1 an update on psers governing boards of pasa, pasbo, and paessp november 21, 2008

11

An Update on PSERSAn Update on PSERS

Governing Boards of PASA, PASBO, and PAESSP Governing Boards of PASA, PASBO, and PAESSP November 21, 2008November 21, 2008

22

AgendaAgenda PSERS’ OverviewPSERS’ Overview PSERS’ Health ProgramsPSERS’ Health Programs Investment UpdateInvestment Update Employer Contribution Rate and the Pending Employer Contribution Rate and the Pending

Rate SpikeRate Spike Employer Contribution Rate UpdateEmployer Contribution Rate Update Employer Contribution Rate Spike UpdateEmployer Contribution Rate Spike Update What does the Future hold? What does the Future hold?

Return to ServiceReturn to Service Retirement-Covered CompensationRetirement-Covered Compensation AttachmentsAttachments QuestionsQuestions

33

PSERS’ OverviewPSERS’ Overview

The Public School Employees’ The Public School Employees’ Retirement System (PSERS) is Retirement System (PSERS) is a governmental, (non ERISA), a governmental, (non ERISA), mandatory, multi-employer, mandatory, multi-employer, defined benefit pension plan defined benefit pension plan for Pennsylvania school for Pennsylvania school employeesemployees

PSERS was established on July PSERS was established on July 18, 1917 and thus is one of the 18, 1917 and thus is one of the oldest public pension plans in oldest public pension plans in the United Statesthe United States

PSERS “plan document”is PSERS “plan document”is the Public School the Public School Employes’ Retirement Employes’ Retirement Code, 24 Pa.C.S. §8101 Code, 24 Pa.C.S. §8101 et. et. seq.seq.

PSERS is governed by a 15 PSERS is governed by a 15 person Board of Trustees, and person Board of Trustees, and has a complement of 310 has a complement of 310 employeesemployees

PSERS serves over 520,000 PSERS serves over 520,000 membersmembers

PSERS currently managesPSERS currently managesassets of approximately $62.7assets of approximately $62.7

billion as of June 30, 2008 billion as of June 30, 2008

PSERS is the PSERS is the 14th14th largest largest defined benefit pension fund in defined benefit pension fund in

the nation according to the nation according to Pensions and Investments Pensions and Investments

MagazineMagazine

44

InvestmentEarnings

78%$39.0 Billion

EmployeeContributions

14%$7.2 Billion

EmployerContributions

8%$4.2 Billion

PSERS Sources of FundingTen Year History (1999 to 2008)

PSERS is PSERS is funded by funded by three sources: three sources: Employee Employee

ContributionContributions, s,

Employer Employer ContributionContributions, and s, and

Investment Investment EarningsEarnings

Investment Investment earnings have earnings have been the been the primary primary source of source of funding for funding for PSERS PSERS benefits, benefits, dwarfing the dwarfing the contributions contributions from both from both school school employers and employers and PSERS active PSERS active membersmembers

PSERS’ Overview

Over the last 25 years, 17% of PSERS’ funding has come from school employers. Another 12% has come from PSERS’ active members. All the rest – 71% – has come from investment earnings

55

Investment UpdateInvestment Update

Net Asset Value (NAV)Net Asset Value (NAV) June 30, 2007June 30, 2007 $67.5 billion$67.5 billion June 30, 2008June 30, 2008 $62.7 billion$62.7 billion

Investment ReturnsInvestment Returns June 30, 2007June 30, 2007 22.93%22.93% June 30, 2008June 30, 2008 (2.82)%(2.82)%

66

FY 1999/2000 - 11.9%FY 1999/2000 - 11.9% FY 2000/2001 - (7.4)%FY 2000/2001 - (7.4)% FY 2001/2002 - (5.3)%FY 2001/2002 - (5.3)% FY 2002/2003 - 2.7%FY 2002/2003 - 2.7% FY 2003/2004 - 19.67%FY 2003/2004 - 19.67% FY 2004/2005 - 12.87%FY 2004/2005 - 12.87% FY 2005/2006 - 15.26%FY 2005/2006 - 15.26% FY2006/2007 - 22.93%FY2006/2007 - 22.93% FY 2007/2008 – (2.82)%FY 2007/2008 – (2.82)%

PSERS’ Investment Rates of Return as of:

Below PSERS’ annual actuarial earnings assumption of 8.5%, therefore resulting in an actuarial loss

77

PSERS Total Net PSERS Total Net Investment IncomeInvestment Income

FY 1999/2000 - FY 1999/2000 - $5,765,133$5,765,133 FY 2000/2001 - FY 2000/2001 - ($3,843,713)($3,843,713) FY 2001/2002 -FY 2001/2002 - ($2,523,025)($2,523,025) FY 2002/2003 - FY 2002/2003 - $1,022,467$1,022,467 FY 2003/2004 -FY 2003/2004 - $8,244,604$8,244,604 FY 2004/2005 -FY 2004/2005 - $6,081,497$6,081,497 FY 2005/2006 -FY 2005/2006 - $7,942,639$7,942,639 FY 2006/2007 -FY 2006/2007 - $12,702,721$12,702,721 FY 2007/2008 - FY 2007/2008 - ($1.775.585)($1.775.585)

TOTAL TOTAL $33,616,738 net $33,616,738 net investment gaininvestment gain

88

PSERS Fiscal Year Returns1999-2008

12.32% 12.10%

-7.34%-5.25%

2.74%

19.67%

12.87%15.26%

-2.82%

22.93%

-10%

-5%

0%

5%

10%

15%

20%

25%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

PSERS Yearly Return 10Yr Return (1999-2008) Actuarial Assumption

7.8%

8.5%

99

PSERS’ Net Plan Assets as of:

June 30, 2002 $43.6 Billion (audited)

March 31, 2003 $38.3 Billion (unaudited)







1010

Investment Returns and RankingsInvestment Returns and Rankings

ReturnReturn Rank*Rank*

QuarterQuarter -0.48%-0.48% 3131 Fiscal YearFiscal Year -2.82%-2.82% 3535 2 Years2 Years 9.309.30 %% 11 3 Years3 Years 11.25%11.25% 11 5 Years5 Years 13.21%13.21% 11 10 Years10 Years 7.76%7.76% 1010

*As per Wilshire’s public sponsors database*As per Wilshire’s public sponsors database

1111

Other State Investment Other State Investment PerformancePerformance

as of June 30, 2008as of June 30, 2008

Illinois TRS = estimated (4.5)%Illinois TRS = estimated (4.5)% CalSTRS = (3.7)%CalSTRS = (3.7)% State Retirement and Pension State Retirement and Pension

System of Maryland = (5.4)%System of Maryland = (5.4)% CalPERS = (2.4)%CalPERS = (2.4)% Massachusetts State = (1.8)%Massachusetts State = (1.8)%

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Employer Contribution Rate Employer Contribution Rate UpdateUpdate

