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Public pensions in Pennsylvania

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Pennsylvania public pensions
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Pension system
Number of pension systems 3
State pension systems: State Employees' Retirement System
Public School Employees' Retirement System
Municipal Retirement System
System type: Defined benefit plan
Pension health (2012)[1]
Fund value: $85,323,431,433
Estimated liabilities: $132,543,877,269
Unfunded liabilities : $47,220,445,836
Percent funded: 64.37%
Percent funded change: Decrease.svg3.9%[2]
Percent funded rank: 34[3]
Pension fund members (2012)
Total members: 842,000
Active members: 388,546
Other members: 453,454
Other state pension information
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Public pensions
State public pension plans
Public pension health by state
Pennsylvania public pensions are the state mechanism by which state and many local government employees in Pennsylvania receive retirement benefits. Three systems administer benefits to eligible retirees: the State Employees' Retirement System (SERS), the Public School Employees' Retirement System (PSERS) and the Municipal Retirement System (MRS).

According to the United States Census Bureau, the state has 1,422 locally-administered pension systems.[4]

A 2012 report from the Pew Center on the States noted that Pennsylvania's pension system was funded at 75 percent at the close of fiscal year 2010, below the 80 precent funding level experts recommend. Consequently, Pew designated the state's pension system as cause for "serious concern."[5]

Taken together, the funding ratio for the state's pension systems decreased from 89.65 percent in fiscal year 2007 to 64.37 percent in fiscal year 2012, a decrease of 25.28 percentage points, or 28.2 percent. Likewise, unfunded liabilities increased from just under $10.3 billion in fiscal year 2007 to more than $47 billion in fiscal year 2012.[6][7][8]


Pension plans

In fiscal year 2012, according to the systems' Comprehensive Annual Financial Reports and Actuarial Valuation Reports, Pennsylvania had a total of 388,546 active members in its retirement plans.[6][7][8] Our membership figures divide plan participants into two broad categories: active and other. Active members are current employees contributing to the pension system. Other members include retirees, beneficiaries and other inactive plan participants (usually terminated employees entitled to benefits but not yet receiving them).[9]

The following data was collected from the systems' Comprehensive Annual Financial Reports and Actuarial Valuation Reports. The "percentage funded" is calculated by taking the current value of the fund and dividing by the estimated amount of total liabilities. The assumed rate of return used to calculate fund value varied by system in fiscal year 2012 (see "Rate of return" below for more information). The Government Accountability Office (GAO) and Pew Research Centers cite a percent funded ratio of 80 percent as the minimum threshold for a healthy fund, though the American Academy of Actuaries suggests that all pension systems "have a strategy in place to attain or maintain a funded status of 100 percent or greater."[10][11] The column labeled "SBS figure" refers to a market liability calculation of the fund by the nonprofit organization State Budget Solutions. This analysis uses a rate of return of 3.225 percent, which is based upon the 15-year Treasury bond yield. The organization calls this a "risk-free" rate of return that would make it easier for states to achieve their pension funding requirements in the future. Since 2006, all private sector corporate pension plans have incorporated market costs into their funding schemes.[12]

Basic pension plan information -- Pennsylvania
Plans Current value Percentage funded Unfunded liabilities Membership
State figure SBS figure[13] State figure SBS figure[13]
State Employees' Retirement System[6] $25,303,000,000 58.8% N/A[14] $17,753,000,000 N/A[14] 106,048 active members
Public School Employees' Retirement System[7] $58,227,622,000 66.3% $29,533,038,000 273,504 active members
Municipal Retirement System[8] $1,792,809,433 103.8% $(65,592,164) 8,994 active members
TOTALS $85,323,431,433 64.37% 35% $47,220,445,836 $156,635,981,000 388,546 active members

Annual Required Contribution

Annual Required Contributions (ARC) are calculated annually and are a sum of two different costs. The first component is the "normal cost," or what the employer owes to the system in order to support the liabilities gained in the previous year of service. The second component is an additional payment in order to make up for previous liabilities that have not yet been paid for. According to a report by the Pew Center on the States, in 2010 Pennsylvania paid 29 percent of its annual required contribution.[5][15]

