The state employee and school employee retirement fund managers reminded members of the Senate and House Appropriations Committee the coming pension contribution spikes for employer contributions cannot be fixed by only addressing pensions for newly hired employees.
The PA State Employees Retirement System (SERS) said the employer contribution rate will increase steadily over the next 6 years to a peak of 28.1 percent of payroll in FY 2016-17 and then will remain above 20 percent through FY 2032-33. The current employer contribution rate is 5 percent.
The PA School Employee Retirement System (PSERS) employer contribution rate to cover the unfunded pension liability will increase to 24.5 percent of payroll in FY 2016-17 increasing to 26.9 percent by FY 2020-21. The current employer contribution rate is 8 percent.
With respect to cost of living increases for existing retired employees, the minimum $500 million cost of a COLA has not been factored into any of these employer contribution rate increases. A cost of a COLA like those adopted in the past would add another 1.6 percent to those contributions for school employees.
Both fund managers noted Gov. Corbett's proposed budget fully funds the employer contribution, unlike previous administrations.
Testimony: State Employees Retirement Fund Budget StatementUnfunded Liability-State Employees: The state employees retirement fund said the current projections of the unfunded pension liability will require an employer contribution rate increasing steadily over the next 6 years to a peak of 28.1 percent of payroll in FY 2016-17 and then will remain above 20 percent through FY 2032-33. The current employer contribution rate is 5 percent.
The unfunded liability for state employees is about $10 billion or about 74 percent funded.
The changes made to the pension programs for new employees by Act 120 of last year will result of an estimated net savings of about $1.3 billion over the next 30 years. The fund managers noted the state cannot solve the unfunded pension mandate by changing the pension benefits of new employees.
SERS said last year for the first time the system had more retired state employees than active employees.
Unfunded Liability-School Employees: The school employee retirement fund said the employer contribution rate to cover the unfunded pension liability will increase to 24.5 percent of payroll in FY 2016-17 increasing to 26.9 percent by FY 2020-21. The current employer contribution rate is 8 percent.
The unfunded liability for school employees is just under $20 billion or about 75 percent funded.
The changes made to the pension programs by Act 120 will result in an estimated $1.3 billion in net savings over the next 30 years.
The school retirement fund managers also noted the state cannot solve the unfunded pension mandate by changing the pension benefits of new employees.
PSERS said they have 282,000 active employees and 185,000 retirees.
Cost Of Living Increases: Representatives of both the state employees and school employees retirement funds said the cost of a COLA for existing retirees would be over $500 million a year for the next 10 years which is not included in any calculations to finance the current unfunded mandate.
Sen. Corman (R-Centre), Majority Chair of the Senate Appropriations Committee, asked if there was any difference in calculating pre-Act 9 versus all employees.
The school employees fund reported the cost of a COLA for pre-Act 9 employees would be about $1.6 billion for a total cost of $3 billion over the next 20 years or about a 1.6 percent increase of the employer's contribution.
The state employees fund said they would have to get back to the Committee. General information on COLAs for SERS is available online.
Defined Contribution vs. Benefits Plans: SERS managers said it would be difficult to come up with a lower cost contribution plan than the one now required under Act 120 of 2010 with a 3.9 percent contribution rate. It would be less for PSERS.
Both SERS and PSERS explained the retirement benefits of current employees cannot be changed to the detriment of those employees as a result of state court decisions. Both fund managers also point out changing benefits for new employees does not solve the unfunded pension liabilities.
2010 Performance: School employees fund positive 5.90 percent return for the quarter and a positive 14.23 percent for the one-year period ending December 31, 2010.
The state employee retirement fund earned 5.7 percent in the fourth quarter, bringing annual performance to 11.9 percent, well above the Fund’s 8 percent long-term assumed rate of return. The fund paid out $2.5 billion in benefits in 2010 with contributions totally $622 million. Total assets at the end of 2010 were $25.2 billion.
Local Teacher Pay Freeze: PSERS said the request by Gov. Corbett for local school districts to freeze teacher/employee pay would be a reduction in the contributions made by employers. The fund had estimated a $600 million increase in local payroll for FY 2011-12. The Governor estimated a freeze would reduce that amount by $400 million causing a corresponding reduction in the employer contributions required.
Early Retirement Windows: SERS said it may be time to revisit early retirement window because of the Act 120 changes in new employee benefit plans. Earlier studies said the cost of early retirements would have to be absorbed by the retirement fund.
PSERS said since they have 700 reporting units, it is more difficult to determine an impact, but there is definitely a cost to the retirement system for early retirements, while it saves money on the local general fund payroll.
Sudan/Iran Divestiture: Both funds indicated they are taking the steps mandated under Act 44 of last year to divest their holdings of stock of companies doing business in the Sudan or Iran.
PSERS said they have identified about $142 million in holdings for 85 companies. SERS said they have about $50 million in holdings of 15 companies.
Both funds face a May 1 deadline for a plan for actual divestiture of stock holdings.
Video/audio files of the Senate Appropriations Committee hearing are available online.
