Pension Reform Becomes a Reality

On November 23, 2010, Governor Rendell signed what is now Act 120 of 2010 which contains significant revisions to the Pennsylvania School Employees Retirement System (PSERS) which impact both employers and employees. 

Of most significance to school districts is the creation of “collars” or limits on the annual increases in the school district’s contribution rates.  For 2010-2011, the employer contribution rate is 5.64% of total compensation for all current employees.  For the next three fiscal years, the employer contribution rates will be 8.72% for 2011-2012, 12.22% for 2012-2013, and 16.71% for 2013-2014. Unfortunately, beginning with 2014-2015, it is projected that school districts will face 21 years of rates over 20% and 27 years of double digit rates.  These projections are based on the assumption that PSERS assets will earn 8% each year.  The contribution rates will fluctuate to the extent that there are more adverse or more favorable investment returns.  For example, for the fiscal year ending June 30, 2010, the return on PSERS investments was 14.59%. 

For the first time for employees, there will be a shared risk element for all new employees that directly connects the PSERS’ investment performance with the employee contribution rate.  New employees hired after June 30, 2011 must pay a shared risk contribution rate of 0.5 percent for every one percent (1%) that the actual rate of return is less than the assumed rate.  This shared risk contribution rate only applies to new employees.  However, to minimize the impact of the shared risk contribution rate, there is a two percent (2%) cap.  For an employee in the T-E class hired after June 30, 2011, the total combined employee contribution rate will be no less than 7.5% and no greater than 9.5%.  Those hired after June 30, 2011 who elect to be in the T-F class to obtain the 2.5% accrual benefit rate will have a contribution rate with a minimum of 10.3% and a maximum of 12.3%.  However, if the PSERS’ actuarial funded status is 100% or greater, the new employee shared risk contribution rate drops to 0%, but the employee will still be required to pay either 7.5% or 10.3%. 

The Act also implements significant revisions to superannuation and employee vesting.  In determining the superannuation age, the Act now requires either age 65 with at least three years of service or a combination of age at retirement and years of service totaling 92, with at least 35 years of accrued service.  Regarding vesting, current employees may vest with only five (5) eligibility points while new employees hired after June 30, 2011 will only vest with ten (10) or more eligibility points.  Also, the Act requires employees who are eligible to purchase service credits to make the purchases at the present value at the full actuarial cost of the increase.  The only exceptions are purchase of service credits for intervening and non-intervening military service.  Finally, the Act, limits the defined benefit to 100% of the member’s final average salary. 

While Act 120 provides some relief to school districts and brings much needed adjustments to the employee contribution rate structure, depending on the return on PSERS investments, future legislative revisions may still be necessary in the future.