $29 billion. CORP’s Fall 2012 Issue Memo, said Joseph P. McLaughlin, Jr., center director, “despite January 2013 Board of Fellows Symposium, and June 2013 widespread agreement of their importance to the Working Group Report raised the visibility of the pension economy and quality of life in our region. problem, influenced the debate, and identified options. During 2014, we will attempt to build on that momentum. “We hope to improve public understanding of the challenges and opportunities and to help identify politically Even steeper pension funding increases loom in the feasible options to make progress in dealing with them.” future for the Commonwealth, school districts, and municipalities, all supported by the same taxpayers. Having co-sponsored a symposium on reforming Meanwhile, the formula for distributing state aid to Philadelphia’s taxes with the Pew Charitable Trusts, CORP schools is in need of updating or rebuilding to reflect also will continue to work on ways to improve the current demographic and fiscal realities. Our goal is to competitiveness of the city’s tax structure, which is heavily explore options for consideration by the governor and impacted by both pension and school funding challenges General Assembly when they take office in January 2015. and which has indirect effects on the regional economy. In addition, CORP will focus on ways to strengthen the region’s arts and cultural institutions, which are important Changing the dialogue on public pensions economic assets facing major economic challenges. Schools, pensions, arts: our menu for 2014. CORP also At the Executive Committee’s direction in 2012, CORP will respond to opportunities to contribute ideas to conducted research, organized a symposium, convened the public dialogue on other important issues, with the a working group of key public and private leaders and approval of our Executive Committee or the relevant experts, and issued several reports on public pension Policy Committee co-chairs. Please stay tuned. issues in Pennsylvania and the Southeast Region. This work culminated in a report in June entitled “What to Do about Joseph P. McLaughlin, Jr., Director Public Pensions? Options for Funding and Reform.” The TempleCenter University on Regional Politics Center on www.temple.edu/corpRegional Politics Bulletin | Volume 2, Number 3| Fall 2013 report highlighted options for making pension funds more Pennsylvania is one of just three states (with Delaware sustainable that are now under discussion in Harrisburg, and North Carolina) in the nation without a standardized including “stacked hybrid” plans that combine defined- funding formula. Others note that the state erred in benefit and defined-contribution components. using federal stimulus funds not just to stabilize but to expand school aid, making painful cuts inevitable as the The report also suggested that the 1% Philadelphia sales stimulus funds faded and recovery faltered. Although much tax due to expire on June 30, 2014, be extended and attention has been focused on this issue as a failure of the dedicated to reducing the City’s $4.8 billion unfunded last few years, the reality is that, with brief exceptions, the liability, accompanied by changes to make the pension Commonwealth has not had a stable and durable school system more sustainable for plan members and taxpayers funding formula for most of the last 20 years. going forward. This option became part of the public dialogue during the 2013 budget season, as the state and A usual formula works from a base cost, or what’s City searched for ways to provide financial support to the needed to meet academic standard (used by 36 states); school district as well as address the City’s pension funding formula factors like poverty (30 states); English language problems. learners (27 states); disability (25 states); if students are in foster care, neglected, etc.; and school district factors A number of public and private sector leaders represented like size and local property taxes (29 states). Although in the working group have asked that CORP continue Pennsylvania uses such factors to distribute relatively small to work on this subject, as it seems likely that the annual increments in the basic education subsidy, the bulk issue will remain a high priority on the agendas of the of public education funding is simply a re-enactment of Commonwealth and its municipalities for the foreseeable older distributions whose relevance to current needs has future. CORP’s working group report noted that this type decayed. By some accounts, the era of comprehensive and of research-based consensus-building activity took place in durable school funding formulas in Pennsylvania ended in Lexington, Kentucky and ultimately led to reforms in the 1992, and attempts to enact such formulas since then have pension system and financial stability for the city. been fitful and short-lived. Finding new options to fund public schools The effects of the recession and the rising costs of school pensions have squeezed the ability of both the state and Public education continuously ranks in public opinion polls local school districts to fund classroom instruction, making as one of the most important issues facing Pennsylvania it more important that the state funds available be used today, in some polls ranking even higher than concern in a more efficient and transparent manner. Although the about jobs. (See the graph below.) Critics contend that Commonwealth spends more state funds in the budget’s basic education line item than at any time in history, other Most Important Problem (MIP) Facing PA 60 50 40 All economic issues 30 Education, Schools 20 Unemployment, Personal Percent of Percent of Respondents 10 Finance 0 Nov. Feb. Aug. Aug. Oct. Aug. Aug. May Aug. Oct. 2005 2006 2006 2007 2010 2011 2012 2013 2013 2013 Sources: MIP for unemployment and personal finance are directly from the Franklin and Marshall College Poll. These responses are combined with concern about taxes and the economy in the Pennsylvania Policy Database (www.temple.edu/papolicy) recoding for fiscal and economic issues. Temple University 2 Center on Regional Politics Bulletin | Volume 2, Number 3| Fall 2013 Average State Share of State + Local Education Funding for critical line items that affect the ability of school 5 County Southeast Region districts to support classroom instruction have 28% been cut or eliminated in the wake of falling state revenues. 27% 26% Further, the Commonwealth and local districts 25% have had to increase their payments to the 24% statewide pension system for school employees by a combined $1 billion since 2009, and these 23% payments are projected to escalate by 155%, 22% or an additional $3 billion, by FY 2018. Most of 21% these pension contributions are needed to pay 20% Five for services performed in the past, not to pay for County Average 19% current or future school operations. Many school districts -- and not just in distressed urban or 18% Percentage of State Share of State + Local Education Funding Education Local + State of Share of State Percentage rural areas -- have had to raise taxes, reduce their complement of teachers and other employees, Source: PA Department of Education increase class sizes, and curtail programs like art, music, and athletics. In response, some legislators Average State Share of State + Local Education Funding for are seeking to eliminate school property taxes Bucks, Chester, Delaware, and Montgomery Counties and replace the revenue with state taxes. Nearby 28% graphs summarize declining state aid, and a 27% table on page 5 and 6 documents pension cost 26% increases for Southeast school districts. 25% 24% In addition to dealing with these budget 23% pressures, local schools and teachers are 22% expected to meet more rigorous federal, state, and professional standards for measuring the 21% educational progress of students. The combined 20% 4 County fiscal and educational pressures on schools will 19% Average increase demands for a rational and transparent 18% funding system. Percentage of State Share of State + Local Education Funding Education Local State + of Share of State Percentage The General Assembly has already recognized Source: PA Department of Education that its special education formula is outdated and State Share of State + Local Education Funding for in need of an overhaul. The House and Senate Philadelphia School District unanimously passed Act 3 of 2013 establishing a 64% bipartisan commission to report in November on 63% recommended revisions to its method of funding 62% this critical component of basic education. Any 61% effort to develop a more rational basis for the rest of basic education funding needs to take 60% account of the work of this commission.