Surging investment markets pumped $14.7 billion into Pennsylvania’s largest pension plan in the past fiscal year, a 24.6% gain hailed as a record by senior staff at the beleaguered school retirement agency, even though its gains trailed the stock market and many other public plans.
So will state and local taxpayers finally get a break, after pumping nearly $5 billion this year alone into the plan, known as PSERS, capping 17 straight years of increasingly costly support?
That would be no. PSERS on Thursday presented the state with yet another increase in the “employer contribution” rate split by school districts and the state government in Harrisburg, costing taxpayers an additional $119 million, according to the agency’s estimate.
PSERS — the Public School Employees’ Retirement System — now plans to collect a levy of $35.26 for every $100 paid to school staff next year. That’s up about 1% from $34.94 last year, and the total is about double what the average state and local government pension plan collects, according to data from Boston College’s retirement plan database.
(Most school staff pay another $7.50 per $100 of their pay to the plan from their paychecks, or $8 per $100 if hired since 2011.)
In total dollars, the increase works out to about $119 million, based on today’s payrolls. It will cost more, if schools collectively add staff this year, as PSERS expects, and boost their pay, as required under union labor contracts.
The more teachers are paid, the bigger their pensions, and the more PSERS collects from taxpayers to help fund them, under state law.
But why does the $73 billion plan need extra millions this year, when it has lately collected so many extra billions?
The outside experts from Buck Consultants and senior PSERS staffers who crunch the numbers spent part of Thursday morning explaining the intricacies of their calculation to board members gathered in Harrisburg and by remote video for a two-day meeting.
For one thing, PSERS doesn’t take all its gains — or losses — in the year they happen. Under the current pension law, they are spread over 10 years. The idea is to “smooth” gains and losses so payments don’t change radically from year to year, and the state and school districts can budget more easily.
So only $1.47 billion of the year’s $14.7 billion gain will be credited to the plan for “contribution” purposes next year, a fraction of the $7 billion paid out to pensioners. (The calculation mixes that recent return with fractional gains and losses from the previous nine years.)
On the bright side, 2021′s results should reduce PSERS’ needs for the next nine years as it is added to future calculations.
Also, PSERS this year voted to reduce its target investment performance to 7% a year from a previous 7.25%, the latest in a string of cuts due to advisers’ uncertainty that investment markets can continue to rise as strongly as they have since the “Great Recession” of 2008-2009.
In predicting lower returns, PSERS says it is obliged to charge more, because it is assuming it will make less money by investing, and needs more from somewhere else.
The rate also went up more than it would have because more working teachers retired or quit last year, slowing the growth of the school payroll that contributions are based on, said Brian Carl, PSERS’ chief financial officer.
PSERS predicts the contributions it extracts from employers will continue to rise, at slowing rates, until about 2035. By then the plan hopes to have built up enough investment assets that it can start charging less each year, instead of more.
Despite these daunting finances, some trustees said they’d like to see PSERS increase the pensions it pays out.
Chris Santa Maria, the Harriton High School teacher and former union president who heads the PSERS board, said he’d especially like to see an increase for older staff who retired before pensions were boosted by the state in 2001. They haven’t had a pension raise since fiscal year 2003, and are especially vulnerable to rising inflation, Santa Maria said.
Republicans on the board warned the legislature is unlikely to do that for the plan, which already faces a $40 billion-plus shortfall of liabilities over assets to pay them with — even after 2021′s windfall.
“I’m not sure there would be an appetite to make any legislative changes now,” said Stacey Connors, an aide to trustee Sen. Patrick M. Browne (R., Lehigh), who represents the senator during his frequent absences from board meetings.
But fellow trustee Sue Lemmo, a Curwensville art teacher and union leader, said she’s worried lower pension guarantees for recent hires adopted since 2010 are driving middle-aged teachers out of the profession and scaring away college graduates.
“That’s why you’re teaching,” she said, “because at the end of your career you are gonna have this pension.” She predicted a “mass exodus” as more people realize guaranteed pensions for recent hires won’t be enough to fund their expected retirements.
It fell to Carl, PSERS’ chief financial officer, to put higher charges in a happier context.
The system had predicted a larger increase than the one it is imposing, he pointed out. The increase in the rate is also “below inflation,” this time, he added, and will hopefully stay low over the next couple of years. It may even decline after 2035, if recent trends hold, he said.
Carl also predicted that school district business managers, who must face property taxpayers’ annual wrath at rising PSERS payments, “are going to be happy with these results,” compared to worse-case projections.
But, he admitted, “I know they’d rather see a decrease.”