On June 25, 2012, the Government Accounting Standards Board (GASB) approved a plan to reform the accounting rules for state and local pension funds. These revised standards were set to take effect in fiscal years 2013 and 2014.[16] As a result, ARCs were removed as a reporting requirement. Instead, plan administrators and accountants will use an actuarially determined contribution or a statutory contribution for reporting purposes.[17]

ARC historical data
Fiscal year SERS[6] PSERS[7] MRS[8]
Annual Required Contribution (ARC) Percentage contributed Annual Required Contribution (ARC) Percentage contributed Annual Required Contribution (ARC) Percentage contributed
2012 $1,044,632,000 53.9% $2,629,244,000 38% $34,062,933 112%
2011 $913,778,000 42.8% $2,436,602,000 27% $33,880,428 119%
2010 $866,822,000 31.4% $1,928,278,000 27% $31,561,925 130%
2009 $643,861,000 39.1% $1,761,295,000 29% $30,631,316 115%
2008 $584,248,000 39.9% $1,852,238,000 41% $29,300,378 108%

Historical funding levels

Historical pension plan data - all systems
Year Value of assets Accrued liability Unfunded liability Funded ratio
2007 $89,233,847,295 $99,531,891,998 $10,298,044,703 89.65%
2008 $93,016,305,442 $106,659,838,000 $13,643,532,558 87.21%
2009 $91,526,727,742 $112,769,373,264 $21,242,645,522 81.16%
2010 $90,370,998,779 $119,745,785,536 $29,374,786,757 75.47%
2011 $88,472,882,974 $129,596,287,145 $41,123,404,171 68.27%
Change from 2007-2011 -$760,964,321 $30,064,395,147 $30,825,359,468 -21.39%

Rate of return

SERS and PSERS presume a 7.5 return rate on their pension investments.[6][7] MRS presumes a 6 percent return rate on its investments.[8]


According to a 2012 analysis by the Pew Center for the States, most state pension plans assume an 8 percent rate of return on investments.[18] Critics assert that this assumption is unrealistic, citing changing market conditions and significantly lower investment returns across the board over the past several years.[19] When states lower the rate of return in an effort to predict investment earnings accurately, it increases the current plan liabilities, thereby lowering the percent funded ratio and causing the ARC to increase. This is because future plan liabilities are discounted based on the rate of return, so smaller expected investment returns result in larger actuarially accrued liabilities.[20] For example, on September 21, 2012, the Illinois Teachers Retirement System voted to lower its rate of return from 8.5 percent to 8.0 percent. This change increased the state's fiscal year 2014 ARC from $3.07 billion to $3.36 billion.[21] Similarly, when California's CalPERS reduced its projected annual rate of return from 7.75 percent to 7.5 percent in March 2012, it cost the state an additional $303 million for fiscal year 2013.[22]

The 2008 financial crisis had a devastating effect on pension plans nationwide and resulted in slower economic growth and increased market volatility. In light of this, some market strategists find the 8 percent assumption to be overly ambitious. Stanford University Finance Professor Joshua Rauh stated that using past investment performance in this economic climate was "dangerously optimistic."[23] Advocates for a lower assumed rate of return argue that the standard assumptions could cause pension fund managers to engage in more risky investments and imprudent stewardship of public funds. Further, if pension plans were using more conservative assumptions, such as the 3 or 4 percent assumed rate of return used in the private sector, and the plans grew more quickly than expected, the fund would have a surplus and smaller future ARCs, which would be preferable to using optimistic assumptions and potentially being caught with larger-than-expected deficits.[24][25][26][27][28]

On the other hand, traditional public pension plan advocates argue that the dip observed in recent years is not sufficient proof of a long-term, downward trend in investment returns. According to Chris Hoene, executive director at the California Budget Project, "The problem with [the market rate] argument is there isn’t significant evidence other than the short term blip during the economic crisis that there’s been that shift. It’s a speculative argument coming out of a very deep recession."[23]

