PSERS Funding Crisis - Frequently Asked Questions
All 500 school districts in Pennsylvania are struggling with this issue and the pension crisis has two parts. The first part is a "spike" in the amount of employer contributions school employers and the state will have to make to the Public School Employees Retirement System (PSERS) between now and the 2014-15 school year. This rate will increase by more than 700 percent during that span. Second, the increased expenses are projected to last for at least two decades after the spike peaks in 2014-15. The issue is important because the employer contributions are made using tax dollars that go to school districts and to the state.
What is PSERS?
PSERS is one of the oldest and most generous defined benefit retirement systems in the country. PSERS is funded by employer contributions - school districts and the commonwealth, employee contributions - teachers and other school employees and investment returns. It is a defined benefits plan, which means a member’s pension benefit is the result of a calculation and the employer holds the risk of ensuring the benefits are paid out. The formula for benefits under PSERS is the employee’s years of service times the employee’s multiplier, either 2 percent or 2.5 percent, times the employee’s average three highest years of salary. Very few employees in the private sector enjoy defined benefit retirement plans, and even public sector employees’ defined benefit plans are becoming scarce.
How does PSERS work?
The premise of a defined benefit pension plan like PSERS is that the benefit or, the annual pension payment an employee can expect, is defined when the plan is established. Funding then is based upon the number of participants, their years of service, their expected earnings at retirement and the actuarially calculated rate of retirement, life expectancy and expected number of years of payments. Most importantly, in a defined benefit plan the members do not benefit when the investment performance of the fund is good. The commonwealth and school employers’ (taxpayers) benefit through a reduced employer contribution rate to PSERS. Likewise, the employees do not bear the investment risk of a down market. Investment risk is borne by the commonwealth and school employers through the employer contribution rate.
What caused the funding crisis?
A variety of factors, including legislative action, stock market volatility and a poor economy led to the system breakdown. This is not a teachers’ union versus taxpayers or school boards issue. Some will have you believe that PSERS is broken because school districts have not been making their fair share of the payments to the system. Despite the rhetoric, school districts have been paying into the system what they are required to pay according to law. While legislation passed in 2001 and 2003 lowered the employer contribution rate, school districts are mandated to make the payments as determined by the PSERS board. Since 60 percent of the PSERS system is funded by investment returns, the stock market crashes after Sept. 11, dot.com bust in 2003 and the down economy the past two years have been the primary factors in the PSERS scenario. Investment earnings are the primary source of funding for PSERS benefits, dwarfing the contributions from both school employers (taxpayers) and its active members. School employee organizations quote employer and employee contributions over the last 12 years, showing they have paid more into the system than employers, which is true. What they fail to cite are the historical contributions from 1955 to 1997 - a 42 year span, when employer contributions were at least double, and from 1974 to 1994 more than double the employee contribution rate. Additionally, there have been several statutes enacted by the state legislature to enhance member benefits over the years. Typically, these bills allowed individual school employees to retire and receive full benefits before the required age. The theory behind these bills was to replace more senior and higher paid employees with newer and lower paid employees, which produces short-term savings but creates additional long-term costs. All of these increased benefits were approved by the legislature for public school employees, without the "approval" of local school boards or taxpayers. The increased benefit makes prior year’s actuarial assumptions meaningless and causes an imbalance in the system’s funding that can only be corrected moving forward. More importantly, once the increase in benefit is given, it cannot be taken away. Consequently, the defined benefit "promise," which employee organizations continually cite, was broken when employee benefits were increased without the approval of the school district employer and the taxpayer.
What is the solution?
A solution requires both short- and long-term remedies. If the state legislature does not develop both short- and long-term solutions to fix the system, the cost to taxpayers and school districts will be enormous and unsustainable. The Pennsylvania School Boards Association has proposed and had sponsored House Bill 2135 and Senate Bill 1185. These bills propose a hybrid pension system that is a long-term solution for the system. PSBA’s proposed hybrid plan only impacts new school employees; it does not affect existing employees already in the system. Recognizing the short-term spike, PSBA advocates for a three-pronged solution of finding a new revenue source, amortizing the debt and restructuring the benefits.
How much does MASD pay and what will our increased contributions be?
This year, Moon Area School District will contribute 4.78 percent to the system. The PSERS Board of Directors already has voted to increase employer contributions to 8.22 percent for the 2010-11 school year, which represents a 72 percent hike over the current contribution rate. However, projections show that within the next four years district contributions to the system will leap to 33.60 percent or a 602 percent increase from current district contributions. They are expected to stay above 30 percent until 2020 under current circumstances. The projected increases would cost MASD and its taxpayers an additional $4.5 million in the next four years. To cover the district’s costs, a 2.14-mill property tax increase would be needed even with the state’s continued reimbursement of half of all district payments.
Where can I learn more about this issue?
Much more information can be found at www.psba.org where you can click on ‘Issues and Advocacy’ link, then the ‘Issues and Research’ button to locate ‘Pension Reform."
