How is PSERS funded?

PSERS is funded by state, school district, and employee contributions to the fund, and the respective contribution rates are fixed by state law.   Contribution rates are expressed as a percentage of the base pay of the employee. Local school boards have no authority to modify the rates or to defer payments.  Rather, rates are determined by the PSERS board, based on recommendations from fund actuaries.  That being said, the legislature (in its wisdom?) will override the actuarial model on occasion — for example in 2001.

Employee contribution rates have been fixed and stable throughout the history of the program, with the exception of a one-time increase following 2001 legislation to increase benefits. Present contribution rates for employees range from 5.25% of base pay to 10.3%, depending on the class chosen. (More here)   But blended contribution rate of all participants is presently 7.4%, and has been at this level for 10+ years.

PSER EE Contr Rates

Employer contribution rates, on the other hand, have fluctuated wildly, especially since 1990. From steady contribution rates of 10% in the late 1980s, rates dropped as low as 1.1% in 2001, and averaged 5.5% from 1992 – 2012. In 2014/2015, employers are required to contribute 21.4% of payroll to PSERS.

This is the third year in a row of double-digit increase.  The rate will continue its rapid increase (projected rates are shown with yellow bars) until it reaches 30% in 2017, and stabilizes at 32% in 2020.

PSERS EER Contr rates

With hindsight, it is plain to see that the large increase in contributions from 2013 forward is due to the under-contributions of 1992-2012.

It is worth noting that the State makes its contributions indirectly, by reimbursing school districts for 50% of local contributions. Poorer districts get additional State reimbursements above and beyond the 50% level. UCFSD only receives 50% reimbursement.  So for the 2014-2015 school year, UCFSD contributes 21.4% of base pay, but is reimbursed 10.7% of base pay by the State.

Contribution rates have changed throughout the history of the program for several reasons

  1. Changes to benefits for state employees (almost always an increase in benefits)
  2. Changes in investment performance
  3. Caps or restrictions placed on the required contribution rate by lawmakers to ‘relieve’ a perceived ‘burden’
  4. A shift of the contribution burden from one party to another (e.g. away from the state and onto school districts)

In a future post we’ll look more closely at the decisions made in Harrisburg that led to the current funding crisis.

Previous posts on PSERS:

1.  PSERS – an emerging problem

2.  What is PSERS?

3.  How are Benefits Earned?