The National Association of State Retirement Administrators compiled data on the median annualized rate of return for public pensions for the 1-, 3-, 5-, 10-, 20-, and 25-year periods ending in 2013. While the median annualized rate of return failed to meet the 8 percent assumption that most public pensions assume over the 5- and 10-year periods, it was just shy (7.9 percent) over the 20-year period, and it exceeded 8 percent for the 1-, 3-, and 25-year periods. It is important to note that the NASRA data is reporting the median returns, indicating that even though median annualized returns exceeded 8 percent in the 25-year period, the investment portfolios for half of the examined public pension funds failed to meet an 8 percent assumed rate of return.[29]

In September 2013, the nonprofit organization State Budget Solutions published an analysis of state pension funding levels. In its calculations, State Budget Solutions used a 3.2 percent rate of return, the 15-year Treasury bond yield as of August 21, 2013, to discount plan liabilities.

The research found that in all states combined, state public employee pension plans have only 39 percent of the assets they need to cover their promised payments—a $4.1 trillion gap. According to the report, Pennsylvania's public pension plans were 35% funded, making it the 28th most funded state.[30]

Moody's report on adjusted pension liabilities

On June 27, 2013, Moody's Investor Service released its report on adjusted pension liabilities in the states. The Moody's report ranked states "based on ratios measuring the size of their adjusted net pension liabilities (ANPL) relative to several measures of economic capacity." In its calculations of net pension liabilities, Moody's employed market-determined discount rates (5.47 percent for Pennsylvania) instead of the state-reported assumed rates of return (8.00 percent for Pennsylvania's largest plan as of June 30, 2010).[31]

The report's authors found that adjusted net pension liabilities varied dramatically from state to state, from 6.8 percent (Nebraska) to 241 percent (Illinois) of governmental revenues in fiscal year 2011.[31]

The adjusted net pension liability for Pennsylvania in fiscal year 2011 was ranked the fourth highest in the nation.[31] The following table presents key state-specific findings from the Moody's report, as well as the state's national rank with respect to each indicator.

Adjusted net pension liabilities (ANPL) relative to key economic indicators - Pennsylvania
Governmental revenue* Personal income State GDP Per capita
State findings 105.0% 11.8% 11.0% $4,985
National ranking 8th 10th 10th 11th
*Moody's uses governmental revenues as reported in each state's consolidated annual financial reports; this includes not only state-generated revenue, but federal funds, as well.[31]

Commonwealth Foundation report on pension costs
A November 2013 report by the director of policy analysis for the Commonwealth Foundation, a Pennsylvania think tank, analyzed the costs of Pennsylvania’s pension system for the state's citizens.[32] The report found that state and school district contributions would increase from $2.5 billion in 2012 to $6.2 billion in 2016-2017. In the Philadelphia region alone, property taxes are expected to rise between $244 in Penn-Delco and $626 in Chester Upland annually per homeowner, according to the report, due to the rising pension costs. The report recommended placing new employees into a 401(k) model called a “defined contribution” plan.[32] The plan would require workers to submit a portion of their salary towards their retirement, with taxpayers also contributing a particular amount. The report also recommended the curtailing of other state spending, wage reform, and prioritizing guaranteed pension payments over other spending in order to control costs.[32]

2014-2015 cost increase
For the 2014-2015 fiscal year, Pennsylvania is expected to devote $2 billion to state public pensions, including the State Employees Retirement System (SERS) and the Public School Employees Retirement System (PSERS), an increase of nearly $600 million from the 2013-2014 budget and roughly $1 out of every $15 Pennsylvania plans to spend. The increase in pension costs generated several responses from Pennsylvania leaders. "The largest cost and growth in next year’s budget will be pension costs," Senate President Joe Scarnati, stated in December 2013. "To pay the bill will mean that we are forced to flat-fund or reduce-fund many areas of the budget that have already been cut close to the bone." State Representative John McGinnis said, "We in state government have had a shameful history since 2001 producing legislation that short-changes the funding of our public employee pensions...The mistake has always been to not pay the bill." The Corbett administration expressed interest in creating a hybrid pension system to potentially cut nearly $7 billion off the state's total pension bill.[33]

