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March 21, 2011 | By | Posted in General News

Twenty-five percent of state pension plans unfunded

House Appropriations hearing focuses on bigger liabilities down the road
By Darwyyn Deyo | PA Independent
With more people collecting retirement payments from the state than working for the state, the state House Appropriations Committee on Monday looked for solutions to Pennsylvania’s unfunded pension liabilities.
Representatives from the  and the State Employee Retirement System (SERS) testified during the state House Appropriations budget hearing.
“One of the things we’ve done to accommodate this swing is to adjust the asset allocation to provide for the benefit payments we see coming,” Leonard Knepp, acting executive director of State Employee Retirement Systems (SERS), said during the House Appropriations budget hearing.  “We are handling that currently through a modification of the asset allocation to deal with the liquidity.”
Of critical importance is the increased life expectancy of retired state and public school employees to the number of active members to retirees in the next 10 to 20 years. For the first time in 2010 SERS had more retirees than active members, with 111,000 to 109,000.
Knepp said the retired employee population has been stagnant for “many years”, so with increased life expectancy, the gap between active employees and retired workers is expected to grow even more.
The Public School Employee Retirement System (PSERS) situation has not yet reached SERS’ ratio, with 1.53 active members for every one retiree. There are currently 282,000 active members and just less than 185,000 retirees in the system.
The average age of SERS retirees is 73, while PSERS’ average retiree age is 70.
The current unfunded liability of PSERS is $20 billion, meaning it is 25 percent unfunded. SERS has an unfunded liability of $10 billion, with 26 percent unfunded, as of September 2010.
Three solutions were proposed during Monday’s committee hearing to deal with the state’s pension liability.
The first proposal is the oft-suggested define-contribution plan, which would only impact new employees and would not resolve the unfunded liabilities, though it would relieve the situation for the next generation of government employees.
“There’s a tremendous push for the (defined contributions),” said Knepp. “With Act 120 right now your current cost for a new member coming on system is approximately 3.9 percent for SERS, less than that for PSERS. Right now it would be difficult to come up with a cost for a new system that would be less than the current proposal under Act 120.” 

Act 120 of 2010 increased taxpayer contributions to the pension plans and modified the pension plans’ actuarial funding methodology to reduce future pension fund volatility.

Knepp stressed that even under a defined contribution plan, in five to six years the state will still be paying $2 billion in contributions toward existing pension plans.
“That’s one thing people keep forgetting — remember you still have a debt you’ve incurred that must be paid,” he said.
Under the current system, for fiscal year 2010-2011 taxpayers are contributing 5 percent of their state taxes to the pension plan, or about $296.8 million. In 2011-2012, that jumps to 8 percent, or $489.4 million. By 2014, that contribution is expected to be 16 percent, or $1.04 billion.
Another strategy suggested was to employ Auditor General Jack Wagner’s early retirement offer, which lets state government employees retire by paying them $1,000 a year — up to 25 years — against retirement.
“Whenever you offer the window or any kind of incentive, there’s going to be a cost associated with that because there’s a reduction factor applied against an individual’s annuity,” said Knepp. “Some people think that could be offset by hiring individual at a younger age at a lower salary scale. That may work for teachers but for the state … through the hiring practices and the promotions, it’s basically taken away.”
The third proposal was suggested by state Rep. Doug Reichley, R-Berks. It’s a cash-balance plan that is similar to the defined-benefit plans SERS and PSERS use now. The employers guarantee an interest rate to the members. Both members and taxpayers contribute, and the employer still assumes the investment risk.
“You don’t have some of the extra costs of closing a (defined-benefit plan) because the cash balance becomes another tier of benefits to a plan,” said PSERS Chief Investment Officer Alan Van Noord. “It’s like a 401(k) but you’re guaranteed to get a certain amount.”
Van Noord said there have been discussions of using a cash-balance plan, but nothing has been agreed upon.
“I don’t think there’s been an agreed to interest rate and things of that matter where we’ve been able to project the benefits and so forth,” he said.
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