Current employer contribution rateCurrent employer contribution rate The FY 2008/2009 rate is The FY 2008/2009 rate is 4.76%4.76% The The 4.76%4.76% rate is composed of a rate is composed of a 0.76%0.76%

rate for health insurance premium rate for health insurance premium assistance and a pension rate of assistance and a pension rate of 4.00%4.00%

The Commonwealth reimburses The Commonwealth reimburses school employers for not less than school employers for not less than 50% of the employer contribution 50% of the employer contribution raterate Statewide average is Statewide average is 54/46%54/46% split with split with

the Commonwealth paying the Commonwealth paying 54%54%

1313


The employer contribution rate for FY The employer contribution rate for FY 2009/2010 will be certified at the PSERS’ 2009/2010 will be certified at the PSERS’ Board meeting on December 12, 2008Board meeting on December 12, 2008

New official projections for the FY New official projections for the FY 2012/2013 funding rate spike will also be 2012/2013 funding rate spike will also be available at that timeavailable at that time

Current financial market conditions will Current financial market conditions will not have an impact on next year's not have an impact on next year's projected employer contribution rate projected employer contribution rate The impact of the current financial The impact of the current financial

market conditions is being mitigated market conditions is being mitigated byby The impact of Act 40 – mismatch of actuarial gains The impact of Act 40 – mismatch of actuarial gains

and lossesand losses Smoothing methodology and amortization- 5 yr Smoothing methodology and amortization- 5 yr

smoothing and 30 year amortizationsmoothing and 30 year amortization Timing of the actuarial valuation – fiscal year ends Timing of the actuarial valuation – fiscal year ends

June 30thJune 30th

1414


FY 2009/2010's employer contribution rate FY 2009/2010's employer contribution rate will be governed by PSERS' FY 2007/2008 will be governed by PSERS' FY 2007/2008 investment rate of return of -2.82%, as of investment rate of return of -2.82%, as of June 30, 2008 June 30, 2008

The FY 2009/2010 employer contribution rate The FY 2009/2010 employer contribution rate is estimated to be is estimated to be 4.75%4.75% based on last year’s based on last year’s projectionsprojections NOTE:NOTE: Next year’s rate could be impacted if Next year’s rate could be impacted if

legislation to solve the funding rate spike is legislation to solve the funding rate spike is introduced and passed early next yearintroduced and passed early next year

The first time that the current markets (i.e. The first time that the current markets (i.e. FY 2008/2009) will have an impact is for FY FY 2008/2009) will have an impact is for FY 2010/2011's employer contribution rate 2010/2011's employer contribution rate

1515

Employer Contribution Rate Spike Employer Contribution Rate Spike UpdateUpdate

Rate Spike Rate Spike EstimateEstimate The current estimate for the FY 2012/2013 The current estimate for the FY 2012/2013

rate spike is rate spike is 11.23%11.23% (based on the(based on the June 30, June 30, 20072007 actuarial valuation)actuarial valuation)

Based on an estimated Based on an estimated -2.82%-2.82% investment investment return for FY 2007/2008 and the return for FY 2007/2008 and the June 30, June 30, 20072007 actuarial valuation, the rate spike in FY actuarial valuation, the rate spike in FY 2012/2013 will increase to 2012/2013 will increase to 16.28% 16.28%

The estimate will change when the June 30, 2008 The estimate will change when the June 30, 2008 actuarial valuation is presented at the December actuarial valuation is presented at the December 1212thth PSERS Board Meeting PSERS Board Meeting

The rate spike in FY 2012/2013 is still below The rate spike in FY 2012/2013 is still below the original rate spike of 27.73%the original rate spike of 27.73%

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Public School Employees' Retirement System of PennsylvaniaProjection of Contribution Rates and Funded Ratios As of June 30, 2007

Market Returns and Pension Rate Floors Set by User

Fiscal Year

Ending June

Appropriation Payroll

(thousands)

Fiscal Year Market Rate

of Return

PensionRateFloor

Employee Contribution

Rate

Employer Normal

Cost

Unfunded Liability

Rate

Preliminary Employer

Pension Rate

HealthCare

Contribution

Total Employer

Contribution Rate

Funded Ratio

UnfundedAccruedLiability

($ Millions)

2006 11,505,093 15.26 % 4.00 % 7.16 % 7.61 % (4.28) % 4.00 % 0.69 % 4.69 % 81.2 % 12,162.6 2007 11,821,951 22.93 4.00 7.21 6.62 (0.95) 5.67 0.74 6.46 85.8 9,438.0 2008 12,881,244 8.50 4.00 7.25 6.68 (0.24) 6.44 0.69 7.13 90.5 6,600.22009 12,500,000 8.50 4.00 7.29 6.68 (3.37) 3.31 0.76 4.76 93.8 4,454.3

2010 12,866,029 8.50 4.00 7.31 6.64 (6.15) 0.49 0.75 4.75 96.8 2,373.62011 13,226,878 8.50 4.00 7.33 6.62 (8.37) (1.75) 0.74 4.74 99.0 794.92012 13,603,456 8.50 4.00 7.35 6.59 (10.55) (3.96) 0.74 4.74 99.1 719.42013 14,001,264 8.50 4.00 7.37 6.57 3.93 10.50 0.73 11.23 100.1 (53.8)2014 14,420,497 8.50 4.00 7.39 6.54 2.18 8.72 0.72 9.44 100.6 (533.7)

2015 14,859,650 8.50 4.00 7.41 6.52 1.01 7.53 0.72 8.25 100.9 (805.9)2016 15,333,694 8.50 4.00 7.42 6.50 0.88 7.38 0.70 8.08 101.1 (1,039.5)2017 15,848,584 8.50 4.00 7.44 6.48 0.80 7.28 0.68 7.96 101.3 (1,270.8)2018 16,409,583 8.50 4.00 7.45 6.46 0.75 7.21 0.67 7.88 101.5 (1,510.4)2019 17,015,045 8.50 4.00 7.46 6.44 0.72 7.16 0.64 7.80 101.7 (1,764.4)

2020 17,659,863 8.50 4.00 7.46 6.44 0.69 7.13 0.64 7.77 101.9 (2,037.2)2021 18,342,593 8.50 4.00 7.47 6.42 0.66 7.08 0.64 7.72 102.1 (2,332.0)2022 19,067,418 8.50 4.00 7.47 6.41 0.63 7.04 0.64 7.68 102.3 (2,651.2)2023 19,832,234 8.50 4.00 7.48 6.40 0.61 7.01 0.64 7.65 102.5 (2,997.2)2024 20,632,651 8.50 4.00 7.48 6.39 0.58 6.97 0.64 7.61 102.7 (3,372.5)

2025 21,467,802 8.50 4.00 7.48 6.38 0.56 6.94 0.64 7.58 103.0 (3,779.6)2026 22,336,205 8.50 4.00 7.48 6.38 0.54 6.92 0.64 7.56 103.2 (4,221.3)2027 23,233,488 8.50 4.00 7.48 6.37 0.52 6.89 0.64 7.53 103.4 (4,700.5)2028 24,157,964 8.50 4.00 7.49 6.36 0.50 6.86 0.64 7.50 103.7 (5,220.5)2029 25,109,827 8.50 4.00 7.49 6.35 0.48 6.83 0.64 7.47 103.9 (5,784.6)

