Pension Sustainability: Pennsylvania

Analysis of Pennsylvania's policies

As of June 30, 2010, the most recent date for which an actuarial valuation is available, Pennsylvania's pension system for teachers is 75.1 percent funded and has an amortization period of over 30 years. This means that if the plan earns its assumed rate of return and maintains current contribution rates, it would take the state more than 30 years to pay off its unfunded liabilities. Neither the state's funding ratio nor its amortization period meets conventional standards, and the state's system is not financially sustainable according to actuarial benchmarks.

Pennsylvania will soon be making excessive contributions toward its teachers' retirement system. The current contribution rate for employers of 5.64 percent is reasonable, but due to recent legislation that rate is set to increase. The rate will increase by a maximum of 3 percent for fiscal year 2012, 3.5 percent for fiscal year 2013, and 4.5 percent for fiscal year 2014 and years thereafter until increases in the employer rate are no longer needed to appropriately fund the system. These rates are excessive in light of the fact that districts must also contribute 6.2 percent to Social Security. 

However, the state pays the districts for their pension obligation for all employees hired after June 30, 1995. While this rate allows the state to pay off its liabilities within regulatory limits, it does so at great cost, precluding Pennsylvania from spending those funds on other, more immediate means to retain talented teachers. The employee rate for new employees hired after July 1, 2011, ranges from 7.5 to 9.5 percent for class T-E and 10.3 to 12.3 percent for class T-F depending on how the system performs (teachers choose their class depending on what benefit multiplier they prefer; see Goal 4-I). Member contribution rates increase within each range if the fund does not meet its assumed rate of return over a 10-year period. The 7.5 percent employee contribution rate is not unreasonable, although it is very close to what is considered excessive, and other rates in the range and the entire T-F class range are excessive in light of the fact that teachers must also contribute 6.2 percent to Social Security.  

Citation

Pennsylvania Public Employees' Retirement System, Comprehensive Annual Financial Report for Fiscal Year Ended June 30, 2010 http://www.psers.state.pa.us/publications/general/cafr.htm

Recommendations for Pennsylvania

Ensure that the pension system is financially sustainable.
The state would be better off if its system was over 95 percent funded and had an amortization period of 30 years or less to allow more protection during financial downturns. However, Pennsylvania should consider ways to improve its funding level without raising the contributions of school districts and teachers. Committing excessive resources to pension benefits can negatively affect teacher recruitment and retention. Improving funding levels necessitates, in part, systemic changes in the state's pension system. Goals 4-G and 4-I provide suggestions for pension system structures that are both sustainable and fair.

In addition, the state may want to reconsider its planned structure for teachers' contribution rates. Recent changes mandating a variable contribution rate shifted some of the risk to teachers' without transferring any of the control.

State response to our analysis

Pennsylvania recognized the factual accuracy of this analysis.