1. 1 An Update on PSERS Governing Boards of PASA, PASBO, and PAESSP November 21, 2008

2. 2 Agenda PSERS’ Overview PSERS’ Overview PSERS’ Health Programs PSERS’ Health Programs Investment Update Investment Update Employer Contribution Rate and the Pending Rate Spike Employer Contribution Rate and the Pending Rate Spike Employer Contribution Rate Update Employer Contribution Rate Update Employer Contribution Rate Spike Update Employer Contribution Rate Spike Update What does the Future hold? What does the Future hold? Return to Service Return to Service Retirement-Covered Compensation Retirement-Covered Compensation Attachments Attachments Questions Questions

3. 3 PSERS’ Overview The Public School Employees’ Retirement System (PSERS) is a governmental, (non ERISA), mandatory, multi-employer, defined benefit pension plan for Pennsylvania school employees The Public School Employees’ Retirement System (PSERS) is a governmental, (non ERISA), mandatory, multi-employer, defined benefit pension plan for Pennsylvania school employees PSERS was established on July 18, 1917 and thus is one of the oldest public pension plans in the United States PSERS was established on July 18, 1917 and thus is one of the oldest public pension plans in the United States PSERS “plan document”is the Public School Employes’ Retirement Code, 24 Pa.C.S. §8101 et. seq. PSERS “plan document”is the Public School Employes’ Retirement Code, 24 Pa.C.S. §8101 et. seq. PSERS is governed by a 15 person Board of Trustees, and has a complement of 310 employees PSERS is governed by a 15 person Board of Trustees, and has a complement of 310 employees PSERS serves over 520,000 members PSERS serves over 520,000 members PSERS currently manages assets of approximately $62.7 billion as of June 30, 2008 PSERS is the 14th largest defined benefit pension fund in the nation according to Pensions and Investments Magazine

4. 4 PSERS is funded by three sources: PSERS is funded by three sources: Employee Contributions, Employee Contributions, Employer Contributions, and Employer Contributions, and Investment Earnings Investment Earnings Investment earnings have been the primary source of funding for PSERS benefits, dwarfing the contributions from both school employers and PSERS active members Investment earnings have been the primary source of funding for PSERS benefits, dwarfing the contributions from both school employers and PSERS active members PSERS’ Overview Over the last 25 years, 17% of PSERS’ funding has come from school employers. Another 12% has come from PSERS’ active members. All the rest – 71% – has come from investment earnings

5. 5 Investment Update Net Asset Value (NAV) Net Asset Value (NAV) June 30, 2007$67.5 billion June 30, 2007$67.5 billion June 30, 2008$62.7 billion June 30, 2008$62.7 billion Investment Returns Investment Returns June 30, 200722.93% June 30, 200722.93% June 30, 2008(2.82)% June 30, 2008(2.82)%

6. 6 FY 1999/2000 - 11.9% FY 1999/2000 - 11.9% FY 2000/2001 - (7.4)% FY 2000/2001 - (7.4)% FY 2001/2002 - (5.3)% FY 2001/2002 - (5.3)% FY 2002/2003 - 2.7% FY 2002/2003 - 2.7% FY 2003/2004 - 19.67% FY 2003/2004 - 19.67% FY 2004/2005 - 12.87% FY 2004/2005 - 12.87% FY 2005/2006 - 15.26% FY 2005/2006 - 15.26% FY2006/2007 - 22.93% FY2006/2007 - 22.93% FY 2007/2008 – (2.82)% FY 2007/2008 – (2.82)% PSERS’ Investment Rates of Return as of: Below PSERS’ annual actuarial earnings assumption of 8.5%, therefore resulting in an actuarial loss

7. 7 PSERS Total Net Investment Income FY 1999/2000 - $5,765,133 FY 1999/2000 - $5,765,133 FY 2000/2001 - ($3,843,713) FY 2000/2001 - ($3,843,713) FY 2001/2002 -($2,523,025) FY 2001/2002 -($2,523,025) FY 2002/2003 - $1,022,467 FY 2002/2003 - $1,022,467 FY 2003/2004 -$8,244,604 FY 2003/2004 -$8,244,604 FY 2004/2005 -$6,081,497 FY 2004/2005 -$6,081,497 FY 2005/2006 -$7,942,639 FY 2005/2006 -$7,942,639 FY 2006/2007 -$12,702,721 FY 2006/2007 -$12,702,721 FY 2007/2008 - ($1.775.585) FY 2007/2008 - ($1.775.585) TOTAL $33,616,738 net investment gain TOTAL $33,616,738 net investment gain

