Rating Agency Reports (Part 1) Fitch Ratings July 16, 2013 “Pension Funding Demands: The funding levels of the Commonwealth’s pension systems, which have been historically adequate, have materially weakened, with annual contribution levels remaining well below actuarially required levels…..Maintenance of the ‘AA’ rating will require action over the next one to two years to make substantive progress towards addressing the state’s structurally unbalanced budget, restoring reserves, and addressing the rapid growth of fixed costs, including for pension funding……Unfunded pension obligations now represent the dominant share of the state’s long-term liabilities.” Source: Rep. Glenn Grell

Rating Agency Reports (Part 2) Moody’s March 29, 2013 “Due to recent investment losses and a seven-year history of low, statutory pension contribution levels, the Commonwealth’s unfunded pension liability has increased substantially and funded ratios have declined below 70%.....What could make the rating go down: Growth in long term liabilities, increase in fixed cost pressures, or additional deferral of pension costs….” Standard and Poor’s April 2, 2013 “The negative outlook on Pennsylvania reflects our view that growing expenditure pressures, primarily pensions, coupled with a slow economic growth environment and limited available reserves, could place downward pressure on the rating…..Should the Commonwealth make significant strides in addressing its pension liabilities or experience substantial economic growth that would mitigate the impact of these liabilities on the budget, we could revise the outlook to stable.” Source: Rep. Glenn Grell

Balanced Approach – Three Buckets Plan Future Employees New Cash Balance Plan Past Underfunding General Fund borrows up to $9 billion to make up for 10 year underfunding Current Members Agree to modest plan changes: Lump sum option modification 5-year final avg. salary Receive a reduction in their employee contribution rate

Cash Balance Plan Employee Contribution Employer Contribution Guaranteed Return Account Value For New Members Enrolled after June 30, % 4/5%4% At retirement account turns into a monthly annuity like a defined benefit plan. Source: Rep. Glenn Grell

General Borrowing General Fund borrows $9 billion in two steps. Step One: $2 billion to PSERS and $1 billion to SERS, amortized over 24 years. Step Two: $4 billion to PSERS and $2 billion to SERS, amortized over 24 years. Source: Rep. Glenn Grell

Current Member Modifications Lump Sum formula – “actuarially neutral” Based on a $55,000 salary with accumulated deductions of $120,000 Current annuity = $3,945.33/monthActuarially Neutral = $3,684.86/month

Current Member Modifications Based on 5 highest years instead of 3 highest years. Reduces final year “spiking. ” Years Employed Multiplier Final Average Salary Annual Annuity Final Average Salary Calculation

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