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8/14/2019 An Update on PSERS
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February 23, 2010 www.psers.state.pa.us 1
An Update on PSERSRate Spike/Plateau Presentation
Dover, Northern, Spring Grove, and West York SchoolDistricts
Dover High School
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PSERS’ Overview
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PSERS’ Overview
The Public School Employees’ Retirement System (PSERS) isa governmental, (non ERISA),mandatory, multi-employer,defined benefit pension planfor Pennsylvania schoolemployeesPSERS was established on July
18, 1917 and thus is one of theoldest public pension plans inthe United States
PSERS principal plandocument”is the Public SchoolEmployes’ Retirement Code, 24Pa.C.S. §8101 et. seq.
PSERS is governed by a 15person Board of Trustees, andhas a complement of 310employeesPSERS serves over 547,000members
PSERS managesassets of approximately $46.7
billion as of December 31, 2009
PSERS is the 16th largest state-sponsored defined benefit pension
fund in the nation according toPensions and Investments
Magazine
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PSERS is fundedby three sources:
EmployeeContributions,EmployerContributions,andInvestment
EarningsInvestmentearnings havebeen the primarysource of fundingfor PSERSbenefits,dwarfing thecontributionsfrom both schoolemployers andPSERS activemembers
PSERS’ Overview
Over the last 25 years, 20% of PSERS’ funding has come fromschool employers. Another 15%has come from PSERS’ activemembers. All the rest – 65% – hascome from investment earnings
InvestmentEarnings
59%$17.3 Billion
MemberContributions
26%
$7.6 Billion
EmployerContributions
15%$4.4 Billion
PSERS Sources of FundingTen Year History (2000 to 2009)
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PSERS OverviewPSERS is a large economic engine in theCommonwealth
PSERS paid out approximately $4.9 billion inbenefits in FY 2009
Since nearly 90% of PSERS’ retirees reside in the
Commonwealth, a substantial portion of PSERS’ estimated $4.9 billion annual payroll remains inPennsylvania, thus benefiting the economy of theCommonwealth
In addition PSERS has a continuing commitmentto Pennsylvania companies by contracting withPennsylvania-based investment advisorcompanies and by investing in Pennsylvania-based companies
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The following is a table of Pennsylvania-based investments and other statistics at Decem2009 ($’s in millions):
Asset Class
Total PA Market Value
(PSERS' Portion)
Total PA Market Value
(Total Invested)
# of People
Employed Payroll
U.S. Equities $ 113.1 $ 113.1 * *Fixed Income 47.3 47.3 * *Private Real Estate 218.4 2,578.6 1,357 $ 32.2Private Markets:Venture Capital 145.3 1,380.5 5,556 $ 285.6Private Equity 1,898.2 12,813.5 28,579 $ 1,110.9Private Debt 265.3 3,646.1 14,295 $ 705.7Total $ 2,687.6 $ 20,579.1 49,787 $ 2,134.4
* Statistics for publicly traded companies not included due to the difficulty in obtaining the information
PSERS Overview
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PSERS’ Net Plan Assets as of:
June 30, 2002 $43.6 Billion (audited)
March 31, 2003 $38.3 Billion (unaudited)June 30, 2003 $42.5 Billion (audited)
June 30, 2004 $48.5 Billion (audited)
June 30, 2007 $67.5 Billion (audited)
June 30, 2005 $52.1 Billion (audited)
June 30, 2006 $57.0 Billion (audited)
June 30, 2008 $62.7 Billion (audited)
December 31, 2008 $45.4 billion (unaudited)September 30, 2008 $54.7 Billion (unaudited)
June 30, 2009 $43.2 billion (audited)
December 31, 2009 $46.7 billion (unaudited)
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S & P 500Bear Markets/Bull Markets
This Decade
