Pennsylvania public pensions

Pennsylvania Public Pensions are divided into three pension systems: the Public School Employees' Retirement System, the State Employees' Retirement System, and the Municipal Retirement System.

As of 2010, Pennsylvania has 208,973 total public employees.^[1] In Fiscal Year 2010, the state has a total of 531,361 active and inactive pension fund members, with 292,297 receiving periodic benefit payments. ^[2] Over 500,000 people participate in the Public School Employees' Retirement System.

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The Pennsylvania State Employees’ Retirement System (PSERS) suffered a 28.7% investment loss in 2008, the worst of any state according to a study by the Pew Center on the States.^[3] The Pennsylvania Public School Employees’ Retirement System was also hit hard, posting losses of 26.5%.^[3] A recent study by economists Joshua Rauh of the Kellogg School of Management at Northwestern University and Robert Novy-Marx of the University of Chicago Booth School of Business concluded that the Pennsylvania pension fund will run out of money in 2023.^[4]

2012 Keystone Pension Report

Pennsylvania faces a $41 billion pension unfunded liability and increasing pension contributions, according to the 2012 Keystone Pension Report. Because of the pension crisis, Gov. Corbett said the state faces a choice between either fully funding pension obligations or making cuts to the core functions of government. ^[5]

Both the State Employees Retirement System and the Pennsylvania School Employees Retirement System pension programs are less than 68 percent funded. ^[6]

Next year's revenue growth is expected to be nearly $819 million. Of that total growth, pension costs are projected to claim about 62 percent. That translates to more than $511 million that could have been spent on programs and services. Without any pension reform, the state must continue spending reductions to account for this amount in balancing its budget. ^[7]

Public Pension Plans

According to the United States Census Bureau, the state has 1,422 locally-administered pension systems.^[8]

State Employees Retirement System

SERS was established in 1923. SERS is a defined benefit pension plan, and provides benefits determined by a fixed benefit formula that takes into account the employee’s length of service and compensation.

Most permanent full-time and permanent part-time State employees and employees of certain independent agencies are required to join SERS. Part-time employees paid by the hour or the day cannot join SERS until they are compensated for 750 hours or 100 days in a calendar year, and must join SERS after reaching that threshold.

Most SERS members have a contribution of 6.25 percent of gross pay, according to the retirement plan summary. ^[9]

Employees are eligible for SERS benefits if they have five or more years of credited service at any age, or if the have reached normal retirement age with at least three years of credited service. Age 60 is the normal retirement age for most members. Age 50 is the normal retirement age for a member of the General Assembly, an enforcement officer, a correction officer, a psychiatric security aide, a Delaware River Port Authority police officer, an officer of the Pennsylvania State Police or a member of any other membership group included by legislative revision of the Pennsylvania retirement code.

Pennsylvania retirement law does not currently provide for automatic COLAs.

Public School Employees Retirement System

The Pennsylvania Public School Employees’ Retirement Act became law in 1917.

The formula for benefits under PSERS is the employee’s years of service times the employee’s multiplier (2 percent or 2.5 percent) times the employee’s average three highest years of salary.

Full-time school employee are required to participate in PSERS. Members who work full-time contribute a percentage of their salary towards a retirement benefit from the first day of employment. Part-time employees must meet certain qualifications to become a member of PSERS. Membership qualification depends on how you were hired by your employer.

• Part-Time Salaried - eligible for membership from your first day of employment.
• Part-Time Hourly - must work at least 500 hours to become eligible for membership.
• Part-Time Per Diem - must work at least 80 days to become eligible for membership.

Part-time salaried, part-time hourly, or part-time per diem employees may waive membership in PSERS within 30 days of employment. Employees working for a community college or a state-owned University, may generally select a retirement plan from among PSERS, SERS or other approved retirement plans. PSERS members are vested after five years.