8. 8 PSERS Fiscal Year Returns 1999-2008

9. 9 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)

10. 10 Investment Returns and Rankings ReturnRank* Quarter-0.48%31 Quarter-0.48%31 Fiscal Year-2.82%35 Fiscal Year-2.82%35 2 Years9.30%1 2 Years9.30%1 3 Years11.25%1 3 Years11.25%1 5 Years13.21%1 5 Years13.21%1 10 Years7.76%10 10 Years7.76%10 *As per Wilshire’s public sponsors database

11. 11 Other State Investment Performance as of June 30, 2008 Illinois TRS = estimated (4.5)% Illinois TRS = estimated (4.5)% CalSTRS = (3.7)% CalSTRS = (3.7)% State Retirement and Pension System of Maryland = (5.4)% State Retirement and Pension System of Maryland = (5.4)% CalPERS = (2.4)% CalPERS = (2.4)% Massachusetts State = (1.8)% Massachusetts State = (1.8)%

12. 12 Employer Contribution Rate Update Current employer contribution rate Current employer contribution rate The FY 2008/2009 rate is 4.76% The FY 2008/2009 rate is 4.76% The 4.76% rate is composed of a 0.76% rate for health insurance premium assistance and a pension rate of 4.00% The 4.76% rate is composed of a 0.76% rate for health insurance premium assistance and a pension rate of 4.00% The Commonwealth reimburses school employers for not less than 50% of the employer contribution rate The Commonwealth reimburses school employers for not less than 50% of the employer contribution rate Statewide average is 54/46% split with the Commonwealth paying 54% Statewide average is 54/46% split with the Commonwealth paying 54%

13. 13 Employer Contribution Rate Update The employer contribution rate for FY 2009/2010 will be certified at the PSERS’ Board meeting on December 12, 2008 The employer contribution rate for FY 2009/2010 will be certified at the PSERS’ Board meeting on December 12, 2008 New official projections for the FY 2012/2013 funding rate spike will also be available at that time New official projections for the FY 2012/2013 funding rate spike will also be available at that time Current financial market conditions will not have an impact on next year's projected employer contribution rate Current financial market conditions will not have an impact on next year's projected employer contribution rate The impact of the current financial market conditions is being mitigated by The impact of Act 40 – mismatch of actuarial gains and losses Smoothing methodology and amortization- 5 yr smoothing and 30 year amortization Timing of the actuarial valuation – fiscal year ends June 30th

14. 14 Employer Contribution Rate Update FY 2009/2010's employer contribution rate will be governed by PSERS' FY 2007/2008 investment rate of return of -2.82%, as of June 30, 2008 FY 2009/2010's employer contribution rate will be governed by PSERS' FY 2007/2008 investment rate of return of -2.82%, as of June 30, 2008 The FY 2009/2010 employer contribution rate is estimated to be 4.75% based on last year’s projections The FY 2009/2010 employer contribution rate is estimated to be 4.75% based on last year’s projections NOTE: Next year’s rate could be impacted if legislation to solve the funding rate spike is introduced and passed early next year NOTE: Next year’s rate could be impacted if legislation to solve the funding rate spike is introduced and passed early next year The first time that the current markets (i.e. FY 2008/2009) will have an impact is for FY 2010/2011's employer contribution rate The first time that the current markets (i.e. FY 2008/2009) will have an impact is for FY 2010/2011's employer contribution rate

15. 15 Employer Contribution Rate Spike Update Rate Spike Estimate Rate Spike Estimate The current estimate for the FY 2012/2013 rate spike is 11.23% (based on the June 30, 2007 actuarial valuation) The current estimate for the FY 2012/2013 rate spike is 11.23% (based on the June 30, 2007 actuarial valuation) Based on an estimated -2.82% investment return for FY 2007/2008 and the June 30, 2007 actuarial valuation, the rate spike in FY 2012/2013 will increase to 16.28% Based on an estimated -2.82% investment return for FY 2007/2008 and the June 30, 2007 actuarial valuation, the rate spike in FY 2012/2013 will increase to 16.28% The estimate will change when the June 30, 2008 actuarial valuation is presented at the December 12 th PSERS Board Meeting The estimate will change when the June 30, 2008 actuarial valuation is presented at the December 12 th PSERS Board Meeting The rate spike in FY 2012/2013 is still below the original rate spike of 27.73% The rate spike in FY 2012/2013 is still below the original rate spike of 27.73%

16. 16

17. 17 Public School Employees’ Retirement System of Pennsylvania Projection of Contribution Rates and Funded Ratio as of June 30, 2007 Contributions Determined Under Current Law