BEAR MARKET PEAK TROUGH % CHANGE
03/24/2000 10/09/2002 1,527.50 776.76 - 49.15%
BULL MARKET TROUGH PEAK % CHANGE
10/09/2002 10/09/2007 776.76 1,565.15 + 101.49%
BEAR MARKET PEAK TROUGH % CHANGE
10/09/2007 3/09/2009 1,565.15 676.53 - 56.78%
BULL MARKET TROUGH PEAK % CHANGE
3/09/2009 12/28/2009 676.53 1,127.78 + 66.70%
TOTAL PERIOD BEGINNING ENDING % CHANGE
12/31/1999 12/31/2009 1,469.25 1,115.10 - 24.10%
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FY 1999/2000 - 11.9%FY 2000/2001 - (7.4)%FY 2001/2002 - (5.3)%
FY 2002/2003 - 2.7%FY 2003/2004 - 19.67%FY 2004/2005 - 12.87%FY 2005/2006 - 15.26%
FY2006/2007 - 22.93%FY 2007/2008 – (2.82)%FY 2008/2009 – (26.54)%
PSERS’ Investment Rates of Return as of:
Below PSERS’ annualactuarialearnings
assumptionthereforeresulting in anactuarial loss
Over the past 25 years the Fund
earned anannualized rate of return of 9.23%
which is above theFund’s actuarial rate
of return for thesame period
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Current EmployerContribution Rate
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Employer Contribution RateEmployer contribution rate for the current fiscal year2009/2010 - ends June 30, 2010
The FY 2009/2010 rate is 4.78%The 4.78% rate is composed of a 0.78% rate for healthinsurance premium assistance and a pension rate of 4.00%School payroll for FY 2009-2010 is estimated to be $12.9billion
Employer contribution rate for the next fiscal year
2010/2011 - begins on July 1, 2010On December 11, 2009, PSERS Board certified the employercontribution rate for FY 2010-2011The rate for FY 2010-2011 is 8.22% ( 0.64% for healthinsurance premium assistance and 7.58% for the pensionrate)School payroll for FY 2010-2011 is estimated to be $13.5billion
The Commonwealth reimburses school employers for notless than 50% of the employer contribution rate
Statewide average is 55/45% split with the Commonwealthpaying 55%
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Employer Contribution RateThe pension component of the employercontribution rate has been below theemployer normal cost for 13 years
The “employer normal cost” is the amount needed
from the school employers to fund the benefitsearned by the active members for that yearIt can be thought of as the minimum payment thatwould be made by school employers if the System’sactual experience perfectly matched its economic and
demographic operating assumptionsPSERS’ funded status is 79.2% as of June30, 2009, down from 86.0% as of June 30,2008
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History of PSERS' Contribution Rates as a Percent of Payroll
0
3
6
9
12
15
18
21
1980 1985 1990 1995 2000 2005 2010Year
P e r c e n t
Average Member Rate Employer Contribution Rate Employer Normal Cost Rate
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History of the EmployerContribution
Rate fromthe Peak
Rate in 1986
SCHOOL TOTAL EMPLOYER AVG. EMPLOYEEYEAR CONTRIBUTION CONTRIBUTIONENDED RATE RATE
1986 20.040% 5.27%1987 19.900% 5.29%
1988 19.540% 5.34%1989 19.270% 5.37%1990 19.680% 5.53%1991 19.180% 5.69%1992 14.900% 5.46%1993 14.240% 5.48%1994 13.170% 5.51%1995 11.060% 5.55%
1996 11.720% 5.59%1997 10.600% 5.62%1998 8.760% 5.65%1999 6.040% 5.69%2000 4.610% 5.72%2001 1.940% 5.77%2002 1.090% 6.43%2003 1.150% 7.10%2004 3.770% 7.08%2005 4.230% 7.12%2006 4.690% 7.16%2007 6.460% 7.21%2008 7.130% 7.25%2009 4.760% 7.29%2010 4.780% 7.32%2011 8.22% 7.34%
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Projected EmployerContribution Rate Spike
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Genesis of Rate Spike
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Employer Contribution Rate SpikeThe projected sharp rise in PSERS’ employer contribution rate from 10.59%in FY 2011-2012 to an estimated 29.22%in FY 2012/2013 is primarily the result of:
The unfunded liabilities primarily
created byThe FYs’ 2001 -2003, 2008-2009 downinvestment marketsEarnings assumption changeCost of deferring contributions
Act 2001-9 multiplier increaseThe Act 2002-38 phased COLA
The actuarial funding changes made by Acts 2002-38 and 2003-40
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Without going into details about the funding
changes of Act 38 and Act 40, each had theeffect of pushing off liability to the future toprovide fiscal relief to both theCommonwealth and School Employersduring recessionary times
Of the two, Act 40 had the greatest impact as itcreated a mismatch of the amortization of PSERS’ actuarial gains and losses for 10 years endingwith the start of FY 2012-2013This technique lowered the employer
contribution rate below the employer normalcost notwithstanding the existence of unfundedliabilityThis artificial suppression has also resulted inadditional unfunded liability for PSERS
Employer Contribution Rate Spike
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Employer Contribution Rate Spike
Act 40 mismatchPre-Act 40
Act 40mismatch
expiresEmployer Normal Cost
FY 2012-2013
Additional unfundedliability
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History of PSERS’ Employer ContributionRate Spike in FY 2012-2013
32.11%27.73%
22.46%22.52%18.73%
11.23%
20.16%
29.22%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
6 / 3 0 / 0 3 p r e - A c t 4 0
6 / 3 0 / 2 0 0 3 p o s t - A c t 4 0
6 / 3 0 / 2 0 0 4
6 / 3 0 / 2 0 0 5
6 / 3 0 / 2 0 0 6
6 / 3 0 / 2 0 0 7
6 / 3 0 / 2 0 0 8
6 / 3 0 / 2 0 0 9
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Options to resolve the ratespike
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Options
Fundamentally, there are onlythree ways to address thefunding issues at the Pension
FundIncrease the funding of the SystemDecrease/cut the costs/liabilities
of the SystemDefer the liabilities of the System
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OptionsIncrease Funding to the System:
Increased employer contributionsEmployer rate are already projected to increasesignificantly in FY 2012-2013 and are expected to continuewell into the future beyond FY 2012-2013Unlikely the Commonwealth and School Employers canafford these increased costs without significant andperhaps prohibitive tax increases at the State and/or Locallevels
Increased employee contributionsCan only occur prospectively for new employeesdue to constitutional impairment of contractissues, therefore not a significant impact oncurrent unfunded liabilities
Significant increased investment returnsUnlikely, under current market conditions
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OptionsSeek another source of funding:
Use of Federal stimulus fundsUnclear if these funds can legally be directly used to fundpension contributionsObtain a formal Federal bailout of public pension funds
Little or no discussion of this option is occurringUse the proceeds of a pension obligation bond(POB)
POB’s are debt instruments issued by a governmentalentity to fund all or a portion of the Unfunded Actuarially
Accrued Liabilities for pension and/or Other PostEmployment BenefitsSignificant risk involved to the Plan Sponsor/Bond issuer if the pension plan’s investment returns are less than thedebt costsPotential legal issue whether the Commonwealth canissue a POB
May require the approval of the voters via a referendum
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OptionsEach of these would have limited impact oncurrent funding issues because it could onlybe done prospectively for new employees
