Contribution Rate Set for 2008-2009 School Year

One of the most difficult duties of the Public School Retirement System (PSRS) Board of Trustees is to annually set the contribution rates to be paid by members and school districts during the next fiscal year. As fiduciaries of the PSRS trust fund, the Board has the legal requirement to establish a contribution rate that will adequately fund the benefit promises made to PSRS members.

As required by law, the Board retains an actuarial firm to review the fund at the close of each fiscal year, determine the value of the benefit promises made and calculate a contribution rate to fund those. Each October, the PSRS consulting actuary presents the Board of Trustees with the results of this review in its annual actuarial valuation. This report, what might be called the System’s annual fiscal check-up, assesses the solvency of the Retirement System and determines the level of employer and employee contributions required to maintain or improve the solvency of the plan. Based on information contained in the most recent valuation, the actuary recommended the Board increase each side of the required employer and employee contribution rate from 12.5% to 13.0% for the 2008-2009 school year.

“This year is probably the most difficult decision we’ve had in a number of years,” stated Dr. Phil Wright, PSRS Board of Trustees Chair. “We were given every indication from preliminary actuary reports that we could hold rates this year, which we feel is needed to assist districts and individual active members. This new report presented by the actuaries is extremely disappointing. Now we have our hands tied by statute and as the chief fiduciaries of the System, our responsibility is to the financial well being of the System as a whole. A major disappointment.”

After much discussion and review, the Board voted to accept that recommendation and the PSRS contribution rate will rise effective July 1, 2008 to 13.0%.

The largest factor behind rising contribution rates is the System’s unfunded actuarial accrued liability (UAAL). UAAL essentially means the System has more in liabilities than assets to cover those long-term liabilities. The UAAL is primarily a result of the challenging investment markets of the early 2000’s, legislative benefit increases in the mid- to late-1990’s affecting both active and retired members, and current contribution rates that are below those needed to adequately fund the System (discussed further below).

The June 30, 2007 PSRS actuarial valuation showed a UAAL of $5.3 billion and a required contribution rate of 14.1% (matched by the employer) to fund the PSRS benefits currently in place for PSRS members. While the actuarially required contribution rate is 14.1%, a 2003 law prohibits increasing the rate any higher than 1% total each year (as discussed above, this, in effect, increases the UAAL each year). In order to address the UAAL, the Board must legally continue to reconsider the contribution rate on an annual basis to be certain the System remains adequately funded. While the Board strives to keep the contribution rates as low as possible, governmental accounting standards require that the unfunded actuarial accrued liability be funded over a period not to exceed 30 years.

As previously stated, actuarial valuations are performed annually to determine PSRS’ liabilities and the contribution rates necessary to adequately fund them. The contribution rates could change each year depending on investment returns, the actual demographic makeup of the current and retired members as well as other information. Based on preliminary information supplied by the actuary in August, it was hoped that the current rates could be held constant for 2008-2009 but the final report indicated that such was not possible.

It is important to note that the primary driver for additional contribution rate changes in future years beyond 2008-2009 will be dependent on how much, if any, investment returns can be generated above the System’s actuarially assumed return of 8%. The Board and staff have worked diligently in structuring an investment program that will provide us a competitive rate of return at the lowest possible cost and risk. Results to date have been positive, making the Board hopeful and cautiously optimistic that the current favorable investment climate will continue and above average investment returns can preclude or diminish the need for future increases.

It is important to note that PSRS is, and continues to be, in a very strong financial condition. PSRS is 83.5% pre-funded on an actuarial basis, which is very positive on both an absolute basis and when compared to other retirement plans. Consideration of a contribution rate increase is not something the PSRS Board of Trustees takes lightly but the Board and administration are deeply committed to maintaining the financial solvency and strength of our Retirement System. Increasing the contribution rates slightly today will ensure that future generations of school employees will inherit a System as strong and reliable as the one we have today.

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	Contribution Rate Set for 2008-2009 School Year One of the most difficult duties of the Public School Retirement System (PSRS) Board of Trustees is to annually set the contribution rates to be paid by members and school districts during the next fiscal year. As fiduciaries of the PSRS trust fund, the Board has the legal requirement to establish a contribution rate that will adequately fund the benefit promises made to PSRS members. As required by law, the Board retains an actuarial firm to review the fund at the close of each fiscal year, determine the value of the benefit promises made and calculate a contribution rate to fund those. Each October, the PSRS consulting actuary presents the Board of Trustees with the results of this review in its annual actuarial valuation. This report, what might be called the System’s annual fiscal check-up, assesses the solvency of the Retirement System and determines the level of employer and employee contributions required to maintain or improve the solvency of the plan. Based on information contained in the most recent valuation, the actuary recommended the Board increase each side of the required employer and employee contribution rate from 12.5% to 13.0% for the 2008-2009 school year. “This year is probably the most difficult decision we’ve had in a number of years,” stated Dr. Phil Wright, PSRS Board of Trustees Chair. “We were given every indication from preliminary actuary reports that we could hold rates this year, which we feel is needed to assist districts and individual active members. This new report presented by the actuaries is extremely disappointing. Now we have our hands tied by statute and as the chief fiduciaries of the System, our responsibility is to the financial well being of the System as a whole. A major disappointment.” After much discussion and review, the Board voted to accept that recommendation and the PSRS contribution rate will rise effective July 1, 2008 to 13.0%. The largest factor behind rising contribution rates is the System’s unfunded actuarial accrued liability (UAAL). UAAL essentially means the System has more in liabilities than assets to cover those long-term liabilities. The UAAL is primarily a result of the challenging investment markets of the early 2000’s, legislative benefit increases in the mid- to late-1990’s affecting both active and retired members, and current contribution rates that are below those needed to adequately fund the System (discussed further below). The June 30, 2007 PSRS actuarial valuation showed a UAAL of $5.3 billion and a required contribution rate of 14.1% (matched by the employer) to fund the PSRS benefits currently in place for PSRS members. While the actuarially required contribution rate is 14.1%, a 2003 law prohibits increasing the rate any higher than 1% total each year (as discussed above, this, in effect, increases the UAAL each year). In order to address the UAAL, the Board must legally continue to reconsider the contribution rate on an annual basis to be certain the System remains adequately funded. While the Board strives to keep the contribution rates as low as possible, governmental accounting standards require that the unfunded actuarial accrued liability be funded over a period not to exceed 30 years. As previously stated, actuarial valuations are performed annually to determine PSRS’ liabilities and the contribution rates necessary to adequately fund them. The contribution rates could change each year depending on investment returns, the actual demographic makeup of the current and retired members as well as other information. Based on preliminary information supplied by the actuary in August, it was hoped that the current rates could be held constant for 2008-2009 but the final report indicated that such was not possible. It is important to note that the primary driver for additional contribution rate changes in future years beyond 2008-2009 will be dependent on how much, if any, investment returns can be generated above the System’s actuarially assumed return of 8%. The Board and staff have worked diligently in structuring an investment program that will provide us a competitive rate of return at the lowest possible cost and risk. Results to date have been positive, making the Board hopeful and cautiously optimistic that the current favorable investment climate will continue and above average investment returns can preclude or diminish the need for future increases. It is important to note that PSRS is, and continues to be, in a very strong financial condition. PSRS is 83.5% pre-funded on an actuarial basis, which is very positive on both an absolute basis and when compared to other retirement plans. Consideration of a contribution rate increase is not something the PSRS Board of Trustees takes lightly but the Board and administration are deeply committed to maintaining the financial solvency and strength of our Retirement System. Increasing the contribution rates slightly today will ensure that future generations of school employees will inherit a System as strong and reliable as the one we have today.