HARRISBURG, PA – The PA Public School Employees' Retirement System (PSERS) Board of Trustees today certified an employer contribution rate of 35.26% for the upcoming fiscal year 2022-2023
(FY 2023) which begins July 1, 2022.
The FY 2023 employer rate is 0.92% higher than the current rate of 34.94%. The increase is lower than previous projections the System provided employers earlier in the year. The smaller than expected increase was the result of the System's strong investment returns and its positive membership demographic experience outlined in the June 30, 2021 Actuarial Valuation the Board also approved on Friday.
The certification marks the seventh consecutive year the employer rate will provide the full actuarially required contributions, which are necessary to pay down the System's long-term pension debt. That debt payment makes up more than 80% of the newly certified employer contribution rate. The debt was caused by years of suppressed employer contributions, unfunded benefit enhancements and two major market downturns since 2000.
"More than a decade ago, Act 120 began the lengthy process of gradually increasing the employer contribution rate to pay down the debt to get PSERS on more sound financial footing," said Sen. Pat Browne, R-Lehigh, chairman of PSERS Budget/Finance Committee. "PSERS latest actuarial and investment figures show the Act 120, as well as Act 5 of 2017, are working thanks to PSERS debt management practices and the budgetary fortitude of the Commonwealth and school employers."
Total school employer contributions, which is a product of the contribution rate and payroll, is estimated to rise by $119 million to $5.1 billion in FY 2022-23. The estimated increase in contributions is $77 million lower than previously projected. The Commonwealth directly reimburses school employers for at least half of the total employer contribution rate.
Aside from the employer contributions, PSERS is funded through mandatory member contributions and investment returns. Employee contributions range from 5.25% to 10.30% of their pay depending on their membership class and when they joined PSERS. Members are expected to contribute an average of 7.52% percent or approximately $1.09 billion in FY 2022-23.
PSERS' net investment return added $14.8 billion in net investment income to the Fund for FY 2021, which ended June 30, 2021. That return helped push up the System's actuarial funded status slightly (59.2% to 59.6%) as PSERS recognizes investment returns over 10 years for actuarial funding purposes. Its market value funded status increased at a higher rate (54.4% to 63.9%) since the strong returns in FY 2021 were fully recognized in FY 2021. Historically, investment income has provided 60% of PSERS funding.
The unfunded accrued liability increased to approximately $45.5 billion in FY 2021 due to the Board's recent adoption of new actuarial and economic assumptions. That liability, however, is expected to fall in the future as the System's nearly 25% investment return is recognized using10-year smoothing and the employer normal cost, which declines from 7.20% to 6.07% in FY 22-23, continues to decline even more in the future due to Act 120 and Act 5. Additionally, the System's funded levels are expected to continue their upward trajectories and could approach 82% by FY 2030, and future employer rate increases are expected to remain lower than the national inflation rate barring any major sustained economic downturns or change in the Commonwealth's budgetary practice of paying the full actuarially required rate.
"While employer contribution rates remain high, full annual funding and favorable investment returns are making a positive difference on the financial health of PSERS," said PSERS Trustee Eric DiTullio, who is elected by school board members and is PSERS Budget/Finance Committee vice chairman. "As noted in today's actuarial presentation, future employer rate increases are anticipated to be smaller than past projections and that is welcome news for school employers."
About the Pennsylvania Public School Employees' Retirement System
PSERS, founded in 1917, began operations in 1919 to oversee a statewide defined benefit pension plan for public school employees. PSERS' role expanded upon the passage of Act 5 of 2017 to include oversight of two new hybrid benefit options consisting of defined benefit and defined contribution (DC) components and a stand-alone DC plan. As of June 30, 2021, PSERS had total net assets of $72.5 billion and a membership of about 248,000 active, 243,000 retired school employees and 27,000 vested inactive members.
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