2030 26,087,050 8.50 4.00 7.49 6.35 0.46 6.81 0.64 7.45 104.1 (6,396.7)2031 27,096,257 8.50 4.00 7.49 6.34 0.44 6.78 0.64 7.42 104.4 (7,060.9)2032 28,138,433 8.50 4.00 7.49 6.34 0.43 6.77 0.64 7.41 104.7 (7,781.4)2033 29,216,400 8.50 4.00 7.49 6.33 (1.87) 4.46 0.64 5.10 104.5 (7,895.2)2034 30,336,809 8.50 4.00 7.49 6.33 (2.75) 3.58 0.64 4.64 104.4 (7,865.3)

2035 31,509,725 8.50 4.00 7.50 6.31 (3.68) 2.63 0.64 4.64 104.2 (7,824.0)2036 32,738,849 8.50 4.00 7.50 6.30 (4.48) 1.82 0.64 4.64 104.0 (7,766.7)

F:\fact sheets\2008-2009 employer contribution rate\[ProjectonOfRatesToPSERS-2007Val.xls]Results 12/7/07

1717

Public School Employees’ Retirement System of PennsylvaniaPublic School Employees’ Retirement System of PennsylvaniaProjection of Contribution Rates and Funded Ratio as of June 30, 2007Projection of Contribution Rates and Funded Ratio as of June 30, 2007

Contributions Determined Under Current LawContributions Determined Under Current Law

ProjectedFiscal Year

Ending June


(thousands)


of Return

PensionRateFloor


Rate

Employer Normal

Cost

Unfunded Liability

Rate

Preliminary Employer

Pension Rate

HealthCare

Contribution

Total Employer

Contribution Rate

Total Employer

Contribution (thousands)

Funded Ratio

2006 11,505,093$ 15.26 % 4.00 % 7.16 % 7.61 % (4.28) % 4.00 % 0.69 % 4.69 % 81.2 %2007 11,821,951 22.93 4.00 7.21 6.62 (0.95) 5.67 0.74 6.46 85.82008 12,881,244 (2.82) 4.00 7.25 6.68 (0.24) 6.44 0.69 7.13 918,433 88.32009 12,500,000 8.50 4.00 7.29 6.68 (3.37) 3.31 0.76 4.76 595,000 89.4

2010 12,866,029 8.50 4.00 7.31 6.64 (4.98) 1.66 0.75 4.75 611,136 89.92011 13,226,878 8.50 4.00 7.33 6.62 (6.01) 0.61 0.74 4.74 626,954 89.52012 13,603,456 8.50 4.00 7.35 6.59 (6.90) (0.31) 0.74 4.74 644,804 86.92013 14,001,264 8.50 4.00 7.37 6.57 8.98 15.55 0.73 16.28 2,279,406 87.82014 14,420,497 8.50 4.00 7.39 6.54 8.69 15.23 0.72 15.95 2,300,069 88.6

2015 14,859,650 8.50 4.00 7.41 6.52 7.53 14.05 0.72 14.77 2,194,770 89.32016 15,333,694 8.50 4.00 7.42 6.50 7.32 13.82 0.70 14.52 2,226,452 90.02017 15,848,584 8.50 4.00 7.44 6.48 7.11 13.59 0.68 14.27 2,261,593 90.62018 16,409,583 8.50 4.00 7.45 6.46 6.88 13.34 0.67 14.01 2,298,983 91.32019 17,015,045 8.50 4.00 7.46 6.44 6.64 13.08 0.64 13.72 2,334,464 92.0

2020 17,659,863 8.50 4.00 7.46 6.44 6.40 12.84 0.64 13.48 2,380,550 92.72021 18,342,593 8.50 4.00 7.47 6.42 6.16 12.58 0.64 13.22 2,424,891 93.42022 19,067,418 8.50 4.00 7.47 6.41 5.93 12.34 0.64 12.98 2,474,951 94.12023 19,832,234 8.50 4.00 7.48 6.40 5.70 12.10 0.64 12.74 2,526,627 94.82024 20,632,651 8.50 4.00 7.48 6.39 5.48 11.87 0.64 12.51 2,581,145 95.4

2025 21,467,802 8.50 4.00 7.48 6.38 5.27 11.65 0.64 12.29 2,638,393 96.12026 22,336,205 8.50 4.00 7.48 6.38 5.06 11.44 0.64 12.08 2,698,214 96.82027 23,233,488 8.50 4.00 7.48 6.37 4.87 11.24 0.64 11.88 2,760,138 97.52028 24,157,964 8.50 4.00 7.49 6.36 4.68 11.04 0.64 11.68 2,821,650 98.12029 25,109,827 8.50 4.00 7.49 6.35 4.50 10.85 0.64 11.49 2,885,119 98.8

2030 26,087,050 8.50 4.00 7.49 6.35 4.33 10.68 0.64 11.32 2,953,054 99.52031 27,096,257 8.50 4.00 7.49 6.34 4.17 10.51 0.64 11.15 3,021,233 100.2

1818


The projected sharp rise in PSERS’ employer The projected sharp rise in PSERS’ employer contribution rate from 4.76% in FY 2011-contribution rate from 4.76% in FY 2011-2012 to an estimated 2012 to an estimated 16.28%16.28% in FY in FY 2012/2013 (up from last year’s projection of 2012/2013 (up from last year’s projection of 4.74% to 4.74% to 11.23%11.23%), is primarily the result of:), is primarily the result of: The unfunded liabilities created byThe unfunded liabilities created by

The FYs’ 2001-2003 down investment markets The FYs’ 2001-2003 down investment markets Act 2001-9 multiplier increaseAct 2001-9 multiplier increase The Act 2002-38 phased COLAThe Act 2002-38 phased COLA The (2.82)% investment return for FY 2007-The (2.82)% investment return for FY 2007-

2008 2008 The changes made by Acts 2002-38 and The changes made by Acts 2002-38 and

2003-40 to PSERS’ actuarial funding 2003-40 to PSERS’ actuarial funding methodologiesmethodologies

1919

Estimated16.28%

2020

Without going into details about the funding Without going into details about the funding changes of Act 38 and Act 40, each had the changes of Act 38 and Act 40, each had the effect of pushing off liability to the future to effect of pushing off liability to the future to provide fiscal relief to both the provide fiscal relief to both the Commonwealth and school employers Commonwealth and school employers during recessionary timesduring recessionary times

Of the two, Act 40 had the greatest impact Of the two, Act 40 had the greatest impact as it created a mismatch of the amortization as it created a mismatch of the amortization of PSERS’ actuarial gains and losses of PSERS’ actuarial gains and losses Pre-Act 9 gains and losses remained on a 10 year Pre-Act 9 gains and losses remained on a 10 year

amortization scheduleamortization schedule Post-Act 9 gains and losses were shifted to a 30 Post-Act 9 gains and losses were shifted to a 30

year amortization scheduleyear amortization schedule

Employer Contribution Rate Spike Update

2121


Act 40 mismatch

Pre-Act 40

Act 40 mismatch

expiresEmployer Normal Cost

FY 2012-2013

Additional unfunded liability

2222

What does the Future hold?What does the Future hold?