18. 18 Employer Contribution Rate Spike Update The projected sharp rise in PSERS’ employer contribution rate from 4.76% in FY 2011-2012 to an estimated 16.28% in FY 2012/2013 (up from last year’s projection of 4.74% to 11.23%), is primarily the result of: The projected sharp rise in PSERS’ employer contribution rate from 4.76% in FY 2011-2012 to an estimated 16.28% in FY 2012/2013 (up from last year’s projection of 4.74% to 11.23%), is primarily the result of: The unfunded liabilities created by The unfunded liabilities created by The FYs’ 2001-2003 down investment markets The FYs’ 2001-2003 down investment markets Act 2001-9 multiplier increase Act 2001-9 multiplier increase The Act 2002-38 phased COLA The Act 2002-38 phased COLA The (2.82)% investment return for FY 2007-2008 The (2.82)% investment return for FY 2007-2008 The changes made by Acts 2002-38 and 2003-40 to PSERS’ actuarial funding methodologies The changes made by Acts 2002-38 and 2003-40 to PSERS’ actuarial funding methodologies

19. 19 Estimated 16.28%

20. 20 Without going into details about the funding changes of Act 38 and Act 40, each had the effect of pushing off liability to the future to provide fiscal relief to both the Commonwealth and school employers during recessionary times Without going into details about the funding changes of Act 38 and Act 40, each had the effect of pushing off liability to the future to provide fiscal relief to both the Commonwealth and school employers during recessionary times Of the two, Act 40 had the greatest impact as it created a mismatch of the amortization of PSERS’ actuarial gains and losses Of the two, Act 40 had the greatest impact as it created a mismatch of the amortization of PSERS’ actuarial gains and losses Pre-Act 9 gains and losses remained on a 10 year amortization schedule Pre-Act 9 gains and losses remained on a 10 year amortization schedule Post-Act 9 gains and losses were shifted to a 30 year amortization schedule Post-Act 9 gains and losses were shifted to a 30 year amortization schedule Employer Contribution Rate Spike Update

21. 21 Employer Contribution Rate Spike Update Act 40 mismatch Pre-Act 40 Act 40 mismatch expires Employer Normal Cost FY 2012-2013 Additional unfunded liability

22. 22 What does the Future hold? Rate Spike Options

23. 23 Rate Spike Options Although some criticize Acts 38 and 40, the Acts were intended to provide fiscal “breathing room” to both the Commonwealth and school employers so that a more permanent and sustainable solution could be found to PSERS’ funding issues Although some criticize Acts 38 and 40, the Acts were intended to provide fiscal “breathing room” to both the Commonwealth and school employers so that a more permanent and sustainable solution could be found to PSERS’ funding issues That time is now as there has been both increased awareness of the pending rate increase and discussions of alternative solutions That time is now as there has been both increased awareness of the pending rate increase and discussions of alternative solutions So what can be done about the pending rate increase? So what can be done about the pending rate increase?

24. 24 Rate Spike Options Over the years, a series of options have already been proposed to resolve the rate spike, including: Over the years, a series of options have already been proposed to resolve the rate spike, including: Fresh start of PSERS’ assets Fresh start of PSERS’ assets Stepped up increases of the employer contribution rate Stepped up increases of the employer contribution rate An increased rate floor An increased rate floor Increased employee contributions Increased employee contributions Conversion of PSERS to a DC or Hybrid plan Conversion of PSERS to a DC or Hybrid plan Benefit reductions Benefit reductions A combination of these concepts A combination of these concepts Governor’s Funding proposal Governor’s Funding proposal

25. 25 Rate Spike Options The Governor’s Funding proposal to address the rate spike was publicly released in June 2008 The Governor’s Funding proposal to address the rate spike was publicly released in June 2008 A copy of the report is available at the following link: http://www.budget.state.pa.us/budget/cwp/vi ew.asp?A=3&Q=213853 A copy of the report is available at the following link: http://www.budget.state.pa.us/budget/cwp/vi ew.asp?A=3&Q=213853 http://www.budget.state.pa.us/budget/cwp/vi ew.asp?A=3&Q=213853 http://www.budget.state.pa.us/budget/cwp/vi ew.asp?A=3&Q=213853 No legislation to implement the proposal was introduced in the General Assembly and no action further action took place No legislation to implement the proposal was introduced in the General Assembly and no action further action took place Action, if any, is more likely in the first six months of 2009 Action, if any, is more likely in the first six months of 2009