Any such changes would have to be prospectiveonly, (meaning impacting new hires after theeffective date of the change), to avoid the PAConstitution’s prohibition against the impairmentof a contract (Article I, Section 17)
The courts have ruled that PSERS’ pension benefits arecontracts with the existing members of the System,regardless of vesting , and thus subject to theconstitutional impairment of contract prohibition
See e.g. Pennsylvania Federation of Teachers v. School District of Philadelphia, 484 A.2d 751 (Pa. 1984) and American Federation of State, County and Municipal Employees, AFL-CIO, v.Commonwealth , 479 A.2d 962 (Pa. 1984)
Each, however, would reduce the long termliability of the System and thus reduce the rateplateau
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OptionsDefer liabilities at the System into thefuture to marginally postpone the impactof funding issues at the System
Further adjust the actuarial funding methodsat the System
No single or combination of changes resolves the ratespike
The Governor’s original funding proposalUses legislatively prescribed employer contributionrate collars and floors that are tied to the funding
status of the System A copy of the proposal is available at thefollowing link:
http://www.budget.state.pa.us/portal/server.pt/community/financial_reports/4574
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OptionsGovernor’s latest funding proposal
Fresh start accrued liability over thirty years1% rate cap for FY 2010-2011
Will require the PSERB to re-certify the employercontribution rate established in December 2009
3% rate cap for FY 2011-2012 and thereafterFor more information on the Governor’sproposal see pages 20- 21 in the Governor’s2010-2011 Budget in brief available at thefollowing link:
http://www.governor.state.pa.us/portal/server.pt/gateway/PTARGS_0_2_24980_2985_368304_43/http%3B/pubcontent.state.pa.us/publishedcontent/publish/cop_general_government_operations/pagov/media/latest_news/budget_in_brief_2010_11_final.pdf
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Public School Employees' Retirement System of PennsylvaniaMarket Returns and Pension Rate Floors Set by User and are the same for both Current and Alternative Funding
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Market Returns and Pension Rate Floors Set by User and are the same for both Current and Alternative FundingMarket Returns Scenario 1
Alternative Funding Assumptions:- Fresh-start accrued liability payments over 30 years.- If applicable, the FYE 2011 rate is limited to the FYE 2010 pension rate + 1% and all succeeding years are limited to the prior FYE's pension rate + 3%.
Projection of Employer Contribution Dollars (in Millions)
C:\Documents and Settings\ jclay\Local Settings\Temporary Internet Files\OLK31\[Funding Proj - 2009 Val - Version 2 (Dec 22 09 Request).xls]Contribution Dollars1/14/2010 9:51
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
2 0 1
0
2 0 1
1
2 0 1
2
2 0 1
3
2 0 1
4
2 0 1
5
2 0 1
6
2 0 1
7
2 0 1
8
2 0 1
9
2 0 2
0
2 0 2
1
2 0 2
2
2 0 2
3
2 0 2
4
2 0 2
5
2 0 2
6
2 0 2
7
2 0 2
8
2 0 2
9
2 0 3
0
2 0 3
1
2 0 3
2
2 0 3
3
2 0 3
4
2 0 3
5
2 0 3
6
2 0 3
7
2 0 3
8
2 0 3
9
Current Law Alternative Funding
Public School Employees' Retirement System of PennsylvaniaMarket Returns and Pension Rate Floors Set by User and are the same for both Current and Alternative Funding
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Market Returns and Pension Rate Floors Set by User and are the same for both Current and Alternative FundingMarket Returns Scenario 1
Alternative Funding Assumptions:- Fresh-start accrued liability payments over 30 years.
- If applicable, the FYE 2011 rate is limited to the FYE 2010 pension rate + 1% and all succeeding years are limited to the prior FYE's pension rate + 3%.
