Pension systems have their own internal logic, which unintentionally reward certain behaviors. A recent article from EducationNext, a reform-oriented journal sponsored by Harvard, Stanford, and Fordham U, illustrates how a hypothetical teacher could maximize the ROI of teacher pension systems.
This recent op ed in the Wall Street Journal cautions that not only are pension funds under-funded, but they also have a very high portion of their assets held in risky assets. Pennsylvania receives special mention as a large fund holding risky positions (79% of PSERS assets as of 3/31/2014 were held in equities, commodities, and hedge funds — all high risk assets). What is the risk? The risk is that a large market downturn erases pension fund balances, making the under-funding problem even worse. As you may recall from one of my PSER posts, the 2008 stock market drop is one of the contributing factors to PSERS current $32B underfunding problem. So it is not merely a hypothetical risk.
Note: access to the article linked above might require a WSJ online subscription (I accessed it the first time without a problem, but on subsequent tries it was behind the WSJ paywall.)
This is my last post on the PSERS crisis. The series started here.
In order to properly fund PSERS, school district contribution rates will increase six fold from 2010 (when the fix was passed) to 2020 (when it is fully phased in.) What does this mean in dollars and cents for UCFSD?
We are almost at the end of the PSERS story. If you are new to the Blog, you should start at the beginning of the series, here.
We have previously established that, as of 2013, PSERS had a shortfall of $32.6B between benefits promised and funds in the plan. And, according to PSERS itself, the causes of this shortfall were:
- $14.0B – Employer Funding Deferrals
- $9.0B – Investment under-performance
- $8.9B – Unfunded Benefit Enhancements
- $0.8B – Divergence between experience and actuarial assumptions (demographics, salaries, etc)
There are really only two pockets from which the needed funds could come — from the plan participants, or from employers. How might we decide how much each party should contribute to the solution? How about in proportion to the funding gap each side caused? Thinking about it this way, I would assign $$ as follows:
In any crisis, it is hard to find a fully objective account of what happened. With PSERS, it is difficult, even with hindsight, to definitively determine the motivation behind key decisions, and to say who is ultimately responsible.
Nevertheless, there is agreement about much of what happened. So rather than wade into that controversy about who is responsible, I thought I would stick to the facts of what happened, and then provide links to the reports I found, some of which seem pretty objective, and some of which are less so.
In my last post in my PSERS series, I covered the basics of pension fund health.
Now that we have completed our review of pension fund basics, how is PSERS doing? As of June 2013, the fund was 63.8% funded. Or, stated differently, assets are 36% below what is required to pay out all of the benefits that have been promised and earned by participants. In dollar terms, the unfunded liability is $32.6 billion as of June 30, 2013.
So we have now covered how PSER contributions are determined, and we previously discussed how PSER benefits are calculated. Contributions and benefits come together in pension fund valuation and accounting! (OK, maybe not the most interesting topic, but so necessary to understand what it means when we say a pension plan is under-funded.)
The objective of pension accounting is to communicate the health of the pension program – will the money coming in to the program be enough to pay for all of the benefits that have been promised and earned by participants? While this is a simple concept, pension accounting requires estimations and modeling, and those come from actuarial science – a discipline that applies math and statistics to assess risk and to value assets and liabilities.
My series on the Public School Employees Retirement System continues. See previous posts 1. PSERS – an emerging problem
2. What is PSERS?
Before we examine contribution rates, let’s examine the benefit formula. Once an employee is vested in the PSER system, a formula determines the lifetime annuity amount.
The formula is:
You will notice that the PSERs multiplier is either 2.0% or 2.5%. This is because PSERS actually has multiple classes of participants. In 2001 and again in 2011 changes were made to key program levers, such as vesting, contribution rates, and risk-sharing provisions. So employees with lower contribution rates / lower risk sharing have the lower multiplier, and employees with higher contribution rates / more risk sharing have the higher multiplier. (I am simplifying this, so if you are interested in the six classes of employees, please see the PSERS member handbook, p. 4 found here.)
So let’s work through an example. Continue reading
In a previous post, I introduced PSERS and the looming problem of an underfunded pension plan. In this post I provide basic information about defined benefits pension plans and basic facts about PSERS.
PSERS is the pension fund for public school employees, covering Pennsylvania’s 499 school districts, 28 intermediate units, 14 community colleges, and 4 state-owned colleges, 169 charter schools, 64 technical schools, and several other units. The Pennsylvania Public School Employees Retirement Act was signed into law in 1917, taking effect on July 1, 1919. The Public School Employee Retirement Systems (PSERS) exists to provide retirement income and health insurance for retirees of the state’s public education system. (Full history and plenty of other info is here.) Continue reading
UCFSD has historically been strong financially. And our current administration has done an excellent job navigating through the financial crisis of 2008-2009 without cutting back essential educational programs.
The next threat is now emerging. Pennsylvania has a significantly under-funded state-run pension program called PSERS (“Peezers”), AKA the Public School Employees Retirement System. And the program is 40% underfunded. Pennsylvania’s credit rating was recently downgraded by Fitch, a bond rating agency, largely due to this unfunded pension liability. See article here.
Although UCFSD did not create this problem, we will be dealing with it for many years to come. And the impact to our District finances is material and potentially troubling. Continue reading