After banner year, PA school pension fund still deep in red

1/5/2015

By Eric Boehm | PA Independent

Even after a fantastic year on the stock market, the pension fund for Pennsylvania’s public school employees is deep in the red.

The Public School Employees Retirement System reported in December that it earned 14.91 percent for the past fiscal year, nearly doubling the fund’s 7.5 percent annual benchmark for investment earnings. As a result of the robust year in the market, PSERS’ unfunded liability has declined slightly, but the fund is still owes $35 billion in benefits beyond what its assets can cover.

Source: PSERS fiscal year 2014-15 employer contribution fact sheet

PSERS: Though the numbers will vary from district to district, Pennsylvania’s 500 school districts will be responsible for paying roughly half of the total employer cost each year.

“It was a goldilocks year for investors,” said James Grossman, PSERS’ chief investment officer, in an email to PA Independent. “The reason the returns were so strong was that all asset classes that we invested in had positive returns last year.”

When combined with the unfunded liability from the State Employees Retirement System, Pennsylvania is still facing $50 billion in pension debt.

Such a successful year on the stock market should come as good news to beleaguered pension funds in Pennsylvania and in many other states around the country.

But the good news also reveals the depth of the hole in which PSERS and other pension systems find themselves.

The system entered the past year with a $35.6 billion unfunded liability, which declined to about $35.1 billion by the end of the year. Even if investments were to return nearly 15 percent annually for the next decade, the fund would still be tens of billions of dollars in debt.

The state budget will see no benefits from the higher investment returns in 2014, because contributions to PSERS and SERS are fixed on a schedule set by state lawmakers in 2010.

The state and its 500 public school districts split the retirement costs connected to PSERS. In the budget year that will begin July 1, contributions to PSERS will climb to an estimated $3.5 billion, up from $2.9 billion this year.

Without structural changes to how PSERS and SERS accounting operates and how the state funds the pension systems, both are in danger of becoming insolvent over the long-term, regardless of how strong their investment returns might be, said Rick Dreyfuss, a retired actuary who studies pension issues for the Manhattan Institute, a conservative think tank.

“This is good news, it has to be taken in the context of the broader funding position and overall financial status of the plan itself,” Dreyfuss said.

Most of the debate over pensions in Pennsylvania has focused on giving reduced benefit structures to future employees, but that doesn’t address the far-more-serious problem of the current debt in the system, Dreyfuss warned.

Three credit rating agencies have downgraded Pennsylvania within the past year,largely because of the state’s underfunded pension plans and the state government’s Act 10 rules that continue to shortchange the pension plans year-after-year.

Governor-elect Tom Wolf, who takes office next week, said during the campaign he would favor borrowing heavily to help the state meet its pension obligations to current workers and retirees.

Wolf is likely to find some support among Republican lawmakers for that approach, if he decides to push for it, but so-called “pension obligation bonds” have a questionable track record of success.

While PSERS officials are optimistic about hitting their 7.5 percent annual expected rate of return — an optimism not shared by many observers of public pension funds — they are clear that no one should expect a repeat of 2014 in coming years.

The fund has pursued more aggressive investments in recent years as the unfunded liability has grown larger. More risk in the system means bigger payouts in good years, like 2014, but bigger losses in the event of another financial downturn.

“As a pension fund seeking to generate returns above cash, we do take a certain amount of risk and when risk doesn’t pay off, returns will suffer,” Grossman said.

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