Rate Spike OptionsRate Spike Options

2323

Rate Spike OptionsRate Spike Options Although some criticize Acts 38 and 40, Although some criticize Acts 38 and 40,

the Acts were intended to provide fiscal the Acts were intended to provide fiscal “breathing room” to both the “breathing room” to both the Commonwealth and school employers Commonwealth and school employers so that a more permanent and so that a more permanent and sustainable solution could be found to sustainable solution could be found to PSERS’ funding issuesPSERS’ funding issues

That time is now as there has been That time is now as there has been both increased awareness of the both increased awareness of the pending rate increase and discussions pending rate increase and discussions of alternative solutionsof alternative solutions

So what can be done about the pending So what can be done about the pending rate increase?rate increase?

2424

Rate Spike OptionsRate Spike Options Over the years, a series of options have Over the years, a series of options have

already been proposed to resolve the already been proposed to resolve the rate spike, including:rate spike, including: Fresh start of PSERS’ assetsFresh start of PSERS’ assets Stepped up increases of the employer Stepped up increases of the employer

contribution ratecontribution rate An increased rate floorAn increased rate floor Increased employee contributionsIncreased employee contributions Conversion of PSERS to a DC or Hybrid planConversion of PSERS to a DC or Hybrid plan Benefit reductionsBenefit reductions A combination of these conceptsA combination of these concepts Governor’s Funding proposalGovernor’s Funding proposal

2525

Rate Spike OptionsRate Spike Options The Governor’s Funding proposal to The Governor’s Funding proposal to

address the rate spike was publicly address the rate spike was publicly released in June 2008released in June 2008 A copy of the report is available at the A copy of the report is available at the

following link: following link: http://http://www.budget.state.pa.us/budget/cwp/view.www.budget.state.pa.us/budget/cwp/view.asp?Aasp?A=3&Q=213853=3&Q=213853

No legislation to implement the proposal No legislation to implement the proposal was introduced in the General Assembly was introduced in the General Assembly and no action further action took place and no action further action took place

Action, if any, is more likely in the first Action, if any, is more likely in the first six months of 2009six months of 2009

http://www.budget.state.pa.us/budget/cwp/view.asp?A=3&Q=213853




2626

Rate Spike OptionsRate Spike Options At a very high level, the Governor’s At a very high level, the Governor’s

proposal can be viewed as an proposal can be viewed as an additional smoothing methodology additional smoothing methodology that will be added to the two that will be added to the two existing techniques, both of which existing techniques, both of which will be retainedwill be retained Five year smoothing of gains and Five year smoothing of gains and

losseslosses Thirty year amortization of the Thirty year amortization of the

smoothed gains and lossessmoothed gains and losses

2727

Rate Spike OptionsRate Spike Options How is this accomplished?How is this accomplished? Through the use of legislatively prescribed Through the use of legislatively prescribed

employer contribution rate collars that are tied employer contribution rate collars that are tied to the funding status of the Systemto the funding status of the System

In essence, the actuaries calculate the required In essence, the actuaries calculate the required contribution rate using the existing funding contribution rate using the existing funding methodologies (entry age normal, present methodologies (entry age normal, present smoothing techniques, level dollar funding etc.)smoothing techniques, level dollar funding etc.)

The product of those calculations are then The product of those calculations are then initially compared to the employer contribution initially compared to the employer contribution rate collars table to see if the calculated rate or rate collars table to see if the calculated rate or a rate dictated by the table is used for the final a rate dictated by the table is used for the final employer contribution rate employer contribution rate

2828

Funded ratio as of valuation

date

Most rate can decrease compared

to prior year

Standard amount rate can increase compared

to prior year

less than 80% 1.25% 0.50%

at least 80% but less than 85% 1.00% 0.50%






equal to or greater than 115% 0.50% 0.75%

The most the rate can increase compared to the prior year is the greater of the standard amount from the contribution rate change table above or one-tenth the difference between the actuarially required contribution rate calculated without regard to the legislatively added costs and the prior year’s final contribution rate.

Table of Rate Collars

2929

Rate Spike OptionsRate Spike Options The net effects of the employer The net effects of the employer

contribution rate collars are:contribution rate collars are: They slow or collar the increase of They slow or collar the increase of

the employer contribution rate when the employer contribution rate when the System is under fundedthe System is under funded

This causes liability to be postponedThis causes liability to be postponed They also slow or collar, to a greater They also slow or collar, to a greater

extent, the decrease of the employer extent, the decrease of the employer contribution rate when the System is contribution rate when the System is over fundedover funded

This maintains surplus that can offset This maintains surplus that can offset future liability future liability

These points are illustrated by the These points are illustrated by the following two examplesfollowing two examples

3030

Example of the collars approach limiting significant Example of the collars approach limiting significant increasesincreases in the in theemployer contribution rateemployer contribution rate

AssumptionsAssumptions Suppose the employer contribution rate for the System in FY 2014-Suppose the employer contribution rate for the System in FY 2014-

15 is 7.8%.15 is 7.8%.

Presume that the funded status of the System in the FY 2015-16 Presume that the funded status of the System in the FY 2015-16 valuation is 89%.valuation is 89%.

Suppose also that an initial actuarial rate of 9.0% has been Suppose also that an initial actuarial rate of 9.0% has been calculated by the System’s actuaries for FY 2015-16.calculated by the System’s actuaries for FY 2015-16.

Application of “Collars” approach limit increases in the rateApplication of “Collars” approach limit increases in the rate

Based on the funded status of the system (89%), the applicable rate Based on the funded status of the system (89%), the applicable rate collar would be a maximum increase in the employer contribution collar would be a maximum increase in the employer contribution rate of 0.5%.rate of 0.5%.

The 0.5% increment would be added to the prior year’s rate of The 0.5% increment would be added to the prior year’s rate of 7.8%, generating a new employer rate for FY 2015-16 of 8.3%.7.8%, generating a new employer rate for FY 2015-16 of 8.3%.

Since the the final rate is the lesser of the 9.0% initial actuarial rate Since the the final rate is the lesser of the 9.0% initial actuarial rate and the 8.3% rate calculated using the collars approach, the and the 8.3% rate calculated using the collars approach, the employer contribution rate for FY 2015-16 is 8.3%.employer contribution rate for FY 2015-16 is 8.3%.

Example 1—Short Version

3131

Example of the collars approach limiting significant Example of the collars approach limiting significant decreasesdecreases in in thethe

employer contribution rateemployer contribution rateAssumptionsAssumptions Suppose that the employer contribution rate for the System in Suppose that the employer contribution rate for the System in

FY 2017-18 is 8.9%.FY 2017-18 is 8.9%.