26. 26 Rate Spike Options At a very high level, the Governor’s proposal can be viewed as an additional smoothing methodology that will be added to the two existing techniques, both of which will be retained At a very high level, the Governor’s proposal can be viewed as an additional smoothing methodology that will be added to the two existing techniques, both of which will be retained Five year smoothing of gains and losses Five year smoothing of gains and losses Thirty year amortization of the smoothed gains and losses Thirty year amortization of the smoothed gains and losses

27. 27 Rate Spike Options How is this accomplished? How is this accomplished? Through the use of legislatively prescribed employer contribution rate collars that are tied to the funding status of the System Through the use of legislatively prescribed employer contribution rate collars that are tied to the funding status of the System In essence, the actuaries calculate the required contribution rate using the existing funding methodologies (entry age normal, present smoothing techniques, level dollar funding etc.) In essence, the actuaries calculate the required contribution rate using the existing funding methodologies (entry age normal, present smoothing techniques, level dollar funding etc.) The product of those calculations are then initially compared to the employer contribution rate collars table to see if the calculated rate or a rate dictated by the table is used for the final employer contribution rate The product of those calculations are then initially compared to the employer contribution rate collars table to see if the calculated rate or a rate dictated by the table is used for the final employer contribution rate

28. 28 Funded ratio as of valuation date Most rate can decrease compared to prior year Standard amount rate can increase compared to prior year less than 80%1.25%0.50% at least 80% but less than 85%1.00%0.50% at least 85% but less than 90%0.75%0.50% at least 90% but less than 95%0.50%0.50% at least 95% but less than 100%0.25%0.50% at least 100% but less than 105%0.50%0.00% at least 105% but less than 115%0.50%0.50% equal to or greater than 115%0.50%0.75% The most the rate can increase compared to the prior year is the greater of the standard amount from the contribution rate change table above or one-tenth the difference between the actuarially required contribution rate calculated without regard to the legislatively added costs and the prior year’s final contribution rate. Table of Rate Collars

29. 29 Rate Spike Options The net effects of the employer contribution rate collars are: The net effects of the employer contribution rate collars are: They slow or collar the increase of the employer contribution rate when the System is under funded They slow or collar the increase of the employer contribution rate when the System is under funded This causes liability to be postponed This causes liability to be postponed They also slow or collar, to a greater extent, the decrease of the employer contribution rate when the System is over funded They also slow or collar, to a greater extent, the decrease of the employer contribution rate when the System is over funded This maintains surplus that can offset future liability This maintains surplus that can offset future liability These points are illustrated by the following two examples These points are illustrated by the following two examples

30. 30 Example of the collars approach limiting significant increases in the employer contribution rate Assumptions Suppose the employer contribution rate for the System in FY 2014-15 is 7.8%. Suppose the employer contribution rate for the System in FY 2014-15 is 7.8%. Presume that the funded status of the System in the FY 2015-16 valuation is 89%. Presume that the funded status of the System in the FY 2015-16 valuation is 89%. Suppose also that an initial actuarial rate of 9.0% has been calculated by the System’s actuaries for FY 2015-16. Suppose also that an initial actuarial rate of 9.0% has been calculated by the System’s actuaries for FY 2015-16. Application of “Collars” approach limit increases in the rate Based on the funded status of the system (89%), the applicable rate collar would be a maximum increase in the employer contribution rate of 0.5%. Based on the funded status of the system (89%), the applicable rate collar would be a maximum increase in the employer contribution rate of 0.5%. The 0.5% increment would be added to the prior year’s rate of 7.8%, generating a new employer rate for FY 2015-16 of 8.3%. The 0.5% increment would be added to the prior year’s rate of 7.8%, generating a new employer rate for FY 2015-16 of 8.3%. Since the the final rate is the lesser of the 9.0% initial actuarial rate and the 8.3% rate calculated using the collars approach, the employer contribution rate for FY 2015-16 is 8.3%. Since the the final rate is the lesser of the 9.0% initial actuarial rate and the 8.3% rate calculated using the collars approach, the employer contribution rate for FY 2015-16 is 8.3%. Example 1—Short Version