Projection of Total Employer Contribution Rate
0%
5%
10%
15%
20%
25%
30%
35%
40%
2 0 1 0
2 0 1 1
2 0 1 2
2 0 1 3
2 0 1 4
2 0 1 5
2 0 1 6
2 0 1 7
2 0 1 8
2 0 1 9
2 0 2 0
2 0 2 1
2 0 2 2
2 0 2 3
2 0 2 4
2 0 2 5
2 0 2 6
2 0 2 7
2 0 2 8
2 0 2 9
2 0 3 0
2 0 3 1
2 0 3 2
2 0 3 3
2 0 3 4
2 0 3 5
2 0 3 6
2 0 3 7
2 0 3 8
2 0 3 9
Current Law Alternative Funding
Public School Employees' Retirement System of PennsylvaniaMarket Returns and Pension Rate Floors Set by User and are the same for both Current and Alternative Funding
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Market Returns and Pension Rate Floors Set by User and are the same for both Current and Alternative FundingMarket Returns Scenario 1
Alternative Funding Assumptions:- Fresh-start accrued liability payments over 30 years.- If applicable, the FYE 2011 rate is limited to the FYE 2010 pension rate + 1% and all succeeding years are limited to the prior FYE's pension rate + 3%.
Projection of Unfunded Liability (in Millions)
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
2 0 1 0
2 0 1 1
2 0 1 2
2 0 1 3
2 0 1 4
2 0 1 5
2 0 1 6
2 0 1 7
2 0 1 8
2 0 1 9
2 0 2 0
2 0 2 1
2 0 2 2
2 0 2 3
2 0 2 4
2 0 2 5
2 0 2 6
2 0 2 7
2 0 2 8
2 0 2 9
2 0 3 0
2 0 3 1
2 0 3 2
2 0 3 3
2 0 3 4
2 0 3 5
2 0 3 6
2 0 3 7
2 0 3 8
2 0 3 9
Current Law Alternative Funding
Public School Employees' Retirement System of PennsylvaniaMarket Returns and Pension Rate Floors Set by User and are the same for both Current and Alternative Funding
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Market Returns and Pension Rate Floors Set by User and are the same for both Current and Alternative FundingMarket Returns Scenario 1
Alternative Funding Assumptions:- Fresh-start accrued liability payments over 30 years.
- If applicable, the FYE 2011 rate is limited to the FYE 2010 pension rate + 1% and all succeeding years are limited to the prior FYE's pension rate + 3%.
Projection of Funded Ratio
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
100%
2 0 1 0
2 0 1 1
2 0 1 2
2 0 1 3
2 0 1 4
2 0 1 5
2 0 1 6
2 0 1 7
2 0 1 8
2 0 1 9
2 0 2 0
2 0 2 1
2 0 2 2
2 0 2 3
2 0 2 4
2 0 2 5
2 0 2 6
2 0 2 7
2 0 2 8
2 0 2 9
2 0 3 0
2 0 3 1
2 0 3 2
2 0 3 3
2 0 3 4
2 0 3 5
2 0 3 6
2 0 3 7
2 0 3 8
2 0 3 9
Current Law Alternative Funding
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OptionsObservations concerning the Governor’s latest
proposal:Next year’s rate of 8.22% would be reduced to 5.64%The rate spike in FY 2012-2013 would be reduced from29.22% to 11.72%The proposal provides short term cash flow relief bysignificant additional deferral of liability and thussignificant additional costThe new and higher rate peak is projected to be 36.48%in FY 2021-2022 as opposed to 33.60% in FY 2014-2015PSERS’ funding level will be driven below 50% for seven
years, presuming PSERS meets its 8% investment
return assumptionThe proposal will aggravate PSERS’ current liquidityconcernsThe proposal makes PSERS more vulnerable to a futuredownturn in the investment markets
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Public School Employees' Retirement System of PennsylvaniaMarket Returns and Pension Rate Floors Set by User and are the same for both Current and Alternative Funding
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Market Returns and Pension Rate Floors Set by User and are the same for both Current and Alternative FundingMarket Returns Scenario 1
Alternative Funding Assumptions:- Fresh-start accrued liability payments over 30 years.
- If applicable, the FYE 2011 rate is limited to the FYE 2010 pension rate + 1.00% and all succeeding years are limited to the prior FYE's pension rate + 3%.