Presume that the funded status of the System in the FY 2018-19 Presume that the funded status of the System in the FY 2018-19 valuation is 111%.valuation is 111%.

Suppose also that an initial actuarial rate of 7.5% has been Suppose also that an initial actuarial rate of 7.5% has been calculated by the System’s actuaries for FY 2018-19.calculated by the System’s actuaries for FY 2018-19.

Application of “Collars” approach to limit reductions in the rateApplication of “Collars” approach to limit reductions in the rate Based on the funded status of the System (111%), the applicable Based on the funded status of the System (111%), the applicable

rate collar would limit the decrease in the employer contribution rate collar would limit the decrease in the employer contribution rate to a maximum of 0.5%.rate to a maximum of 0.5%.

The 0.5 percent increment would be subtracted from the prior The 0.5 percent increment would be subtracted from the prior year’s rate of 8.9%, generating a new employer rate for FY 2018-year’s rate of 8.9%, generating a new employer rate for FY 2018-19 of 8.4%.19 of 8.4%.

Since the final rate is the greater of the 7.5% initial actuarial Since the final rate is the greater of the 7.5% initial actuarial rate and the 8.4% rate calculated using the collars approach, the rate and the 8.4% rate calculated using the collars approach, the employer contribution rate for FY 2018-19 is 8.4%.employer contribution rate for FY 2018-19 is 8.4%.


3232

Rate Spike OptionsRate Spike Options

A fail-safe provision was also incorporated into the A fail-safe provision was also incorporated into the collars smoothing methodology to protect against collars smoothing methodology to protect against a protracted market downturna protracted market downturn

This requires the annual employer contribution This requires the annual employer contribution increase to be at least an amount sufficient to increase to be at least an amount sufficient to reach the amount of the actuarially calculated rate reach the amount of the actuarially calculated rate for the year in question within a maximum of ten for the year in question within a maximum of ten yearsyears

Hence the language at the bottom of the Rate Hence the language at the bottom of the Rate Collars Table:Collars Table: The most the rate can increase compared to the prior year is the The most the rate can increase compared to the prior year is the

greater of the standard amount from the contribution rate change greater of the standard amount from the contribution rate change table above or one-tenth the difference between the actuarially table above or one-tenth the difference between the actuarially required contribution rate calculated without regard to the required contribution rate calculated without regard to the legislatively added costs and the prior year’s final contribution rate.legislatively added costs and the prior year’s final contribution rate.

See Example 3 that followsSee Example 3 that follows

3333

Fail-Safe Adjustment: An example of an employer rate Fail-Safe Adjustment: An example of an employer rate calculationcalculation

following a market downturnfollowing a market downturnAssumptionsAssumptions Suppose that the final employer contribution rate in FY Suppose that the final employer contribution rate in FY

2019-20 is 5.0%. 2019-20 is 5.0%. Presume that the funded status of the System in the FY Presume that the funded status of the System in the FY

2020-21 valuation is 96%.2020-21 valuation is 96%. Suppose also that an initial actuarial rate of 10% has been Suppose also that an initial actuarial rate of 10% has been

calculated by the System’s actuaries for FY 2020-21.calculated by the System’s actuaries for FY 2020-21.Application of “Collars” approachApplication of “Collars” approach Based on the funded status of the System (96%), the Based on the funded status of the System (96%), the

applicable rate collar would generate a maximum increase applicable rate collar would generate a maximum increase in the employer contribution rate of 0.25%.in the employer contribution rate of 0.25%.

Before taking into account the fail safe provision, this Before taking into account the fail safe provision, this would generate a preliminary employer contribution rate would generate a preliminary employer contribution rate of 5.25%.of 5.25%.

Because, however, the initial, calculated actuarial rate for Because, however, the initial, calculated actuarial rate for FY 2020-21 (10%) is greater than the preliminary employer FY 2020-21 (10%) is greater than the preliminary employer rate (5.25 %), a fail safe adjustment may required.rate (5.25 %), a fail safe adjustment may required.


3434

Application of Fail Safe ProvisionApplication of Fail Safe Provision Step 1: Calculate how much the new actuarial rate Step 1: Calculate how much the new actuarial rate

exceeds the prior year’s final employer rate.exceeds the prior year’s final employer rate. Answer: The initial actuarial rate for FY 2020-21 Answer: The initial actuarial rate for FY 2020-21

(10%) minus last year's employer rate (5%) is 5%.(10%) minus last year's employer rate (5%) is 5%. Step 2: To reach the actuarially-calculated rate within Step 2: To reach the actuarially-calculated rate within

ten years, calculate one-tenth of the difference ten years, calculate one-tenth of the difference determined in Step 1.determined in Step 1.

Answer: 0.5% (5%/10 = 0.5%)Answer: 0.5% (5%/10 = 0.5%) Step 3: Compare the 0.5% calculated in Step 2 with Step 3: Compare the 0.5% calculated in Step 2 with

the increase determined by the application of the the increase determined by the application of the rate collar, i.e., 0.25% to see which increase applies.rate collar, i.e., 0.25% to see which increase applies.

Answer: The final employer contribution for FY 2020-Answer: The final employer contribution for FY 2020-21 would be 5.5% (not 5.25%), a rate that would 21 would be 5.5% (not 5.25%), a rate that would expect to reach the actuarial rate of 10% within 10 expect to reach the actuarial rate of 10% within 10 years.years.

Example 3—Short Version, cont’d

3535

Rate Spike OptionsRate Spike Options Other components of the proposal include:Other components of the proposal include:

Temporarily increasing PSERS’ current employer Temporarily increasing PSERS’ current employer contribution rate floor of 4% to 6.44%, effective contribution rate floor of 4% to 6.44%, effective July 1, 2008 through and including FY 2011-2012July 1, 2008 through and including FY 2011-2012

Beginning in FY 2012-2013, a new permanent Beginning in FY 2012-2013, a new permanent PSERS’ rate floor would take effect at the PSERS’ rate floor would take effect at the employers’ normal cost minus 2%employers’ normal cost minus 2%

For example, if PSERS’ employer normal cost is 6.54%, the For example, if PSERS’ employer normal cost is 6.54%, the rate floor for that year would be 4.54%rate floor for that year would be 4.54%

These rate floors would also have to be taken These rate floors would also have to be taken into account when calculating the employer rate, into account when calculating the employer rate, i.e., the final rate, under all circumstances, could i.e., the final rate, under all circumstances, could not fall below the current floor then in effectnot fall below the current floor then in effect

3636

Rate Spike OptionsRate Spike Options Under the Governor’s proposal, any benefit Under the Governor’s proposal, any benefit

enhancements, e.g. COLAs or early enhancements, e.g. COLAs or early retirement incentives, would continue to be retirement incentives, would continue to be amortized over ten years with level dollar amortized over ten years with level dollar paymentspayments