Pension fund management fees

See also: Public pension fund management fees

In July 2013, the Maryland Public Policy Institute (MPPI) and the Maryland Tax Education Foundation released a report detailing the fees paid for the management of state pension systems. According to MPPI, the 10 state pension funds that paid the most in management fees relative to net assets experienced lower returns over a five-year period than the 10 state pension funds that paid the least in management fees. For example, in fiscal year 2012 South Carolina's pension system paid approximately $296.1 million in total management fees (1.31 percent of total net assets at the beginning of the fiscal year) and its five-year rate of return was 1.46 percent. By contrast, Alabama's pension system paid roughly $13.3 million in management fees (0.05 percent of total net assets) and its five-year rate of return was 7.53 percent.[34]

The table below presents the information collected by MPPI for Pennsylvania and surrounding states. For each state's pension system, total net assets are listed (both for the beginning and end of the fiscal year in question), as well as the total amount paid in management fees. In addition, the rates of return for the pension systems are presented. Pennsylvania represented the median total net assets and total management fees compared with surrounding states.

Public pension fund management fees, 2011-2012
State Fiscal year Total net assets at the beginning of the year Total net assets at the end of the year Total management fees Management fees as a percentage of total net assets at the beginning of the year Five-year rate of return for the pension fund
Pennsylvania 2012; 2011 $77,319,283,000 $73,140,758,000 $682,878,000 0.88% 1.00%
Delaware 2012 $7,648,780,000 $7,536,367,000 $47,318,000 0.62% 3.90%
Maryland 2012 $37,592,752,000 $37,178,726,000 $241,489,000 0.64% 0.78%
New Jersey 2012 $81,067,610,282 $77,883,990,040 $224,200,000 0.28% 2.46%
New York 2012 $315,448,861,000 $316,880,795,000 $874,147,529 0.28% 2.91%
1"Three states— Hawaii, Nevada and Rhode Island—were excluded because they hadn’t published CAFRs for fiscal years ending December 31, 2011 or later. West Virginia was excluded because its June 30, 2012 CAFR lacked sufficient disclosure."[34]
Source: Maryland Public Policy Institute, "Wall Street Fees, Investment Returns, Maryland 49 Other State Pension Funds," July 1, 2013


Proposed reforms


Prior to adjourning for the summer, committees in both the House and the Senate recommended bills that proposed to place future state and school employees into defined contribution plans. Governor Tom Corbett, meanwhile, sought more comprehensive reforms to address the current unfunded liability of the state's pension systems. According to The Patriot-News, due to the contentiousness of the matter and the absence of a popular plan, many felt it was unlikely that significant pension reforms could be passed in the fall of 2013.[35][36]

Local public pensions

See also: Local government public pensions

According to the United States Census Bureau, the state has 1,422 locally-administered pension systems.[4]


See also: Public pension disclosure and Governmental Accounting Standards Board
  • SERS publishes actuarial and investment information on its website.[37]
  • Names of recipients and amounts disbursed are not published.
  • The SERS strategic investment plan, which outlines holdings in real estate and public and private holdings, is posted.[38]

Recent news

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Pennsylvania Public Pensions News Feed

