2011 Budgets: 2010 legislature and governor imposes brand new unfunded pension mandate

On Wednesday of next week, our Board of Education will conduct a workshop to begin the budgeting process for budget year running from July 1, 2011 through June 30, 2012. The administration is going to tell us that in the coming budget, Governor Pawlenty and the legislature passed along to us an additional $1.2 million in new unfunded mandate costs in the last legislative session. We will be told that unless we rescind them in the coming collective bargaining agreements, we will absorb $ 1 million for in additional compensation costs before we even begin bargaining. The Board of Education is going to have to do some really hard thinking about what sustainable finances mean.

We face the following financial challenges:

• Unfunded cost increase in TRA and PERA retirement fund contributions will rise $250,000 per year each of the next four years. (I explained this cost in the prior post)

• Annual cost of special education pro-ration revenue reductions will increase $350,000 per year, each year until the legislature fixes this problem. (I'll explain this cost in my next post)

• Total state special education unfunded mandate deficit in our district is about $8.5 million.

• Annual cost of compensation increases under continuing contract agreements (health benefits and lanes) $500,000 per year. Of the costs listed above, this is the only one that we can do something about through bargaining.

I'm going to run a series of posts explaining the financial factors that are driving our budget. Today, I'm going to discuss the increases in pension contributions required by the legislature that require our school district and other school districts to increase our contributions to the State retirement pension programs for public employees. We have employees in both the TRA and PERA plans.. Over the last decade, both of these plans were allowed to get out of actuarial balance, paying out too much and committing to benefits that were higher than the plans could sustain for the long run. Somebody wasn't minding the store at the State.

The deficiency in contributions--or if you prefer, the excess in TRA payouts in the pension plans--amounted to about 3.3 percent of payroll. To put that in perspective, that would be about $1.6 million per year for licensed teachers for our school district alone. To address this problem, Governor Pawlenty and the legislature agreed to impose a brand new unfunded mandate on school districts. Under legislation passed last year employing unit contribution rates for school districts will increase 0.5% a year for each of the four years beginning July 1, 2011. All of our employee plans taken together will experience employer contribution increases totaling more than $250,000 each year. By the end of four years, our total pension costs will have increased by $1,000,000 per year without any funding increase by the legislature to take care of these increases.

Who will absorb the costs of these mandates? Should the cost increases associated with providing increased pension benefits to teachers and other employees (albeit retroactively) be absorbed by parents and students through cuts in their local school districts across the state? Should they be absorbed by increased taxes at the State level? Should they be absorbed by funding reductions in other state programs--health, environment, state public employee pay reductions? Should they be absorbed by increased taxes at the local level? Should they be absorbed by local employee pay reductions? Governor Pawlenty signed this unfunded mandate without answering this question. In doing so, he was joining hands with the DFL dominated legislature in just one more act of increasing mandates on local school districts without answering the painful question: where is the money going to come from to fund this new cost.

Under the rules operating in last year's legislature, when the governor and legislature increased local school districts obligations, providing additional funds to meet these obligations was, well, off the table. It was part of the basic operating principle that has existed in our State recently that affords a higher priority to public employees and taxpayers than children in school. And so, here is a new unfunded mandate passed along to school districts in a legislative year when the entire legislature, Republicans and Democrats alike, were telling us that they were committed to reducing unfunded mandates.

Now don't be yelling at me, please. These plans are not run by local school districts. We don't set the amount of benefits. We didn't decide to increase benefits permanently when the stock market went up temporarily. We don't manage TRA or PERA investment policies. Both plans are funded, like social security, by a combination of employer and employee contributions. When eventually the State recognized that something had to be done to make these plans solvent, the legislature decided to make school districts (and employees), as well as municipal and county government (PERA) pay more into the plans. However, the legislature provided no new revenues to school districts to fund these contributions, as I have said. You can find more about the reasons for and operation of these increases at the following websites: Click Here. Click Here.

If we were in an ordinary year, we'd say, look, this is no big deal. If we received, say, a 3 percent increase in funding, we could allocate the proportionate share of the 3 percent to employees, and then deduct the TRA costs from compensation increases. But in the last two years, we've had no increases from the State. And so, we have only two choices, really, to make things come out even. One, is to pass the increased pension plan costs on to kids, by cutting programs. Or, we could take it out of employment compensation through collective bargaining, but that would require us to implement actual pay cuts, because we don't expect to receive additional revenues from the State.

The other solution would be for the new State legislature, now under the control of Republicans most of whom campaigned on no unfunded mandates, to fund this mandate. A member of the Republican legislative leadership said that this legislative session we're going to "put children first." What does that mean in this context? First before public employees? First before no-new taxes pledge? What would it mean for our board of education to put children first? Should we be passing the cuts passed along to us by Governor Pawlenty and the Democrats in ways that make children and parents pay the costs?