1. Understanding PSERS and the Employer Contribution Rate
January 11, 2008
Understanding PSERS and the Employer Contribution Rate
Presentation to PASA
Public School Employees’ Retirement System
January 11, 2008
PASA

2. Agenda PSERS’ Overview PSERS’ Health Programs Investment Update
January 11, 2008
Agenda
PSERS’ Overview
PSERS’ Health Programs
Investment Update
Employer Contribution Rate and the Pending Rate Spike
What is the Current Employer Contribution Rate?
Why is there a Projected Employer Rate Spike in FY 2012/2013?
What can be done to Mitigate the Spike?
January 11, 2008
PASA
PASA

3. PSERS’ Overview

4. PSERS’ Overview PSERS currently manages assets of approximately $67.2
January 11, 2008
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
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 is governed by a 15 person Board of Trustees, and has a complement of 306 employees
PSERS serves approximately 519,000 members
PSERS currently manages
assets of approximately $67.2
billion as of June 30, 2007
PSERS is the 13th largest public defined benefit pension fund in the nation and the 23rd largest public or corporate fund in the nation
As of January 2, 2008 PSERS
Net Asset Value was over
$66 billion
January 11, 2008
PASA
PASA

5. PSERS’ Overview Basic Benefit Formula 2.5% or 2.0% Multiplier Years of
A defined benefit (DB) plan is different from many private sector pension plans, e.g. Individual Retirement Accounts (IRAs), Keogh and 401(k) plans
These private sector plans are generally defined contribution (DC) plans
The chief differences between the two are in how the actual pension benefit is determined and who bears the risk of investment
In a DC plan, the ultimate benefit is determined by the investment performance of the member’s account and the member bears the investment risk
In a DB plan, the final benefit is typically based on a fixed formula and the employer bears the investment risk
PSERS also offers a disability benefit for eligible members with 5 or more years of service
Basic Benefit Formula
2.5% or
2.0%
Multiplier
Years of
Service
Final
Average
Salary
Maximum
Single
Life
Annuity X X =
PSERS paid out in excess of $4.0 billion in pension benefits for the fiscal year ending June 30, 2007
January 11, 2008
PASA

6. PSERS’ Overview PSERS is funded by three sources:
Employee Contributions,
Employer Contributions, and
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
Over the last 25 years, only 16% of PSERS’ funding has come from school employers. Another 11% has come from PSERS’ active members. All the rest – 73% – has come from investment earnings
January 11, 2008
PASA

7. HEALTH OPTIONS PROGRAM
PSERS Health Programs
Premium Assistance
Benefit
HOP
HEALTH OPTIONS PROGRAM

8. Health Options Program (HOP): Overview
Besides administering a DB pension plan, PSERS sponsors the Health Options Program (HOP)
The HOP is a voluntary group health insurance program for over 61,000 PSERS annuitants, their spouses (including surviving spouses) and dependents
The program was first started in the late 1960’s solely as a Medicare supplement indemnity plan and in 1994 the program was transformed into HOP
Funding is through the premium payments of the participants, with no direct funding by the employers or PSERS
HOP provides access to coverage
65 Special Program – Medicare eligible
Traditional Program – Not Medicare eligible
High and Standard Options w/ Rx coverage
Fee-for-service plans
HOP Medical Plan
Basic & Enhanced Medicare Part D Rx Options
PSERS is one of only nine employer/union direct Prescription Drug Plans (PDP)
HMO, POS and PPO plans (where available)
January 11, 2008
PASA

9. Premium Assistance Benefit (PAB)
PSERS also offers a Premium Assistance Benefit (PAB) to qualified members
The PAB is an employer funded (pay-as-you-go) benefit that provides eligible annuitants up to $ per month or their actual out-of-pocket costs for health insurance, whichever is less
To be eligible for the PAB one must:
have 24.5 years of service; or
be a disability annuitant; or
have 15 years of service AND retired on or after age 62
And eligible annuitants must participate in either:
PSERS’ Health Options Program; or
School Employer Health Plans
January 11, 2008
PASA

10. Investment Update

11. PSERS’ Investment Rates of Return as of:
FY 1999/ %
FY 2000/ (7.4)%
FY 2001/ (5.3)%
FY 2002/ %
FY 2003/ %
FY 2004/ %
FY 2005/ %
FY2006/ %
Below PSERS’ annual actuarial earnings assumption of 8.5%, therefore resulting in an actuarial loss
As of December 31, 2007
FYTD Return= 2.34%
CYTD Return= 13.02%
January 11, 2008
PASA

12. PSERS’ Net Plan Assets as of:
June 30, $43.6 Billion (audited)
March 31, $38.3 Billion (unaudited)
June 30, $42.5 Billion (audited)
June 30, $48.5 Billion (audited)
June 30, $52.1 Billion (audited)
June 30, $57.0 Billion (audited)
June 30, $67.2 Billion (audited)
January 11, 2008
PASA

13. PSERS’ Funded Ratio: 1990 – 2007 (percentage)
PSERS total funded ratio is measured by comparing the actuarial value of assets (based on a 5 year moving average market value) with the accrued liability
Historically PSERS was only 50% funded in 1982
PSERS first achieved fully funded status in FY 1996/1997 (105.0%)
PSERS reached the highest funded ratio in the history of the Fund in FY 1999/2000 (123.8%)
PSERS’ current funded ratio is 85.8% as of June 30, 2007, an increase from 81.2% as of June 30, 2006
PSERS’ Funded Ratio: 1990 – 2007 (percentage)
January 11, 2008
PASA

14. Employer Contribution Rate and the Pending Rate Spike

15. What is the Current Employer Contribution Rate?

16. Employer Contribution Rate
The Public School Employees' Retirement Board met on December 13, 2007 and certified the employer contribution rate for FY 2008/2009
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 Commonwealth reimburses school employers for not less than 50% of the employer contribution rate
Statewide average is 52/48% split with the Commonwealth paying 52%
January 11, 2008
PASA

