Would increase expected future liabilities
This story has been updated to include a correction. See bottom for details.
Only two months after a major change to Pennsylvania’s public pension systems was passed by the state legislature, one of the two largest funds is planning to make some important changes to the pension liability equation.
Evelyn Tatkovski, spokesperson for the Public School Employees Retirement System (PSERS), confirmed the plans for a special board meeting in January to discuss potential adjustments to the assumed rate of return to the pension fund’s investments. The board will consider changes to the fund’s assumptions based on the results of a five-year study which was completed last month.
Currently, PSERS assumes an annual rate of return of 8 percent, which is typical for public pension funds. Generally, private retirement funds assume a lower rate, usually around 6 percent.
Two weeks ago, following a year-long review of its own public pension systems, the state of California lowered investment return assumptions from 8 percent to 7.75 percent for its public school retirement fund.
If PSERS makes the same adjustments, the unfunded liability of the pension plan would increase. The pension’s unfunded liability is the amount of earned benefits which exceed the plan’s current total assets.
“That is existing debt that needs to be paid off,” said Ms. Tatkovski. “Even if you were to change the multipliers or change the benefits, that portion is owed and needs to be paid.”
If the fund’s assets are enough to cover all pension costs for current retirees in the current year, it would have an unfunded liability of zero. Lowering the expected return on investments would decrease projected future assets and thus decrease the amount of liabilities covered by those assets, creating a larger unfunded liability.
PSERS is funded with a combination of investment returns, taxpayer contributions and mandatory payroll contributions from school employees in the state. The taxpayer-financed portion is split evenly between the state and local school districts.
As it currently stands, PSERS holds an unfunded liability of more than $19 billion, which will grow to more than $47 billion in fiscal year 2020 before beginning to decline as higher contribution rates and lower benefits to future employees help reduce the fund’s cost.
The $19 billion unfunded liability represents a funded ratio – the percentage of assets to liabilities – of slightly more than 75 percent. With the lower contribution rates established by the General Assembly in November, PSERS’ funded ratio is expected to drop to 56 percent by 2018 before rebounding. The fund will not achieve 90 percent funding until 2035, according to the most recent projections.
If the PSERS board were to decide to lower the estimated return on investment, the estimated funded ratio would decline further, though the board could also make other actuarial changes to balance the impact of lowering the investment assumptions, said Richard Dreyfuss, a retired actuary and senior fellow with the Commonwealth Foundation, a Harrisburg-based free market think tank.
“If you lower the assumptions, all that does is put more liabilities in the system,” said Mr. Dreyfuss.
In November, the General Assembly approved Act 120 of 2010, which made several changes to the state’s public pension systems to avoid a massive taxpayer contribution spike and deferred payment to later years.
The act doubled the vesting period for PSERS to 10 years, increased the employee retirement age to 65 and created a lower benefit level for all future employees. Because it made no changes to the benefits of current employees, it did little to reduce the unfunded liability of the pension plan in the short term.
Even supporters of the measure acknowledged its inability to decrease current costs.
“It’s put us on a path to resolve the problem, but there’s not an additional dollar that goes into the system to pay off the liabilities,” said Steven Nickol, assistant director of PSEA-Retired, which is affiliated with the Pennsylvania State Education Association. Mr. Nickol told The Gazette (Gaithersburg, Md.) the state counting on investment earnings to offset deferred payments was what caused the pension problem in the first place.
Investment returns during the past year been very positive for PSERS though the fund is still feeling the effects of $1.8 billion investment losses in 2008.
For the year ending on September 30, PSERS posted a 12.27 percent investment return. Over the last 25 years, PSERS has an annualized investment return of 9.13 percent, according to a report released last Friday.
“PSERS remains guarded optimistic on the market outlook for 2011,” said Alan Van Noord, the fund’s chief investment officer, in a statement.
CORRECTION: This story initially reported that PSERS’ unfunded liability is expected to climb to $47 million in 2020. It will actually climb to $47 billion in that year.