31. 31 Example of the collars approach limiting significant decreases in the employer contribution rate Assumptions Suppose that the employer contribution rate for the System in FY 2017-18 is 8.9%. Suppose that the employer contribution rate for the System in FY 2017-18 is 8.9%. Presume that the funded status of the System in the FY 2018-19 valuation is 111%. Presume that the funded status of the System in the FY 2018-19 valuation is 111%. Suppose also that an initial actuarial rate of 7.5% has been calculated by the System’s actuaries for FY 2018-19. Suppose also that an initial actuarial rate of 7.5% has been calculated by the System’s actuaries for FY 2018-19. Application of “Collars” approach to limit reductions in the rate Based on the funded status of the System (111%), the applicable rate collar would limit the decrease in the employer contribution rate to a maximum of 0.5%. Based on the funded status of the System (111%), the applicable rate collar would limit the decrease in the employer contribution rate to a maximum of 0.5%. The 0.5 percent increment would be subtracted from the prior year’s rate of 8.9%, generating a new employer rate for FY 2018-19 of 8.4%. The 0.5 percent increment would be subtracted from the prior year’s rate of 8.9%, generating a new employer rate for FY 2018-19 of 8.4%. Since the final rate is the greater of the 7.5% initial actuarial rate and the 8.4% rate calculated using the collars approach, the employer contribution rate for FY 2018-19 is 8.4%. Since the final rate is the greater of the 7.5% initial actuarial rate and the 8.4% rate calculated using the collars approach, the employer contribution rate for FY 2018-19 is 8.4%. Example 2—Short Version

32. 32 Rate Spike Options A fail-safe provision was also incorporated into the collars smoothing methodology to protect against a protracted market downturn A fail-safe provision was also incorporated into the collars smoothing methodology to protect against a protracted market downturn This requires the annual employer contribution increase to be at least an amount sufficient to reach the amount of the actuarially calculated rate for the year in question within a maximum of ten years This requires the annual employer contribution increase to be at least an amount sufficient to reach the amount of the actuarially calculated rate for the year in question within a maximum of ten years Hence the language at the bottom of the Rate Collars Table: Hence the language at the bottom of the Rate Collars Table: The most the rate can increase compared to the prior year is the greater of the standard amount from the contribution rate change table above or one-tenth the difference between the actuarially required contribution rate calculated without regard to the legislatively added costs and the prior year ’ s final contribution rate. The most the rate can increase compared to the prior year is the greater of the standard amount from the contribution rate change table above or one-tenth the difference between the actuarially required contribution rate calculated without regard to the legislatively added costs and the prior year ’ s final contribution rate. See Example 3 that follows See Example 3 that follows

33. 33 Fail-Safe Adjustment: An example of an employer rate calculation following a market downturn Assumptions Suppose that the final employer contribution rate in FY 2019-20 is 5.0%. Suppose that the final employer contribution rate in FY 2019-20 is 5.0%. Presume that the funded status of the System in the FY 2020-21 valuation is 96%. Presume that the funded status of the System in the FY 2020-21 valuation is 96%. Suppose also that an initial actuarial rate of 10% has been calculated by the System’s actuaries for FY 2020-21. Suppose also that an initial actuarial rate of 10% has been calculated by the System’s actuaries for FY 2020-21. Application of “Collars” approach Based on the funded status of the System (96%), the applicable rate collar would generate a maximum increase in the employer contribution rate of 0.25%. Based on the funded status of the System (96%), the applicable rate collar would generate a maximum increase in the employer contribution rate of 0.25%. Before taking into account the fail safe provision, this would generate a preliminary employer contribution rate of 5.25%. Before taking into account the fail safe provision, this would generate a preliminary employer contribution rate of 5.25%. Because, however, the initial, calculated actuarial rate for FY 2020-21 (10%) is greater than the preliminary employer rate (5.25 %), a fail safe adjustment may required. Because, however, the initial, calculated actuarial rate for FY 2020-21 (10%) is greater than the preliminary employer rate (5.25 %), a fail safe adjustment may required. Example 3—Short Version

34. 34 Application of Fail Safe Provision Step 1: Calculate how much the new actuarial rate exceeds the prior year’s final employer rate. Step 1: Calculate how much the new actuarial rate exceeds the prior year’s final employer rate. Answer: The initial actuarial rate for FY 2020-21 (10%) minus last year's employer rate (5%) is 5%. Answer: The initial actuarial rate for FY 2020-21 (10%) minus last year's employer rate (5%) is 5%. Step 2: To reach the actuarially-calculated rate within ten years, calculate one-tenth of the difference determined in Step 1. Step 2: To reach the actuarially-calculated rate within ten years, calculate one-tenth of the difference determined in Step 1. Answer: 0.5% (5%/10 = 0.5%) Answer: 0.5% (5%/10 = 0.5%) Step 3: Compare the 0.5% calculated in Step 2 with the increase determined by the application of the rate collar, i.e., 0.25% to see which increase applies. Step 3: Compare the 0.5% calculated in Step 2 with the increase determined by the application of the rate collar, i.e., 0.25% to see which increase applies. Answer: The final employer contribution for FY 2020-21 would be 5.5% (not 5.25%), a rate that would expect to reach the actuarial rate of 10% within 10 years. Answer: The final employer contribution for FY 2020-21 would be 5.5% (not 5.25%), a rate that would expect to reach the actuarial rate of 10% within 10 years. Example 3—Short Version, cont’d

