Pennsylvania’s Public Pension Crisis Grows

When you assume an investment return rate of 7.5 percent and your actual returns are 3.04 percent you have a problem. If you are the Pennsylvania Public School Employees' Retirement System you have a BIG problem.

This week, PSERS announced an investment return of 3.04 percent for the 2015 fiscal year. In other words, local school districts and state taxpayers will have to find even more cash to make good on retirement promises.

The PSERS system already carries a $35 billion unfunded liability, $39 billion if you look at the market value of assets rather than the actuarial value of assets. This shortfall will add roughly $2 billion to these deficit figures, when the official results are released this December.

Experts note the system's 7.5 percent return on investment assumption is overly optimistic. Chris Comisac over at Capitolwire (subscription) explains:

Wilshire Associates, an independent investment management firm . . . calculated the median return of public plans with more than $5 billion in assets at 3.4 percent, meaning PSERS fell short of that median level.

. . . since the most recent financial market meltdown in 2008-09, PSERS hasn’t had investment returns actuarially valued above 6 percent, with a few below 5 percent. Meaning that since 2008-09, PSERS’ investment returns have fallen short of their target, increasing the system’s unfunded liability.

PSERS is disguising how broken the pension system is by operating under the current investment return assumptions. Without substantial pension reform including compliant funding policies, the unfunded liability will continue to increase and stretch school districts and gobble up state tax dollars, leaving less and less for the rest of state government.

The one silver lining is lower investment fees. For the second year PSERS’ investment expenses have declined, from $558 million in FY 2012-2013 to $455 million in FY 2014-2015, an 18 percent reduction. But $100 million in savings pales in comparison to a liability growing by billions each year.

PSERS overly optimistic investment return assumptions are just one more example of how the system is broken. Pension reform isn't an option as budget negotiations continue; it's a necessity.