Projection of Total Employer Contribution Rate
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
2 0 1 0
2 0 1 1
2 0 1 2
2 0 1 3
2 0 1 4
2 0 1 5
2 0 1 6
2 0 1 7
2 0 1 8
2 0 1 9
2 0 2 0
2 0 2 1
2 0 2 2
2 0 2 3
2 0 2 4
2 0 2 5
2 0 2 6
2 0 2 7
2 0 2 8
2 0 2 9
2 0 3 0
2 0 3 1
2 0 3 2
2 0 3 3
2 0 3 4
2 0 3 5
2 0 3 6
2 0 3 7
2 0 3 8
2 0 3 9
Current Law Alternative Funding
Public School Employees' Retirement System of PennsylvaniaMarket Returns and Pension Rate Floors Set by User and are the same for both Current and Alternative Funding
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y gMarket Returns Scenario 1
Alternative Funding Assumptions:- Fresh-start accrued liability payments over 30 years.
- If applicable, the FYE 2011 rate is limited to the FYE 2010 pension rate + 1.00% and all succeeding years are limited to the prior FYE's pension rate + 3%.
Projection of Funded Ratio
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2 0 1 0
2 0 1 1
2 0 1 2
2 0 1 3
2 0 1 4
2 0 1 5
2 0 1 6
2 0 1 7
2 0 1 8
2 0 1 9
2 0 2 0
2 0 2 1
2 0 2 2
2 0 2 3
2 0 2 4
2 0 2 5
2 0 2 6
2 0 2 7
2 0 2 8
2 0 2 9
2 0 3 0
2 0 3 1
2 0 3 2
2 0 3 3
2 0 3 4
2 0 3 5
2 0 3 6
2 0 3 7
2 0 3 8
2 0 3 9
Current Law Alternative Funding
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Projection Showing AlternativeFunding Proposal
FOR EXAMPLE PURPOSES ONLY
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Public School Employees' Retirement System of PennsylvaniaMarket Returns and Pension Rate Floors Set by User and are the same for both Current and Alternative Funding
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Market Returns Scenario 1Alternative Funding Assumptions: Alternative Benefit Provisions for Members Enrolled after 6/30/10- Fresh-start accrued liability payments over 30 years - Ten year vesting.
with level percent of pay amortization beginning FY2011. - An 8.0% conversion rate is used to determine annuity equivalent of member contribution.
- PUC funding method is used beginning FY2011. Other Special Funding Provisions- Fresh-start asset smoothing over 10 years beginning FY2010. - The Total Employer Pension Contribution Rate is limited to the prior FY contribution plus:
3.46% for FY2011, 3.50% for FY2012 and 4.50% for FY2013 and after.
Projection of Total Employer Contribution Rate
The Board at its January 2009 meeting adopted to reduce the interest rate from 8.50% to 8.25% for the June 30, 2008 valuation and to 8.00% thereafter.This projection model was created at the request of, and sole use by, PSERS. Any unauthorized user should contact PSERS or Buck for proper interpretation of results.
0%
5%
10%
15%
20%
25%
30%
35%
40%
2 0 0 7
2 0 0 8
2 0 0 9
2 0 1 0
2 0 1 1
2 0 1 2
2 0 1 3
2 0 1 4
2 0 1 5
2 0 1 6
2 0 1 7
2 0 1 8
2 0 1 9
2 0 2 0
2 0 2 1
2 0 2 2
2 0 2 3
2 0 2 4
2 0 2 5
2 0 2 6
2 0 2 7
2 0 2 8
2 0 2 9
2 0 3 0
2 0 3 1
2 0 3 2
2 0 3 3
2 0 3 4
2 0 3 5
2 0 3 6
2 0 3 7
Current Law Alternative Funding
Public School Employees' Retirement System of PennsylvaniaMarket Returns and Pension Rate Floors Set by User and are the same for both Current and Alternative Funding
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Market Returns Scenario 1Alternative Funding Assumptions: Alternative Benefit Provisions for Members Enrolled after 6/30/10- Fresh-start accrued liability payments over 30 years - Ten year vesting.
with level percent of pay amortization beginning FY2011. - An 8.0% conversion rate is used to determine annuity equivalent of member contribution.