All additional employer costs associated with All additional employer costs associated with a benefit enhancement would be added to a benefit enhancement would be added to the final employer contribution rate the final employer contribution rate calculated in accordance with the new floors calculated in accordance with the new floors and collars funding methodologyand collars funding methodology

This prevents the perception that the This prevents the perception that the enhancements are free, as their actual cost enhancements are free, as their actual cost will be clearly identifiablewill be clearly identifiable

3737

Fiscal Year

Ending June


(thousands)


of Return

PensionRateFloor


Rate

Employer Normal

Cost

Funded % w/o Health

Care

Unfunded Liability

Rate

Actuarial Employer

Pension Rate

HealthCare

Contribution

Total Employer

Contribution Rate

2006 11,505,093 15.26 % 4.00 % 7.16 % 7.61 % % (4.28) % 4.00 % 0.69 % 4.69 %2007 11,821,951 22.93 4.00 7.21 6.62 85.7 (0.95) 5.67 0.74 6.462008 12,881,244 (2.80) 4.00 7.25 6.68 88.1 0.00 6.68 0.69 7.132009 12,500,000 8.50 4.00 7.29 6.68 89.6 (3.37) 3.31 0.76 6.70

2010 12,866,029 8.50 6.44 7.31 6.64 90.7 (4.98) 1.66 0.75 7.192011 13,226,878 8.50 6.44 7.33 6.62 90.7 (6.21) 0.41 0.74 7.182012 13,603,456 8.50 6.44 7.35 6.59 88.8 (7.33) (0.74) 0.74 7.182013 14,001,264 8.50 6.44 7.37 6.57 88.4 8.29 14.86 0.73 8.012014 14,420,497 8.50 4.54 7.39 6.54 88.1 7.73 14.27 0.72 8.75

2015 14,859,650 8.50 4.52 7.41 6.52 87.9 7.36 13.88 0.72 9.502016 15,333,694 8.50 4.50 7.42 6.50 87.9 7.77 14.27 0.70 10.232017 15,848,584 8.50 4.48 7.44 6.48 88.0 8.05 14.53 0.68 10.962018 16,409,583 8.50 4.46 7.45 6.46 88.3 8.26 14.72 0.67 11.702019 17,015,045 8.50 4.44 7.46 6.44 88.7 8.38 14.82 0.64 12.42

2020 17,659,863 8.50 4.44 7.46 6.44 89.2 8.43 14.87 0.64 13.172021 18,342,593 8.50 4.42 7.47 6.42 90.0 8.41 14.83 0.64 13.922022 19,067,418 8.50 4.41 7.47 6.41 90.8 8.31 14.72 0.64 14.672023 19,832,234 8.50 4.40 7.48 6.40 91.7 8.13 14.53 0.64 15.172024 20,632,651 8.50 4.39 7.48 6.39 92.5 7.87 14.26 0.64 14.90

2025 21,467,802 8.50 4.38 7.48 6.38 93.4 7.56 13.94 0.64 14.582026 22,336,205 8.50 4.38 7.48 6.38 94.2 7.25 13.63 0.64 14.272027 23,233,488 8.50 4.37 7.48 6.37 95.1 6.96 13.33 0.64 13.972028 24,157,964 8.50 4.36 7.49 6.36 95.9 6.69 13.05 0.64 13.692029 25,109,827 8.50 4.35 7.49 6.35 96.7 6.43 12.78 0.64 13.42

Governors’ Funding Proposal withFY 2007-2008 investment rate of return and an 8.5% assumed rate thereafter

3838

Fiscal Year

Ending June


(thousands)


of Return

PensionRateFloor


Rate

Employer Normal

Cost

Funded % w/o Health

Care

Unfunded Liability

Rate

Actuarial Employer

Pension Rate

HealthCare

Contribution

Total Employer

Contribution Rate

2006 11,505,093 15.26 % 4.00 % 7.16 % 7.61 % % (4.28) % 4.00 % 0.69 % 4.69 %2007 11,821,951 22.93 4.00 7.21 6.62 85.7 (0.95) 5.67 0.74 6.462008 12,881,244 (2.80) 4.00 7.25 6.68 88.1 0.00 6.68 0.69 7.132009 12,500,000 2.00 4.00 7.29 6.68 88.5 (3.37) 3.31 0.76 6.70

2010 12,866,029 2.00 6.44 7.31 6.64 87.3 (4.98) 1.66 0.75 7.192011 13,226,878 15.40 6.44 7.33 6.62 86.0 (5.60) 1.02 0.74 7.182012 13,603,456 15.40 6.44 7.35 6.59 83.8 (5.53) 1.06 0.74 7.182013 14,001,264 2.00 6.44 7.37 6.57 82.2 10.77 17.34 0.73 8.262014 14,420,497 2.00 4.54 7.39 6.54 80.5 10.37 16.91 0.72 9.25

2015 14,859,650 15.40 4.52 7.41 6.52 80.9 10.77 17.29 0.72 10.252016 15,333,694 15.40 4.50 7.42 6.50 81.6 11.95 18.45 0.70 11.232017 15,848,584 2.00 4.48 7.44 6.48 80.8 11.94 18.42 0.68 12.212018 16,409,583 2.00 4.46 7.45 6.46 80.0 11.76 18.22 0.67 13.202019 17,015,045 15.40 4.44 7.46 6.44 81.1 12.52 18.96 0.64 14.17

2020 17,659,863 15.40 4.44 7.46 6.44 82.6 13.18 19.62 0.64 15.172021 18,342,593 2.00 4.42 7.47 6.42 82.6 12.77 19.19 0.64 16.172022 19,067,418 2.00 4.41 7.47 6.41 82.6 12.19 18.60 0.64 17.172023 19,832,234 15.40 4.40 7.48 6.40 84.5 12.54 18.94 0.64 18.172024 20,632,651 15.40 4.39 7.48 6.39 86.9 12.81 19.20 0.64 19.17

2025 21,467,802 2.00 4.38 7.48 6.38 87.3 12.00 18.38 0.64 19.022026 22,336,205 2.00 4.38 7.48 6.38 87.5 10.98 17.36 0.64 18.522027 23,233,488 15.40 4.37 7.48 6.37 89.6 11.02 17.39 0.64 18.032028 24,157,964 15.40 4.36 7.49 6.36 92.0 11.13 17.49 0.64 18.132029 25,109,827 2.00 4.35 7.49 6.35 92.4 10.25 16.60 0.64 17.63

Governors’ Funding Proposal with FY 2007-2008 investment rate of return and varying up and down rates of return for subsequent

years

3939

Fiscal Year

Ending June


(thousands)


of Return

PensionRateFloor


Rate

Employer Normal

Cost

Funded % w/o Health

Care

Unfunded Liability

Rate

Actuarial Employer

Pension Rate

HealthCare

Contribution

Total Employer

Contribution Rate

2006 11,505,093 15.26 % 4.00 % 7.16 % 7.61 % % (4.28) % 4.00 % 0.69 % 4.69 %2007 11,821,951 22.93 4.00 7.21 6.62 85.7 (0.95) 5.67 0.74 6.462008 12,881,244 (2.80) 4.00 7.25 6.68 88.1 0.00 6.68 0.69 7.132009 12,500,000 (5.00) 4.00 7.29 6.68 87.3 (3.37) 3.31 0.76 6.70