Funding levels

Responding to massive increases in state payments for the public pensions, Gov. Ed Rendell signed a bill to cut Pennsylvania pension benefits for newly hired state workers and school employees in November, 2010. ^[10] The new law buys time for the state treasury and school districts to fund the two major public-sector pension plans. Besides cutting benefits for new hires, the law doubles to 10 years the vesting period for new employees. The bill also creates an independent fiscal office in the Legislature. ^[10]

Prior to the reforms initiated by Rendell, the state failed to pay the annual recommended amount to the state pension plans for years. ^[11] The annual recommended contribution is the yearly amount required to cover administrative costs, the cost of benefits employees earned in a given year and the cost of paying off any unfunded liabilities. Pennsylvania increased benefits for state and school employees and lawmakers in 2001, added a cost-of-living raise for retirees in 2002, and then reduced contributions to the funds and spread costs out over a decade to soften the blow of market declines.

The state's pension liabilities can be calculated in a variety of ways, which yield different numbers. Below are the numbers as calculated by to the Pew Center on the States,^[3] the American Enterprise Institute^[12] and Professors Robert Novy-Marx of the University of Chicago and Joshua Rauh of Northwestern University, Kellogg Graduate School of Management.^[13]

Other information from the Pew Center on the States Feb. 2010 publication "The Trillion Dollar Gap":

This data is based on projected data from 2008 census data.^[14] In 2008, $1.94 trillion was set aside for pensions, but it is estimated that states have $5.17 trillion in unfunded liabilities.

Research conducted by State Budget Solutions shows the extent to which the state has funded or underfunded its Annual Required Contribution:^[15]

School Funding Levels

In five years, pension contributions for area school districts are projected to increase by $172.9 million. From fiscal 2011-12 to 2015-16, contributions are set to triple. Area districts have already furloughed teachers, cut tutoring programs and increased class sizes. ^[16]

Projected increases are mainly due to a stock market dive that caused pension fund investment losses and costs associated with 25 percent pension boosts enacted in 2001 now taking effect. And in good economic times, with strong investment returns, districts paid little into the system. For the first 10 years this century, school employees paid twice as much into the system as districts and the state combined. ^[17]

Rate of return

Pennsylvania presumes a 8.00% return rate on its pension investments.^[3] In 2009 the PSERS System lowered its assumption of investment return from 8.5% to 8%.^[3]

Pension criticisms

Like other government pension plans, Pennsylvania's is not without its share of criticism. Not only has the administration missed pension payments, some of the high pension payouts have also been criticized. Some government pensions reach as high as 70 percent of recorded earnings, padded with overtime to inflate the salaries on which pension payments will be based. That includes some of the generous legislators’ pensions, such as Sen. Bob Mellow, who is projected to take home more than $300,000 per year for his decades of service. ^[18] The biggest pension payout, at $254,000 a year, to a non-legislator, currently goes to a retired Penn State surgery professor. ^[19]

According to the Associated Press in 2012, the cost of subsidizing pensions for state employees and teachers is expected to jump from less than $1 billion to more than $3 billion a year – and the higher payments are expected to continue for decades. The amount is equal to about $240 for every man, woman and child in Pennsylvania, compared with $80 today. ^[19]

Projections from the Independent Fiscal Office say pension costs will far outpace revenues in coming years. An annual economic and budgetary projection from the state’s Independent Fiscal Office, a state equivalent of the Congressional Budget Office, forecasts 0.8 percent revenue growth this year and 3 percent annual growth for the state’s revenues in the next five year. Pension costs are projected to climb by 46 percent in this year’s budget and 42 percent in next year’s budget. In comparison to the skyrocketing pension costs, non-pension budgetary expenses are anticipated to climb by only 2.5 percent over the next five years – meaning they would be sustained by the expected 3 percent annual growth in tax revenues if pension costs were not a factor. ^[20]

The growing pension costs are the result of three events in the last decade: increased pension payouts, a reduction in the state’s contribution rate, and the economic collapse of 2008. ^[21]

Pension reform

2010

The new pension reform law passed in November 2010 buys time for the state treasury and school districts to fund the two major public-sector pension plans. Besides cutting benefits for new hires, the law doubles to 10 years the vesting period for new employees. The bill also creates an independent fiscal office in the Legislature. ^[10] The reform legislation caps the employer contribution rate increases to 3 percent in fiscal years 2010 and 2011, 3.5 percent in fiscal years 2012 and 2013, and 4.5 percent in fiscal years 2013 and 2014. ^[22]