35. 35 Rate Spike Options Other components of the proposal include: Other components of the proposal include: Temporarily increasing PSERS’ current employer contribution rate floor of 4% to 6.44%, effective July 1, 2008 through and including FY 2011-2012 Temporarily increasing PSERS’ current employer contribution rate floor of 4% to 6.44%, effective July 1, 2008 through and including FY 2011-2012 Beginning in FY 2012-2013, a new permanent PSERS’ rate floor would take effect at the employers’ normal cost minus 2% Beginning in FY 2012-2013, a new permanent PSERS’ rate floor would take effect at the employers’ normal cost minus 2% For example, if PSERS’ employer normal cost is 6.54%, the rate floor for that year would be 4.54% For example, if PSERS’ employer normal cost is 6.54%, the rate floor for that year would be 4.54% These rate floors would also have to be taken into account when calculating the employer rate, i.e., the final rate, under all circumstances, could not fall below the current floor then in effect These rate floors would also have to be taken into account when calculating the employer rate, i.e., the final rate, under all circumstances, could not fall below the current floor then in effect

36. 36 Rate Spike Options Under the Governor’s proposal, any benefit enhancements, e.g. COLAs or early retirement incentives, would continue to be amortized over ten years with level dollar payments Under the Governor’s proposal, any benefit enhancements, e.g. COLAs or early retirement incentives, would continue to be amortized over ten years with level dollar payments All additional employer costs associated with a benefit enhancement would be added to the final employer contribution rate calculated in accordance with the new floors and collars funding methodology All additional employer costs associated with a benefit enhancement would be added to the final employer contribution rate calculated in accordance with the new floors and collars funding methodology This prevents the perception that the enhancements are free, as their actual cost will be clearly identifiable This prevents the perception that the enhancements are free, as their actual cost will be clearly identifiable

37. 37 Governors’ Funding Proposal with FY 2007-2008 investment rate of return and an 8.5% assumed rate thereafter

38. 38 Governors’ Funding Proposal with FY 2007-2008 investment rate of return and varying up and down rates of return for subsequent years

39. 39 Governors’ Funding Proposal with FY 2007-2008 investment rate of return followed by three years at (5%) and an 8% assumed rate thereafter Actual employer contribution rate high point is 37.22% in FY 2031-2032

40. 40 Return to Service and Still Collect a Pension? Is this Possible?

41. 41 What the Law Says about Return to Service… Under the PERC, PSERS must stop the annuity of any PSERS retiree who returns to public school service Under the PERC, PSERS must stop the annuity of any PSERS retiree who returns to public school service 24 Pa.C.S. §8346(a): 24 Pa.C.S. §8346(a): “If an annuitant returns to school service, … any annuity payable to him under this part shall cease effective upon the date of his return to school service … and … the present value of such annuity … shall be frozen as of the date such annuity ceases.” “If an annuitant returns to school service, … any annuity payable to him under this part shall cease effective upon the date of his return to school service … and … the present value of such annuity … shall be frozen as of the date such annuity ceases.” This includes service at a community college, SSHE, and Penn State University since, they are deemed to be public schools under the PSERC This includes service at a community college, SSHE, and Penn State University since, they are deemed to be public schools under the PSERC

42. 42 What the Law Says about Return to Service… Why does the PSERC have this rule? Why does the PSERC have this rule? IRS Tax Qualification requirement IRS Tax Qualification requirement You cannot retire and then return to work for the same “employer” while still receiving a pension from that employer You cannot retire and then return to work for the same “employer” while still receiving a pension from that employer In this context “employer” is used collectively in the broad sense In this context “employer” is used collectively in the broad sense It means any individual employer under the PSERC and thus includes community colleges, SSHE and Penn State University It means any individual employer under the PSERC and thus includes community colleges, SSHE and Penn State University E.g. if the member retires from PSERS employer X and returns to service at Community College Y, it is deemed a return to service with the same employer E.g. if the member retires from PSERS employer X and returns to service at Community College Y, it is deemed a return to service with the same employer IRS

