Pension Transparency: Pennsylvania

Analysis of Pennsylvania's policies

Teachers, policymakers and taxpayers deserve accurate and reliable information about the costs and benefits of the public pension systems they support.

Just as teachers can easily obtain their salary schedules, they should have access to information about pensions so that they can make informed decisions about their career and retirement futures. It is unclear what information, if any, Pennsylvania provides to teachers about their retirement benefits. No evidence could be found on the retirement system's website that Pennsylvania provides teachers with information on how their benefits accrue for each year of service, the amount contributed each year by teachers and employers on behalf of teachers, or the projected value of a teacher's contributions based on different assumptions about the rate of return expected (e.g. 4%, 6%, and 8%), nor that the state provides teachers with transparent information about the opportunity cost of leaving contributions in the system by reporting how much might be earned if teachers were to put contributions into a personal retirement savings account.

Teachers in Pennsylvania enroll in a final-salary DB plan, which means that employee and employer contributions should be sufficient to pre-fund the employee's pension. As Pennsylvania has a multi-tier pension system, contributions that exceed the normal cost may be used to fund other teachers' benefits (so-called legacy costs). There is no evidence, however, that Pennsylvania provides teachers with clear information about how their contributions are being used, including the extent to which current employer contributions are being used to subsidize the retirement benefits of teachers under other tiers.


Public disclosures on teacher pensions in Pennsylvania also lack transparency. While Pennsylvania reports projections for future contributions, it does not project all years required to fully amortize the system's total unfunded liabilities. It should also report these projections under a range of assumptions about the rate of return on investments, not just under the system's own assumption. Doing so would allow stakeholders in Pennsylvania to appropriately assign risk to the system's obligations and provide clarity about potential unfunded liabilities facing taxpayers.

The Government Accountability Standards Board (GASB) requires public retirement systems to disclose who makes employer contributions, and the proportion of total contributions for which each contributor is responsible. Although all states' pension systems collect this information, Pennsylvania does not make these data readily available.

Pennsylvania, like most states, reports the portion of total pension contributions that is normal cost and the proportion that is amortization cost. However, the state does not report information about whether it has taken on debt in order to pay for current or future retiree benefits (e.g. through pension obligation bonds or other instruments for raising capital). Even if the state has not taken on debt, it should disclose this information to the public as it is an important indicator of the state's overall health and stability.

Citation

The Public School Employees' Retirement System of Pennsylvania, Actuarial Valuation, June 30, 2015.

Recommendations for Pennsylvania

Provide teachers with the information necessary to understand their retirement benefits.
Pennsylvania should provide much more detailed information to teachers about how their benefits accrue at different points during their careers, as well as information about the opportunity costs related to any contributions made into the system. Because the system has multiple tiers, the plan should also disclose to teachers how their contributions are being used (i.e. whether they all are directed at prefunding their own retirement, or whether a portion of their contributions are used to help pay for retirement benefits of other members). Moreover, Pennsylvania could provide detailed information about how employer contributions are used - e.g. to what extent the employer contributions for an individual teacher are used to subsidize teachers in different tiers and teachers with different tenure.

Report to policymakers and the public data that give a complete representation of the system's financial health.
Pennsylvania should also report projections for future contributions necessary to fully pay off its unfunded liabilities, and it should disclose those projections under a range of assumptions about its discount rate. GASB requires systems to disclose who makes the employer contributions, and Pennsylvania should make this report available on its web site. Finally, the state should disclose in its reports whether or not the system has taken debt service to pay for retirement benefits.

State response to our analysis

Pennsylvania was helpful in providing information that enhanced this analysis. Pennsylvania also responded that future contributions required to fully amortize total pension debt are reported, and that "current projections show UAL fully amortized by 2037." The state also indicated that the source of employer contributions are disclosed, and that debt service reporting is not applicable since the use of pension obligation bonds is currently barred by statute. Further, teachers are provided with information about how their benefits accrue over time. Each member of the system receives a statement of account annually.

Last word

We did not find the valuation report to include an amortization schedule, nor could we identify a report that identified the sources of employer contributions. We also did not find the teacher annual statement to include the specific and detailed information recommended in this goal.