2010 12,866,029 (5.00) 6.44 7.31 6.64 83.9 (4.98) 1.66 0.75 7.192011 13,226,878 (5.00) 6.44 7.33 6.62 77.4 (4.94) 1.68 0.74 7.182012 13,603,456 8.00 6.44 7.35 6.59 68.7 (3.67) 2.92 0.74 7.182013 14,001,264 8.00 6.44 7.37 6.57 61.3 15.43 22.00 0.73 8.732014 14,420,497 8.00 4.54 7.39 6.54 55.8 18.57 25.11 0.72 10.43

2015 14,859,650 8.00 4.52 7.41 6.52 52.1 22.10 28.62 0.72 12.322016 15,333,694 8.00 4.50 7.42 6.50 50.3 25.45 31.95 0.70 14.332017 15,848,584 8.00 4.48 7.44 6.48 49.0 27.78 34.26 0.68 16.382018 16,409,583 8.00 4.46 7.45 6.46 48.1 29.14 35.60 0.67 18.362019 17,015,045 8.00 4.44 7.46 6.44 47.7 30.27 36.71 0.64 20.23

2020 17,659,863 8.00 4.44 7.46 6.44 47.6 31.15 37.59 0.64 22.032021 18,342,593 8.00 4.42 7.47 6.42 47.9 31.83 38.25 0.64 23.722022 19,067,418 8.00 4.41 7.47 6.41 48.4 32.32 38.73 0.64 25.282023 19,832,234 8.00 4.40 7.48 6.40 49.3 32.66 39.06 0.64 26.722024 20,632,651 8.00 4.39 7.48 6.39 50.4 32.86 39.25 0.64 28.04

2025 21,467,802 8.00 4.38 7.48 6.38 51.8 32.93 39.31 0.64 29.292026 22,336,205 8.00 4.38 7.48 6.38 53.5 32.89 39.27 0.64 30.542027 23,233,488 8.00 4.37 7.48 6.37 55.4 32.73 39.10 0.64 31.792028 24,157,964 8.00 4.36 7.49 6.36 57.7 32.47 38.83 0.64 33.042029 25,109,827 8.00 4.35 7.49 6.35 60.2 32.10 38.45 0.64 34.29

Governors’ Funding Proposal with FY 2007-2008 investment rate of return followed by

three years at (5%) and an 8% assumed rate thereafter

Actual employer contribution rate high point is 37.22% in FY

2031-2032

4040

Return to Service and Return to Service and Still Collect a Pension? Still Collect a Pension?

Is this Possible?Is this Possible?

4141

What the Law Says about What the Law Says about Return to Service…Return to Service…

Under the PERC, PSERS must stop the Under the PERC, PSERS must stop the annuity of any PSERS retiree who returns annuity of any PSERS retiree who returns to public school serviceto public school service 24 Pa.C.S. §8346(a):24 Pa.C.S. §8346(a):

““If an annuitant returns to school service, … any If an annuitant returns to school service, … any annuity payable to him under this part shall cease annuity payable to him under this part shall cease effective upon the date of his return to school service effective upon the date of his return to school service … and … the present value of such annuity … shall … and … the present value of such annuity … shall be frozen as of the date such annuity ceases.”be frozen as of the date such annuity ceases.”

This includes service at a community college, This includes service at a community college, SSHE, and Penn State University since, they SSHE, and Penn State University since, they are deemed to be public schools under the are deemed to be public schools under the PSERCPSERC

4242

What the Law Says about What the Law Says about Return to Service…Return to Service…

Why does the PSERC have this Why does the PSERC have this rule?rule?

IRS Tax Qualification requirementIRS Tax Qualification requirement You cannot retire and then return You cannot retire and then return

to work for the same “employer” to work for the same “employer” while still receiving a pension from while still receiving a pension from that employerthat employer

In this context “employer” is used In this context “employer” is used collectively in the broad sensecollectively in the broad sense It means any individual employer It means any individual employer

under the PSERC and thus includes under the PSERC and thus includes community colleges, SSHE and community colleges, SSHE and Penn State UniversityPenn State University

E.g. if the member retires from E.g. if the member retires from PSERS employer X and returns to PSERS employer X and returns to service at Community College Y, it service at Community College Y, it is deemed a return to service with is deemed a return to service with the same employerthe same employer

IRS

4343

Retired Member ImpactRetired Member Impact There are There are threethree primary exceptions primary exceptions

to the general rule that PSERS must to the general rule that PSERS must stop the annuity of any PSERS retiree stop the annuity of any PSERS retiree who returns to public school service:who returns to public school service:

1)1) Return to public school service in an Return to public school service in an emergencyemergency

2)2) Return to public school service in an extra-Return to public school service in an extra-curricular capacitycurricular capacity

3)3) Enrollment by the retiree in either the Enrollment by the retiree in either the State Employees’ Retirement System State Employees’ Retirement System (SERS) or an alternative approved pension (SERS) or an alternative approved pension plan offered by the community college, plan offered by the community college, SSHE or Penn State University, i.e. TIAA-SSHE or Penn State University, i.e. TIAA-CREFCREF

4444

Retired Member ImpactRetired Member ImpactException #1*:Exception #1*:

Return to school service in an emergencyReturn to school service in an emergency Under the PSERC a PSERS’ retiree can Under the PSERC a PSERS’ retiree can

return to service without interrupting his return to service without interrupting his or her pension if:or her pension if: An emergency exists that creates a serious An emergency exists that creates a serious

impairment of service; orimpairment of service; or There is a shortage of subject-certified There is a shortage of subject-certified

teachersteachers The emergency exception can extend The emergency exception can extend

only for the length of the school yearonly for the length of the school year

*24 Pa.C.S. §8346(b)

4545

Retired Member ImpactRetired Member ImpactException #2*:Exception #2*:

Return to school service in an Return to school service in an extracurricular positionextracurricular position

The PSERC allows a PSERS’ retiree to The PSERC allows a PSERS’ retiree to service in an extracurricular position service in an extracurricular position without interrupting his or her pension if:without interrupting his or her pension if: The retiree is employed under a separate The retiree is employed under a separate

contractcontract The extracurricular position is primarily The extracurricular position is primarily

performed outside the regular instructional performed outside the regular instructional hours and is not part of the mandated hours and is not part of the mandated curriculum curriculum

For example: A not for credit adult education For example: A not for credit adult education classes taught at nightclasses taught at night

*24 Pa.C.S. §8346(b.1)

4646

Retired Member ImpactRetired Member ImpactException #3*: Exception #3*:

Enrollment by the retiree in either SERS Enrollment by the retiree in either SERS or another approved planor another approved plan

The PSERC allows individuals working The PSERC allows individuals working for a community college, SSHE or for a community college, SSHE or Penn State University to choose one Penn State University to choose one of three retirement plan options:of three retirement plan options: PSERSPSERS SERSSERS Another approved employer plan, i.e. TIAA-Another approved employer plan, i.e. TIAA-

CREF CREF *24 Pa.C.S. §8301

4747

Retired Member ImpactRetired Member Impact

Exception #3:Exception #3: If a returning PSERS’ member If a returning PSERS’ member

chooses SERS or TIAA-CREF, PSERC’s chooses SERS or TIAA-CREF, PSERC’s return to service restriction does not return to service restriction does not applyapply

So what’s the problem?So what’s the problem? A returning member cannot always elect A returning member cannot always elect

SERS or TIAA-CREFSERS or TIAA-CREF Why?Why?