43. 43 Retired Member Impact There are three primary exceptions to the general rule that PSERS must stop the annuity of any PSERS retiree who returns to public school service: There are three primary exceptions to the general rule that PSERS must stop the annuity of any PSERS retiree who returns to public school service: 1) Return to public school service in an emergency 2) Return to public school service in an extra- curricular capacity 3) Enrollment by the retiree in either the State Employees’ Retirement System (SERS) or an alternative approved pension plan offered by the community college, SSHE or Penn State University, i.e. TIAA-CREF

44. 44 Retired Member Impact Exception #1*: Return to school service in an emergency Under the PSERC a PSERS’ retiree can return to service without interrupting his or her pension if: Under the PSERC a PSERS’ retiree can return to service without interrupting his or her pension if: An emergency exists that creates a serious impairment of service; or An emergency exists that creates a serious impairment of service; or There is a shortage of subject-certified teachers There is a shortage of subject-certified teachers The emergency exception can extend only for the length of the school year The emergency exception can extend only for the length of the school year *24 Pa.C.S. §8346(b)

45. 45 Retired Member Impact Exception #2*: Return to school service in an extracurricular position The PSERC allows a PSERS’ retiree to service in an extracurricular position without interrupting his or her pension if: The PSERC allows a PSERS’ retiree to service in an extracurricular position without interrupting his or her pension if: The retiree is employed under a separate contract The retiree is employed under a separate contract The extracurricular position is primarily performed outside the regular instructional hours and is not part of the mandated curriculum The extracurricular position is primarily performed outside the regular instructional hours and is not part of the mandated curriculum For example: A not for credit adult education classes taught at night For example: A not for credit adult education classes taught at night *24 Pa.C.S. §8346(b.1)

46. 46 Retired Member Impact Exception #3*: Enrollment by the retiree in either SERS or another approved plan The PSERC allows individuals working for a community college, SSHE or Penn State University to choose one of three retirement plan options: The PSERC allows individuals working for a community college, SSHE or Penn State University to choose one of three retirement plan options: PSERS PSERS SERS SERS Another approved employer plan, i.e. TIAA-CREF Another approved employer plan, i.e. TIAA-CREF *24 Pa.C.S. §8301

47. 47 Retired Member Impact Exception #3: If a returning PSERS’ member chooses SERS or TIAA-CREF, PSERC’s return to service restriction does not apply If a returning PSERS’ member chooses SERS or TIAA-CREF, PSERC’s return to service restriction does not apply So what’s the problem? So what’s the problem? A returning member cannot always elect SERS or TIAA-CREF A returning member cannot always elect SERS or TIAA-CREF Why? Why? The member may not be eligible to elect another plan or, The member may not be eligible to elect another plan or, An election is not offered by the community college An election is not offered by the community college

48. 48 Retired Member Impact Exception #3: In the latter case, returning member will default into PSERS thereby triggering the PSERC return to service provisions In the latter case, returning member will default into PSERS thereby triggering the PSERC return to service provisions In the former case, the default occurs because the returning member does not work enough hours to qualify for either SERS or TIAA-CREF In the former case, the default occurs because the returning member does not work enough hours to qualify for either SERS or TIAA-CREF To elect SERS, an employee must work at least 750 hours in a calendar year To elect SERS, an employee must work at least 750 hours in a calendar year To elect TIAA-CREF, an employee must work a minimum number of hours which varies from community college to community college, e.g. 1000 hours To elect TIAA-CREF, an employee must work a minimum number of hours which varies from community college to community college, e.g. 1000 hours

49. 49 Retired Member Impact “Exception #4:” Is the person really a return to service or are they an independent contractor If the retiree is truly an independent contractor then they are not eligible for membership in the System and therefore are not a return to service If the retiree is truly an independent contractor then they are not eligible for membership in the System and therefore are not a return to service These situations are reviewed on a case by case basis which is based on the ten Zimmerman factors These situations are reviewed on a case by case basis which is based on the ten Zimmerman factors The Zimmerman factors are found on the eligibility form which must be filled out in these cases The Zimmerman factors are found on the eligibility form which must be filled out in these cases