Other reforms include raising the retirement age for state employees to 65 from 62. School employees’ retirement ages were increased five years, to between 55 and 65, from between 50 and 60. Employees of both systems will be required to work 10 years before vesting, instead of the current five years.^[22]

The reform law establishes a variable contribution rate for employees of both retirement systems, which increases half a percentage point per year, for a maximum of 2 percent in years when investment returns are at least 1 percent under the assumed rate of return for any given year. When the returns are 1 percent above the assumed rate of return or greater, the contribution rate is dropped by half a percentage point but cannot drop below the basic contribution rate. ^[22]

A study published by the Pew Charitable Trusts and the Economy League of Greater Philadelphia revealed that the city of Philadelphia has a problem with the efficiency and costs of public employee pensions. ^[23]. The amount that Philadelphia pays to pension recipients limits the city’s ability to use its budget effectively. The report revealed that there were more individuals receiving pension benefits—33,907 claimants in 2006—than workers in the city—28,701. ^[23]

City pensions are comparable to the benefits that employees in other cities receive, ranging from $29,000 for municipal employees to $42,00 for firefighters. But Philadelphia employees contribute less to their fund that employees in other cities at an average of 1.85% of contributions coming from employees in the last twenty years. ^[23]

The authors of the study recommend three steps towards addressing the problem of high costs in pensions. ^[23] First, improve data collection so that decision-making in terms of pension policies is more informed. Second, promote transparency for better accountability to citizens. Third, reduce costs and use the savings for developing Philadelphia.

2012

Rick Bloomingdale, president of the Pennsylvania AFL-CIO, said defined contribution plans like 401(k)s are the "modern-day equivalent of the gold watch" for retiring workers, and they should not be forced on public employees in lieu of guaranteed pension plans. Bloomingdale responded to proposals to shift public employees to a defined contribution plan, which proponents say will benefit the taxpayer. State government's cost of paying for existing pensions will increase from $1.7 billion in the proposed 2012-13 budget to $4 billion in 2016, the governor's office said. ^[24]

American Federation of Teachers President Ted Kirsch says his members are being asked for more concessions, when it may not be needed. Kirsch contends that the state hasn’t paid in to the pension for roughly a decade and said the fund's investments are doing well. According to the AFT, the employer rate from 1999-2000 school year to the 2010-11 school year ranged from 0 in 2001-02 to a high of 6.44 percent. At no time during that period did the employer contribution (which is split between the school district employer and the state) match or exceed the employee contribution of 6.25% of gross wages in 1999-2000 and 2000-01 and the current rate of 7.5 percent, which is what all employees hired since the 2001-02 school year pay. ^[25]

2013

Gov. Tom Corbett said pension reform is his top priority in 2013. Underfunded by $41 billion in its total liability, even increasingly painful rate hikes faced by both the state and school districts will not be enough to meet the state’s obligations, Pennsylvania Treasury Secretary Charles Zogby warned the governor, not without raising taxes or reforming the pension system itself. Zogby said covering the shortfall entirely by raising taxes would require a $9,000 tax hike on the average Pennsylvania household. ^[26] Pension costs will consume “close to $700 million in year over year costs,” Zogby said. ^[27]

Eligibility

Pennsylvania raised retirement ages last year for state workers hired after Dec. 31, 2010, from age 60 to 65 for most workers. Lawmakers, however, taking office after that date may retire at age 55. Before then, most state workers could retire at age 60, and lawmakers could retire at age 50.^[28]

Cost of living adjustments

The Pennsylvania General Assembly must make an amendment to the Constitution of Pennsylvania to grant cost of living increases and this usually occurs every four or five years.^[29]

History

In the 1990s, when the pension system was funded at 126%, the robust returns on the pension fund's investment led officials to dramatically raise retirement benefits, which amounted to a 25% increase for state employees and teachers in 2001, a well as cost-of-living increases for retirees. In 2008, PERS lost more than 28%of its assets. Officials in Pennsylvania’s state employee pension system are projecting a jump in contribution rate from 4% of payroll today to 28.3% in FY2013, and 31.3% in FY2014. If the state were required to make that jump today, it would need to find an extra $1.38 billion to pay the FY2013 rate and an extra $1.55 billion to pay the FY2014 rate.^[3]