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See also

Additional reading

External links


  1. Figures below are compiled by adding up all state pension plans
  2. This figure is derived by calculating the percent difference between the current year's funding level and the system's percent funded from the prior year.
  3. Rank is relative to the 50 state pension programs. "1" refers to the healthiest pension plan while "50" would be the least well-funded plan.
  4. 4.0 4.1 United States Census Bureau, "Public Employee Retirement Systems State- and Locally-Administered Pensions Summary Report: 2010," April 30, 2012
  5. 5.0 5.1 Pew Center on the States, "Widening Gap Update: Pennsylvania," June 18, 2012
  6. 6.0 6.1 6.2 6.3 6.4 6.5 State Employees' Retirement System, "2012 Comprehensive Annual Financial Report," accessed November 19, 2013
  7. 7.0 7.1 7.2 7.3 7.4 7.5 Public School Employees' Retirement System, "2012 Actuarial Valuation Report," accessed November 19, 2013
  8. 8.0 8.1 8.2 8.3 8.4 8.5 Municipal Retirement System, "2012 Comprehensive Annual Financial Report," accessed November 19, 2013
  9. Organisation for Economic Co-operation and Development, "Pensions Glossary," accessed November 27, 2013
  10. United States Government Accountability Office Report to the Committee on Finance, U.S. Senate, "State and Local Government Retiree Benefits: Current Status of Benefit Structures, Protections, and Fiscal Outlook for Funding Future Costs," September 2007. accessed October 23, 2013
  11. American Academy of Actuaries, "Issue Brief: The 80% Pension Funding Standard Myth," July 2012. accessed October 23, 2013
  12. Governing Magazine, " Is There a Plot Against Pensions?" October 14, 2013
  13. 13.0 13.1 State Budget Solutions, "Promises Made, Promises Broken - The Betrayal of Pensioners and Taxpayers," accessed September 20, 2013
  14. 14.0 14.1 Analysis only available for system totals and not individual funds.
  15. Government Accounting Standards Board, "Annual Required Contribution (ARC)," accessed October 17, 2013
  16. Reuters, "Little-known U.S. board stokes hot pension debate," July 10, 2012
  17. State Budget Solutions, "GASB's ineffective public pension reporting standards set to take effect," June 5, 2013
  18. "The Widening Gap Update,” Pew Center on the States, accessed October 17, 2013
  19. The New York Times "Public Pensions Faulted for Bets on Rosy Returns," May 27, 2012
  20. Benefits Magazine "Public Pension Funding 101: Key Terms and Concepts," April 2013. accessed October 23, 2013
  21. Crain's Chicago Business "State teachers pension board lowers expected rate of return," September 21, 2013. accessed October 23, 2013
  22. Huffington Post "California Pension Funds Expect Lower Investment Return," March 14, 2012. accessed October 23, 2013
  23. 23.0 23.1 Governing "Expert: Governments Are Masking Their Pension Liabilities ," October 25, 2013. accessed October 25, 2013
  24. The Washington Post "Kansas’s pension funding gap just grew by $1 billion," September 6, 2013. accessed October 25, 2013
  25. Topeka Capital-Journal "KPERS' unfunded liability rises to $10.2B," September 4, 2013. accessed October 25, 2013
  26. Wall Street Journal "Pensions Wrestle With Return Rates," October 10, 2011. accessed October 23, 2013
  27. The Courant "Promising Too Much On Public Pensions," August 10, 2012. accessed October 23, 2013
  28. Business Wire "NCPERS 2013 Survey: Public Pension Plans Report Increasing Confidence, Lower Costs, Growing Returns," October 22, 2013. accessed October 25, 2013
  29. National Association of State Retirement Administrators "Issue Brief: Public Pension Plan Investment Return Assumptions," October 2013. accessed October 23, 2013
  30. State Budget Solutions, "Promises Made, Promises Broken - The Betrayal of Pensioners and Taxpayers," accessed September 20, 2013
  31. 31.0 31.1 31.2 31.3 Moody's Investor Service, "Adjusted Pension Liability Medians for US States," June 27, 2013
  32. 32.0 32.1 32.2 The Daily Times, "Pa. can't afford to dither on meaningful pension reform," accessed December 24, 2013
  33., "Cash or credit? PA facing $600 million in new pension costs," accessed February 10, 2014
  34. Cite error: Invalid <ref> tag; no text was provided for refs named report
  35. PennLive, "Lawmakers get back to work: Pension reform considered a long shot this fall," September 22, 2013
  36. Reuters, "Pennsylvania lawmakers pass budget but not pension reform," June 30, 2013
  37. State Employees' Retirement System, "Home page," accessed November 19, 2013
  38. State Employees' Retirement System, "Investments," accessed November 19, 2013