Pension Sustainability: Pennsylvania

Analysis of Pennsylvania's policies

As of June 30, 2015, the most recent date for which an actuarial valuation is available, Pennsylvania's pension system for teachers is 60.6 percent funded, a decrease of 3.2 percentage points since NCTQ's last report. Its current pension debt exceeds $21,200 per pupil throughout the state. It also has an amortization period of 30 years. Thus, if the plan earns its assumed rate of return of 7.5 percent and makes its full actuarially determined contribution payments, it would take the state 30 years to pay off its unfunded liabilities. The Commonwealth's funding ratio does not meet conventional standards, and its system is not financially sustainable according to actuarial benchmarks.

School districts are required to pay the full employer contribution rate, but then are reimbursed by the Commonwealth at an amount determined by formula and equal to at least one-half of the full employer contribution amount. The contribution rate for the Commonwealth and employers combined of 30.03 percent is very excessive in light of the fact that districts must also contribute 6.2 percent to Social Security.

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 a high 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 pension neutrality goal). 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 reasonable, 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

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

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. Pennsylvania, however, 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 and crowd out funding for other areas in education. 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.

State response to our analysis

Pennsylvania was helpful in providing information that enhanced this analysis. Pennsylvania also noted that its response to teacher and district contributions rates are reasonable "is a definitive yes." The contributions necessary to fund the plan (normal cost, accrued liability and UAL amortization) are actuarially determined on an annual basis. Employee contributions are set forth in statute.

Last word

While it is clear that Pennsylvania is taking important and necessary steps to improve the funding level of its system, the costs are extremely high and take a significant bite out of local district budgets, likely impacting other aspects of teacher compensation including salary as well as direct services to students.