Local public pensions

Main article: Local government public pensions

According to the United States Census Bureau, the state has 1,422 locally-administered pension systems.^[8]

Pension Consolidation Proposal

Pennsylvania’s roughly 2,600 municipal pension systems are about $6 billion in the red, while two major state pension systems have a combined unfunded liability of more than $40 billion. ^[30]

Auditor General Jack Wagner proposed that the state’s municipal pension plans be consolidated into a statewide system for different classes of employees such as police officers, firefighters and non-uniformed employees. Wagner said that consolidation would yield higher investment return rates for municipal employees, reduce administrative expenses and help reduce the need for increased contributions from taxpayers. A report by the auditor's office revealed that 52, or 2 percent, of the plans are seriously underfunded with less than 50 percent of their plan liabilities covered. According to Wagner’s report, about two-thirds of the 2,600 local government pension plans audited by the Department of the Auditor General have 10 or fewer members. It says the 2,600 local government pension plans hold $10.2 billion in assets and $17.4 billion in liabilities for an aggregate funding ratio of 58 percent. ^[31] The report noted:^[32]

• The assets of 52 plans identified as severely distressed totaled $760 million and liabilities totaled $1.69 billion, for an aggregate funded ratio of 45 percent.
• The assets of 234 plans identified as moderately distressed totaled $5.6 billion and liabilities totaled $10.6 billion, for an aggregate funded ratio of 53 percent.
• The assets of 663 plans identified as minimally distressed totaled $3 billion and liabilities totaled $3.9 billion, for an aggregate funded ratio of 79 percent.

But some local governments are resistant to the proposal. Administrators of local plans that are well funded say it is unfair to lump their surpluses in with communities that have not adequately funded their pensions. For example, West Newton Borough, Pennsylvania West Newton Borough has a funding level of 160 percent for its pension plan. ^[33]

Transparency

Main articles: Public pension disclosure and Governmental Accounting Standards Board

Data availability

The Pennsylvania State Employees Retirement System includes a variety of information on its website, including actuarial and investment information. ^[34]

Names of recipients and amounts the pension plan pays are not posted.

Fund performance data

The strategic investment plan, which outlines holdings in real estate and public and private holdings, is posted. ^[35]

Rate of return

The assumed rate of return is not posted on the website, but is available in the actuarial reports. ^[36]

Unfunded liabilities

Unfunded liabilities are not posted on the site, but they are available in the actuarial reports. ^[36]

Oversight

Former Gov. Edward Rendell received $11,000 in contributions during his 2002 and 2006 campaigns from Stephen Schwarzman, chairman of the private equity firm Blackstone Group. Pennsylvania’s governors appoint six of the state pension board’s 11 members. The state pension fund invested more than $2.8 billion with Blackstone from 1994 through 2007. Blackstone has earned $129 million in management fees. ^[37]

In Sept. 2009 Rendell signed a new law that mandates ethics standards for municipal pension systems, including the Pennsylvania Municipal Retirement System, to stabilize municipal pension funds and increase transparency. The law prohibits those systems from "entering into contracts with persons or affiliated entities that have made contributions to an official or candidate for office in the municipality that controls the pension in the two years preceding." ^[38]

In Pennsylvania the Public Employee Retirement Commission has given actuarial assessments when legislation is proposed to change pension plans. PERC also files annual reports on all the state's pension funds. PERC was in danger of being eliminated due to budget issues, although the commission only has a budget of $690,000 and employs seven people. ^[39]

See also

• Public pensions
• Pennsylvania state budget
• Pennsylvania state government salary
• Pennsylvania Taxpayers on the Hook for Increased Pension Fund Contributions
• Legislative Cost Reduction Package, Pennsylvania House Bill 1061
• Pennsylvania Spending Transparency
• State takeover of Pittsburgh pension looms
• Ten cities facing the worst of the pension crisis

External links

• Pennsylvania State Employees’ Retirement System
• Pennsylvania State Pension Fund Management - State Integrity Investigation

References

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