50. 50 Retirement-Covered Compensation Charles Serine, PSERS Legal Office

51. 51 Definition of Compensation Definition according to the Retirement Code Definition according to the Retirement Code "Compensation." Pickup contributions plus any remuneration received as a school employee excluding reimbursements for expenses incidental to employment and excluding any bonus, severance payments, any other remuneration or other emolument received by a school employee during his school service which is not based on the standard salary schedule under which he is rendering service, payments for unused sick leave or vacation leave, bonuses or other compensation for attending school seminars and conventions, payments under health and welfare plans based on hours of employment or any other payment or emolument which may be provided for in a collective bargaining agreement which may be determined by the Public School Employees' Retirement Board to be for the purpose of enhancing compensation as a factor in the determination of final average salary; provided, however, that the limitation under section 401(a)(17) of the Internal Revenue Code of 1986 (Public Law 99-514, 26 U.S.C § 401 (a)(17)) taken into account for the purpose of member contributions, including regular or joint coverage member contributions, regardless of class of service, shall apply to each member who first became a member of the Public School Employes' Retirement System on or after July 1, 1996, and who by reason of such fact is a noneligible member subject to the application of the provisions of section 8325.1 (relating to annual compensation limit under IRC § 401(a)(17)). "Compensation." Pickup contributions plus any remuneration received as a school employee excluding reimbursements for expenses incidental to employment and excluding any bonus, severance payments, any other remuneration or other emolument received by a school employee during his school service which is not based on the standard salary schedule under which he is rendering service, payments for unused sick leave or vacation leave, bonuses or other compensation for attending school seminars and conventions, payments under health and welfare plans based on hours of employment or any other payment or emolument which may be provided for in a collective bargaining agreement which may be determined by the Public School Employees' Retirement Board to be for the purpose of enhancing compensation as a factor in the determination of final average salary; provided, however, that the limitation under section 401(a)(17) of the Internal Revenue Code of 1986 (Public Law 99-514, 26 U.S.C § 401 (a)(17)) taken into account for the purpose of member contributions, including regular or joint coverage member contributions, regardless of class of service, shall apply to each member who first became a member of the Public School Employes' Retirement System on or after July 1, 1996, and who by reason of such fact is a noneligible member subject to the application of the provisions of section 8325.1 (relating to annual compensation limit under IRC § 401(a)(17)).

52. 52 Retirement-Covered Compensation Retirement-Covered Compensation Retirement-Covered Compensation PSERS is Defined Benefit Plan – pension based on a fixed formula PSERS is Defined Benefit Plan – pension based on a fixed formula FAS impacts benefit – spikes in FAS result in cost shifting to other employers FAS impacts benefit – spikes in FAS result in cost shifting to other employers Code excludes payments that artificially inflate FAS Code excludes payments that artificially inflate FAS

53. 53 Retirement-Covered Compensation Code limits what PSERS can recognize Code limits what PSERS can recognize BUT - Code does not limit what employers can pay BUT - Code does not limit what employers can pay

54. 54 Retirement-Covered Compensation Compensation is all regular remuneration Exceptions: Compensation is all regular remuneration Exceptions: Fringe benefits Fringe benefits Bonus Bonus Generally, one time payment not added to base salary Generally, one time payment not added to base salary Incentive pay is allowed – Beardsley Incentive pay is allowed – Beardsley

55. 55 Incentive under Beardsley IF: Incentive under Beardsley IF: Payment tied to actual work performance Payment tied to actual work performance Performance standards agreed ahead of time Performance standards agreed ahead of time Objective means of calculating payment Objective means of calculating payment Employer contractually obligated to make payment if standards are met Employer contractually obligated to make payment if standards are met Payment is significant amount Payment is significant amount Retirement-Covered Compensation

56. 56 Retirement-Covered Compensation Severance – any payment made in connection with agreement to retire or terminate service Severance – any payment made in connection with agreement to retire or terminate service Unused Vacation and Sick Leave payments Unused Vacation and Sick Leave payments

57. 57 Attachments Act 2004-63 Affects Retirees Working After Retirement Act 2004-63 Affects Retirees Working After Retirement Zimmerman Test Zimmerman Test Membership Eligibility Form Membership Eligibility Form Compensation Information Compensation Information

58. 58 Questions? Jeff Clay PSERS Executive Director 717-720-4749jclay@state.pa.uswww.psers.state.pa.us

59. 59 Rate Projection Assumptions The employer rate projections contained in this presentation are simply that; projections based on certain assumptions The employer rate projections contained in this presentation are simply that; projections based on certain assumptions Therefore the projected rates can change Therefore the projected rates can change The rates may decrease with investment performance over PSERS’ 8.5% actuarial assumption and vice versa The rates may decrease with investment performance over PSERS’ 8.5% actuarial assumption and vice versa Also the projected employer rates and related data are impacted by actual experience that varies from the mortality, salary growth, and other economic and demographic assumptions of the System Also the projected employer rates and related data are impacted by actual experience that varies from the mortality, salary growth, and other economic and demographic assumptions of the System Benefit enhancements will also impact the rate projections Benefit enhancements will also impact the rate projections