The member may not be eligible to elect The member may not be eligible to elect another plan or,another plan or,

An election is not offered by the An election is not offered by the community collegecommunity college

4848

Retired Member ImpactRetired Member ImpactException #3:Exception #3:

In the latter case, returning member will In the latter case, returning member will default into PSERS thereby triggering the default into PSERS thereby triggering the PSERC return to service provisionsPSERC return to service provisions

In the former case, the default occurs because In the former case, the default occurs because the returning member does not work enough the returning member does not work enough hours to qualify for either SERS or TIAA-CREFhours to qualify for either SERS or TIAA-CREF To elect SERS, an employee must work at least To elect SERS, an employee must work at least

750 hours in a calendar year750 hours in a calendar year To elect TIAA-CREF, an employee must work a To elect TIAA-CREF, an employee must work a

minimum number of hours which varies from minimum number of hours which varies from community college to community college, e.g. community college to community college, e.g. 1000 hours1000 hours

4949

Retired Member ImpactRetired Member Impact““Exception #4:” Exception #4:”

Is the person really a return to service Is the person really a return to service or are they an independent or are they an independent

contractorcontractor If the retiree is truly an independent If the retiree is truly an independent

contractor then they are not eligible contractor then they are not eligible for membership in the System and for membership in the System and therefore are not a return to servicetherefore are not a return to service These situations are reviewed on a case These situations are reviewed on a case

by case basis which is based on the ten by case basis which is based on the ten Zimmerman factorsZimmerman factors

The Zimmerman factors are found on the The Zimmerman factors are found on the eligibility form which must be filled out eligibility form which must be filled out in these casesin these cases

5050

Retirement-Covered Retirement-Covered CompensationCompensation

Charles Serine, PSERS Legal OfficeCharles Serine, PSERS Legal Office

5151

Definition of CompensationDefinition of Compensation

Definition according to the Retirement CodeDefinition according to the Retirement Code "Compensation." Pickup contributions plus any remuneration "Compensation." Pickup contributions plus any remuneration

received as a school employee excluding reimbursements for expenses received as a school employee excluding reimbursements for expenses incidental to employment and excluding any bonus, severance incidental to employment and excluding any bonus, severance payments, any other remuneration or other emolument received by a payments, any other remuneration or other emolument received by a school employee during his school service which is not based on the school employee during his school service which is not based on the standard salary schedule under which he is rendering service, standard salary schedule under which he is rendering service, payments for unused sick leave or vacation leave, bonuses or other payments for unused sick leave or vacation leave, bonuses or other compensation for attending school seminars and conventions, compensation for attending school seminars and conventions, payments under health and welfare plans based on hours of payments under health and welfare plans based on hours of employment or any other payment or emolument which may be employment or any other payment or emolument which may be provided for in a collective bargaining agreement which may be provided for in a collective bargaining agreement which may be determined by the Public School Employees' Retirement Board to be determined by the Public School Employees' Retirement Board to be for the purpose of enhancing compensation as a factor in the for the purpose of enhancing compensation as a factor in the determination of final average salary; provided, however, that the determination of final average salary; provided, however, that the limitation under section 401(a)(17) of the Internal Revenue Code of limitation under section 401(a)(17) of the Internal Revenue Code of 1986 (Public Law 99-514, 26 U.S.C § 401 (a)(17)) taken into account for 1986 (Public Law 99-514, 26 U.S.C § 401 (a)(17)) taken into account for the purpose of member contributions, including regular or joint the purpose of member contributions, including regular or joint coverage member contributions, regardless of class of service, shall coverage member contributions, regardless of class of service, shall apply to each member who first became a member of the Public School apply to each member who first became a member of the Public School Employes' Retirement System on or after July 1, 1996, and who by Employes' Retirement System on or after July 1, 1996, and who by reason of such fact is a noneligible member subject to the application reason of such fact is a noneligible member subject to the application of the provisions of section 8325.1 (relating to annual compensation of the provisions of section 8325.1 (relating to annual compensation limit under IRC § 401(a)(17)). limit under IRC § 401(a)(17)).

5252


Retirement-Covered CompensationRetirement-Covered Compensation PSERS is Defined Benefit Plan – PSERS is Defined Benefit Plan –

pension based on a fixed formulapension based on a fixed formula FAS impacts benefit – spikes in FAS FAS impacts benefit – spikes in FAS

result in cost shifting to other result in cost shifting to other employersemployers

Code excludes payments that Code excludes payments that artificially inflate FASartificially inflate FAS

5353


Code limits what PSERS can Code limits what PSERS can recognizerecognize

BUT - Code does not limit what BUT - Code does not limit what employers can payemployers can pay

5454


Compensation is all regular Compensation is all regular remuneration Exceptions:remuneration Exceptions: Fringe benefitsFringe benefits BonusBonus

Generally, one time payment not Generally, one time payment not added to base salaryadded to base salary

Incentive pay is allowed – Incentive pay is allowed – BeardsleyBeardsley

5555

Incentive under Incentive under Beardsley Beardsley IF:IF: Payment tied to actual work Payment tied to actual work performanceperformance

Performance standards agreed Performance standards agreed ahead of timeahead of time

Objective means of calculating Objective means of calculating paymentpayment

Employer contractually obligated Employer contractually obligated to make payment if standards are to make payment if standards are metmet

Payment is significant amountPayment is significant amount


5656


Severance – any payment made Severance – any payment made in connection with agreement in connection with agreement to retire or terminate serviceto retire or terminate service

Unused Vacation and Sick Unused Vacation and Sick Leave paymentsLeave payments

5757

AttachmentsAttachments

Act 2004-63 Affects Retirees Act 2004-63 Affects Retirees Working After RetirementWorking After Retirement

Zimmerman TestZimmerman Test Membership Eligibility FormMembership Eligibility Form Compensation InformationCompensation Information

5858

Questions?Questions?Jeff ClayJeff Clay

PSERS Executive DirectorPSERS Executive Director717-720-4749717-720-4749

[email protected]@state.pa.uswww.psers.state.pa.uswww.psers.state.pa.us

1 an update on psers governing boards of pasa, pasbo, and paessp november 21, 2008

Documents

psers funding

psers benefits

employer contributions

psers governing boards

investment earnings

school employers

employee contributions

defined benefit pension