Pension, PSERS background basics

(With information from the Public School Employees’ Retirement System (PSERS) 2015 and 2016 Comprehensive Annual Financial Report (CAFR) and other materials from PSERS, and from the Public Employee Retirement Commission)

The Pennsylvania Public School Employees Retirement Act establishing the Public School Employees' Retirement System (PSERS) became law in 1917 with the purpose of providing retirement and disability benefits to public school employees. The PSERS system is a governmental cost-sharing, multi-employer defined benefit pension plan (DB Plan). It is funded through three sources: contributions from employees (members), the employer contribution rate which is contributions from employers (generally school districts) and the Commonwealth, and investment returns from the System.  Under the system all members and 781 reporting units contribute. PSERS has a governing board of trustees which exercises control and management of the system, including the investment of its assets. The system is the 20th largest state-sponsored public defined benefit pension fund in the nation.

The members eligible to participate in PSERS include all full-time public school employees, part-time hourly public school employees who render at least 500 hours of service in the school year, and part-time per diem public school employees who render at least 80 days of service in the school year in any of the reporting entities in Pennsylvania. Membership for full-time employees is mandatory. Part-time salaried, part-time hourly, and part-time per diem employees may waive membership with PSERS under certain circumstances.

PSERS’ most recent Comprehensive Annual Financial Report (CAFR) states that as of June 30, 2016, the system had approximately 257,000 active members with an estimated annual active payroll of $13.0 billion. The annuitant membership as of June 30, 2016 was comprised of approximately 225,000 retirees and beneficiaries who receive over $476 million in pension benefits each month.  The total for fiscal year 2016, PSERS provided over $6.3 billion in pension benefits to its members. Of this amount approximately 90%, or $5.7 billion, was paid in Pennsylvania. The average yearly benefit paid to annuitants is $25,203.

The Commonwealth and local school districts share the employer contribution costs – as a historical rule the commonwealth pays a minimum of 50 percent and increases the rate to accommodate the relative wealth of a district.  The school districts share is calculated through a process based on the amount needed to fund the cost of benefits earned that year by active members plus the unfunded liability – this is referred to as a the “normal cost.”  The normal cost for PSERS in 2016-17 is 8.31%. Total employer contributions for 2016-17 are estimated at $4.1 billion.

Employee (member) contributions range from 5.25% to 10.30% of payroll depending on the class of membership of the employee and when they joined PSERS. Employees are expected to contribute an average of 7.52% of their salary to help fund their retirement benefit in fiscal year 2016-17. Employee contributions of approximately $1 billion are expected in fiscal year 2016-17.

As of July 1, 2011 new members bear some of the investment risk via the shared risk provisions of Act 120 of 2010. With a “shared risk” program, new members since July 1, 2011 share some of the risk when investments underperform. Since PSERS investment performance exceeded the Act 120 benchmarks, the PSERS Board certified and retained the current T-E member contribution rate of 7.50% and T-F member contribution rate of 10.30% for the three-year period from July 1, 2015 to June 30, 2018.

The problem facing the state and school districts is the high employer contribution costs to sustain the current retirement system. These mandated expenses continue to increase each year, taking larger shares of already-stretched budgets. In the coming fiscal year, both the state and school officials must figure out how to pay pension obligations that continue to mount, with the total employer contributions for 2017-18 projected by the Public School Employees Retirement System (PSERS) at nearly $4.4 billion. Beginning on July 1, 2017 the annual employer contribution rate that must be paid by the state and school districts will jump to 32.57%, up from 30.03% in 2016-17, and from the 2015-16 rate of 25.84%.  The contribution will continue to climb over the next few years to a staggering 36.40% by 2021-22.  At that time, the total employer contribution is expected to be $5.2 billion, half of which must be paid by the state, and half by school districts.

For school districts, pension costs are taking a greater and greater share of available revenues. In 2008-09, pension contributions were at about 2% of a district’s total expenditures. In 2016-17, pension costs are estimated to climb over 11.5%.  Without action by the General Assembly to address this pension crisis or provide more state funding to offset these rising costs, districts have no option but to cover these soaring costs at the expense of the rest of their budgets. State budget increases in school district funding become used to pay for pension contributions.

PSBA calls for significant reform

Although various reform plans have been introduced, the General Assembly has not reached agreement on a specific approach. While some changes were enacted under Act 120 of 2010, they did not fully address both long-term and short-term concerns for the funding of the retirement system.

From PSBA’s perspective, school districts have been in compliance with the law by making the mandated required contributions to PSERS each year, but the system is unsustainable and must be fixed now.  While some changes were enacted under Act 120 of 2010, they did not fully address both long-term and short-term concerns for the funding of the retirement system.  Without pension reform, the costs just continue to climb. PSBA believes that allowing Act 120 to play out without further refinement is not a tenable solution.

Meaningful changes must involve identifying another funding source for PSERS, decreasing or cutting the costs and liabilities of the system, including benefit levels, and examining the possibility of adoption of a hybrid pension plan that would reduce employer costs over time.  A hybrid plan combines elements of a defined benefit plan and a defined contribution plan in some manner. Most importantly, any reform plan needs to generate both short-term and long-term savings for districts.

Pension reform is needed to protect school districts and taxpayers from the fiscal stress of our current costly and unsustainable pension system. The state must enact meaningful school employee pension reform with the dual purpose of reducing projected employer contribution rate increases and reducing projected costs over the next two decades, while maintaining an appropriate pension benefit for school employees.