- PUC funding method is used beginning FY2011. Other Special Funding Provisions- Fresh-start asset smoothing over 10 years beginning FY2010. - The Total Employer Pension Contribution Rate is limited to the prior FY contribution plus:
3.46% for FY2011, 3.50% for FY2012 and 4.50% for FY2013 and after.
Projection of Funded Ratio
0%
20%
40%
60%
80%
100%
120%
2 0 0 7
2 0 0 8
2 0 0 9
2 0 1 0
2 0 1 1
2 0 1 2
2 0 1 3
2 0 1 4
2 0 1 5
2 0 1 6
2 0 1 7
2 0 1 8
2 0 1 9
2 0 2 0
2 0 2 1
2 0 2 2
2 0 2 3
2 0 2 4
2 0 2 5
2 0 2 6
2 0 2 7
2 0 2 8
2 0 2 9
2 0 3 0
2 0 3 1
2 0 3 2
2 0 3 3
2 0 3 4
2 0 3 5
2 0 3 6
2 0 3 7
Current Law Alternative Funding
Alternative Proposal: Governor’s Proposal:
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Alternative Funding Assumptions:- Fresh-start accrued liability paymentsover 30 years with level percent of payamortization beginning FY2011- PUC funding method is usedbeginning FY2011- Asset smoothing over 10 years
beginning FY2010
Alternative Benefit Provisions for Members Enrolled after6/30/10-Ten year vesting.- An 8.0% conversion rate is used to determine annuityequivalent of member contributionsOther Special Funding Provisions-The Total Employer Pension Contribution Rate is limited tothe prior FY contribution plus:
3.46% for FY2011, 3.50% for FY 2012 and 4.5% for FY2013and after.
p
Alternative Funding Assumptions:
-Fresh-start accrued liabilitypayments over 30 years.
-- If applicable, the FYE 2011 rate islimited to the FYE 2010 pension rate+ 1% and all succeeding years are
limited to the prior FYE’s pensionrate + 3%.
Governor s Proposal:
Projection of Total Employer Contribution RateAs Percentage of Payroll
0
5
10
15
20
25
30
35
40
2 0 0 8
2 0 0 9
2 0 1 0
2 0 1 1
2 0 1 2
2 0 1 3
2 0 1 4
2 0 1 5
2 0 1 6
2 0 1 7
2 0 1 8
2 0 1 9
2 0 2 0
2 0 2 1
2 0 2 2
2 0 2 3
2 0 2 4
2 0 2 5
2 0 2 6
2 0 2 7
2 0 2 8
2 0 2 9
2 0 3 0
2 0 3 1
2 0 3 2
2 0 3 3
2 0 3 4
2 0 3 5
2 0 3 6
2 0 3 7
2 0 3 8
Current Law Alternative Proposal Governor's Proposal
Alternative Proposal: Governor’s Proposal:
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Alternative Funding Assumptions:- Fresh-start accrued liability paymentsover 30 years with level percent of payamortization beginning FY2011- PUC funding method is usedbeginning FY2011- Asset smoothing over 10 yearsbeginning FY2010
Alternative Benefit Provisions for Members Enrolled after6/30/10-Ten year vesting.- An 8.0% conversion rate is used to determine annuityequivalent of member contributionsOther Special Funding Provisions-The Total Employer Pension Contribution Rate is limited tothe prior FY contribution plus:
3.46% for FY2011, 3.50% for FY 2012 and 4.50% for FY2013and after.
pAlternative Funding Assumptions:
-Fresh-start accrued liabilitypayments over 30 years.
-- If applicable, the FYE 2011 rate islimited to the FYE 2010 pension rate+ 1% and all succeeding years arelimited to the prior FYE’s pensionrate + 3%.