17. Employer Contribution Rate
The FY 2008/2009 rate of 4.76% is a decrease from the current rate of 7.13%
The FY 2008/2009 rate is below the employer normal cost of 6.68% for FY 2008/2009
January 11, 2008
PASA

18. Employer Contribution Rate
The “employer normal cost” is the amount needed from the school employers to fund the benefits earned by the active members for that year
It can be thought of as the minimum payment that would be made by school employers if the System’s actual experience perfectly matched its economic and demographic operating assumptions
In other words, the employer’s base line contribution in a perfect actuarial world
January 11, 2008
PASA

19. Employer Contribution Rate
In preparing school district budgets, the Pennsylvania Department of Education recommended that school districts plan for the current PSERS employer contribution rate of 7.13% to remain in effect
The PDE memo stated:
If pension reform is enacted, it will likely require school districts to maintain their existing employer contribution rate rather than reducing it. The Department of Education therefore recommends that school districts plan accordingly by budgeting based on a 7.13% employer contribution rate
PDE Memo
January 11, 2008
PASA

20. Why is there a projected large employer rate increase in FY 2012/2013?

21. Projected Employer Rate Spike
The projected sharp rise in the employer contribution rate to 11.23% (down from last year’s projection of 18.73%) in FY 2012/2013 is primarily the result of:
The unfunded liabilities created by
Act
The down investment markets;
The Act 38 phased COLA
The changes made by Acts and to PSERS’ funding methodologies
January 11, 2008
PASA

22. What can be done to mitigate the rate increase?

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
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?
January 11, 2008
PASA

24. Rate Spike Options
Fundamentally, the current problem has been been caused by the underfunding of the System
This has practically occurred by way of Acts 38 and 40
It has also been abetted by the Retirement Code itself
Prior to Act , the funding methodology of the Retirement Code permitted the employer contribution rate to drop to zero thus giving school employers a false sense of fiscal prosperity
January 11, 2008
PASA

25. Rate Spike Options
To resolve the funding issues, these factors need to be corrected
The first step is additional funding
This has already partially occurred but not through large increases in the employer contributions
On the contrary, it has come from the superior investment performance of PSERS’ investment assets in FY’s 2003/2004, 2004/2005, 2005/2006, and 2006/2007
Projected rate spike reduced from the initial spike of 27.73% to 11.23%
January 11, 2008
PASA

26. Rate Spike Options
It is unlikely, however, that PSERS will “earn” itself out of the rate spike problem
PSERS’ investment consultants forecast a low return environment for the next ten years
Also, PSERS’ past four years of investment returns (FY 2003/2004, 2004/2005, 2005/2006 and 2006/2007) have been top decile returns
It is not likely that PSERS can continue to post such returns in today’s market conditions
January 11, 2008
PASA

27. Rate Spike Options
Therefore, additional employer contributions will be needed to mitigate the projected rate spike
One proposal includes raising the employer contribution rate floor to the FY 2007/2008 preliminary employer pension rate
SB 826- This proposal seeks to increase the Act 40 employer contribution pension rate floor for PSERS from 4% to 6.44% plus the premium assistance contribution (current rate) and increase the minimum employer rate for SERS from 4% to 5%
January 11, 2008
PASA

28. Rate Spike Options
This proposal is a step in the right direction, as it will help to avoid future under funding of the System
This legislation, however, does not in and of itself eliminate the present projected rate spike
Reflecting the 22.93% rate of return for FY 2006/2007, the projected impact of SB 826 causes the current rate spike of 11.23% to drop to 10.50%
January 11, 2008
PASA

29. Rate Spike Options
Another option includes increasing employer contributions in a predictable and controlled manner, that will permit the Commonwealth and school employers to adequately budget for the increases and spread out their impact
For example, increase the employer pension rate beginning in FY 2008/2009 through 2011/2012 as follows:
7.25%-7.75%-8.50%-9.00%
Projected rate spike drops to 10.08% and the rate plateau is smoothed out
January 11, 2008
PASA

30. Rate Spike Options
Instead of increasing the employer contributions as suggested, are there other options to reduce PSERS’ unfunded liabilities?
Yes, several concepts have been raised in the media, principally being:
Increasing the employee contribution rate
Reducing benefits
Repealing or modifying the Act multiplier increase
Return to a 10-year vesting period
Prohibit the withdrawal of a member’s contribution
Converting PSERS from a DB plan to a defined contribution (DC) plan
January 11, 2008
PASA

31. Rate Spike Options
Although superficially attractive, these suggestions will not provide any meaningful mitigation of the projected rate spike
Why?
Any such changes would have to be prospective only to avoid the PA Constitution’s prohibition against the impairment of a contract (Article I, Section 17)
The courts have ruled that PSERS’ pension benefits are contracts with the existing members of the System, regardless of vesting, and thus subject to the constitutional impairment of contract prohibition
January 11, 2008
PASA

32. Rate Spike Options
Therefore, they will only incrementally increase the funding and/or reduce the System’s current unfunded liability prior to the occurrence of the projected rate spike
Moreover, in the case of the DC option, arguably it will increase the cash flow problems for both the Commonwealth and school employers since they will be simultaneously funding two separate pension systems
January 11, 2008
PASA

33. PSERS Executive Director
January 11, 2008
Questions?
Jeff Clay
PSERS Executive Director
January 11, 2008
PASA
PASA

34. Rate Projection Assumptions
The employer rate projections contained in this presentation are simply that; projections based on certain assumptions
Therefore the projected rates can change
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
Benefit enhancements will also impact the rate projections
January 11, 2008
PASA