THE PENSION LAUNCH PASBO Annual Conference March 18, 2011 Mr. Patrick Sable, PRSBA Chief Financial Officer Allegheny Intermediate Unit #3 Are You Communicating With Your Board and Community?

OVERVIEW This presentation is intended to provide the district, school board’s and community with information on the Public School Employees’ Retirement System (PSERS) as it relates to the past, present and future concerns that face school districts across Pennsylvania

Background Information About PSERS PSERS was established in 1917 and is a governmental, Mandatory, Multi-employed defined benefit pension plan for PA School Employees. PSERS is governed by a 15 person Board of Trustees, which includes school employees and school board members. PSERS serves approximately 282,000 active employees and over 184,000 retirees.

Background Information About PSERS PSERS Assets are approximately $50 Billion which makes them a large economic contributor in the financial market. PSERS paid out almost $5 Billion in benefits in FY 2009 and since nearly 90% of PSERS retirees reside in the Commonwealth, a substantial portion of that money helps fuel PA’s economy. PSERS is the 16 th largest State-Sponsored Defined Benefit Program in the Nation.

5 What Makes Up PSERS Assets 25 Year History( ) Investment Earnings 65% Employer Contributions 20% Employee Contributions 15%

PSERS Assets Continued Since 65% of the assets are tied to earnings from investment, the state of the economy and prudent investment practices has a great impact on the viability of the fund. PSERS annualized rate of return for the 25 year period ending 2010 was 9.01% PSERS current investment rate of return ASSUMPTION is 8.0% Investment earnings have been the primary source of funding for PSERS benefits, dwarfing the contributions from both school and PSERS active members. Even with return on investment rates such as these, it is still not enough to cover the actuarial liabilities of the fund.

The Launch The projected sharp rise in PSERS employer contribution rate from 5.64% in FY10-11 to an estimated 27.05% in FY23-24 is primarily the result of: – The Act 9 (2001) Multiplier increase – The FY’s , down investment markets – The Act 38 (2002) phased COLA – Cost of deferring Contributions – Earnings assumption change – The actuarial funding changes made by ACT 40(2003). This caused an artificial suppression of the rates and resulted in additional unfunded liability.

The Launch The Pension Component of the employer contribution rate has been below the employer normal cost for the last 13 years The state and local governments were aware of this actuarial spike in future rates long before the economic recession of

The Launch Fundamentally, there are only three ways to address the projected launch in the PSERS rates: – Increase funding of the system – Decrease/cut the costs /liabilities of the System – Defer the liabilities of the System

The Launch Act 120 of 2010 (H.B. 2497) which will become effective July 1,2011 addresses the three fundamental options to deal with the projected rate launch Act 120 will also minimize the “SPIKE” in employer rates, however, districts still will have significant increases for the next ten years and they must plan accordingly. The ACT suppresses the employer contribution rate by using rate caps in future years to keep the rate from rising too high, too fast.

The Launch 20 Year Rate Projection

The Launch ACT 120 addresses “new” employee contributions and reduces the overall benefit plan for members employed after July 1, 2011 New members will now bear some of the investment risk via the shared risk provisions of ACT 120

The Launch The effects that the PSERS Rate Launch will have on school districts: – Retirement contributions presently make up approximately 3.5% of school districts budget and that percentage may quadruple in the next 20 years – Contributions to the retirement fund may and in some cases already have found its way onto the negotiations table as part of the labor relations – Since ACT 1 limits the ability to raise taxes above a set index, districts may find a need to file exemptions for increase in the PSERS rate

The Launch – Effective July 1,2011 ACT 120 will require new employees to elect a new option in the pension system creating a two tier rate to employee contributions and matching employer share – Districts may and some have designated portions of their fund balance to offset these progressive increases in rates – This is a constitutional obligation of the commonwealth and the State must fund their portion, leaving less available funding for Basic Education

The Launch

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