Projection of Funded Ratio
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
100%
2 0 1 0
2 0 1 1
2 0 1 2
2 0 1 3
2 0 1 4
2 0 1 5
2 0 1 6
2 0 1 7
2 0 1 8
2 0 1 9
2 0 2 0
2 0 2 1
2 0 2 2
2 0 2 3
2 0 2 4
2 0 2 5
2 0 2 6
2 0 2 7
2 0 2 8
2 0 2 9
2 0 3 0
2 0 3 1
2 0 3 2
2 0 3 3
2 0 3 4
2 0 3 5
2 0 3 6
2 0 3 7
2 0 3 8
Current Law Alternative Proposal Governor's Proposal
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OptionsWhatever solution is developed, however,should be governed by the following principles:
It must be actuarially reasonableIt should have an employer contribution rate that ata minimum, should be the employer normal costplus some reasonable amount to amortize theSystem's unfunded liabilityIt should be able to withstand reasonable stresstestsIt should reflect fiscally doable increases in theemployer contribution rate to a reasonable plateau
To the extent possible, it should have budgetarypredictabilityIt should incorporate provisions to avoid/mitigate afuture funding crisis, e.g. a employer contributionrate floor set at the employer normal cost
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OptionsIt should avoid undue risk, e.g. avoid
excessive reliance on POB'sIt should set the policy with respect to futureCOLA's, i.e. either:
Are they to continue on an automatic or ad hoc basis, in which case they should be pre-funded to reduce overall costs; or
Are they are to be discontinued for all or someportion of present and/or future retirees
It should address the potential of futurebenefit enhancements, e.g., when and atwhat funding level will they be permissible,if at all
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OptionsIt must provide an adequate pensionbenefit at a reasonable cost that willattract and retain employees, andreasonably sustain them when retiredThe proposed solution must be politicallyacceptable or reasonably "sellable" to theGeneral Assembly, the Governor, thepublic, PSERS' constituent groups, themedia, etc.The proposed solution must be legallycorrect/defensible, i.e. not subject topotentially successful litigation
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Conclusions
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ConclusionsThere is no silver bullet to resolve PSERS’ funding issues
Solution will likely be a combination of severalapproaches and will only smooth out the rateplateau and lower the peak
Under all options, however, there will be a
need for significant additional funding tothe SystemIncreases in the employer contribution ratewill occur before FY 2012-2013
The FY 2010-2011 rate will be 8.22% comparedto 4.78% for FY 2009-2010The FY 2011-2012 rate is projected to exceedthe FY 2010-2011 rate
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ConclusionsConverting the System to a DC or Hybridplan will not effect the current liabilitiesor resolve the immediate fundingconcerns
In fact it may aggravate theCommonwealth’s and School Employer’s cash
flow problems as they will be supporting twopension plansPolitically, some prospective benefit cutsare probably inevitable, even if onlysymbolic in nature with respect toresolving the rate spikeSimilarly, politically, benefitenhancements are not likely now or inthe near future
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ConclusionsFinally, this issue posits the fundamentalquestion/dilemma of what level of benefits andemployer contribution rate are affordable forthe Commonwealth and School Employersversus what is an adequate level of retirementbenefits for school employees, both active andretired
Is a plan with an annual employer normal cost of 8%+/- affordable?What impact will possible structural changes haveon the attraction and retention of schoolemployees?
Will structural changes create a larger problem bysubstituting inadequate and unsecured retirementoptions that may ultimately cause future retirees torely on other government programs, each withtheir own funding issues?
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Conclusions
As such, the resolution of the currentfunding issues confronting PSERS is a vitalimperative for the Agency and representsthe greatest challenge the Agency hasfaced in its historyTherefore PSERS is committed to providingall available assistance to the Governor,General Assembly and School Employers tosolve the rate spike and future fundingissues, ASAP
PSERS will continue to be very public with the issue in anattempt to raise awarenessWill keep you apprised of developments in the coming
year