PSRS/PEERS dealing with the economic crisis

PSRS/PEERS meeting summary from January 21, 2009.

A meeting was called to educate the PSRS Board and the education community on how the national economic crisis is impacting the retirement system. Missouri NEA President, Chris Guinther, and Director of Programs and Public Relations DeeAnn Aull were seated at the front table beside PSRS/PEERS Board Members and other education association leaders while experts summarized the problems and answered questions.

It should come as no surprise that PSRS/PEERS investment returns- along with every other pension plan in the United States – have decreased significantly during the past six months. Declining returns were large enough to prompt this special meeting. Even in these difficult times, some special interest groups were poised to push the legislature for benefit improvements. This meeting should have helped them understand that the system needs to recover from current losses and the law prohibits benefit improvement until the contribution rate returns to 10.5%.

So let’s examine some of the information from the meeting:
First – the good news. The PSRS/PEERS system is stable and secure. PSRS assured members that the board and staff are committed to minimizing losses during this economic downturn and in addition over the past year they have established multiple safeguards to ensure that retiree checks go out even in the event of a terrorist attack, tornado, earthquake or some other crisis. They stated that they are equally committed to ensuring the active employees have a stable and secure system to draw upon fifty years from now.

PSRS opened the meeting with a review of the systems investment history, funding history, and contribution rate history. Staff then presented the bad news about declining investment returns. They put this negative information in perspective with long term performance information.

There was some good news related to long term performance. Since 1980 there has never been a five year period with a combined return of less than 5.9%. In fact, in the past 27 years there are only 5 years when the returns were negative numbers. In other words, this is not the first time investment returns have been very disappointing because of an economic downturn. In each case, the economy rebounded and returns exceeded the expected 8% which made up for previous losses.

There was good and bad news with regard to our overall funding status. In spite of the losses of 2008, the system currently remains 83% funded, thanks to a five year average. However, the impact of the 2008 losses could take our funding status dangerously close to the required 80% mark as the good years drop out of the five year average.

Other key points from the meeting are covered in the following Q and A.
How much money does the PSRS System have? On June 30, 2008 the system had a market value of invested assets of about $27.3 billion. In the past six months, that number has declined by $5.8 billion to about $21.5 in invested assets.

Does this loss mean the “sky is falling”? No, but it does raise a caution flag. The system combines asset gains and losses over a five (5) year period to “smooth” or balance the good years with the bad. For example: In the past four years (2004 – 2007), investment returns were $3.6 billion dollars more than the 8% return the system had expected. We celebrated the $3.6 billion in unexpected gains accumulated over the past four years only to find these gains were nearly wiped out by the 2008 single year loss of nearly $3.5 billion in negative returns.

Is there a way to make up for these losses? We can either increase what comes in or decrease what goes out.
What comes in…….there are three ways that money enters the PSRS system: investment returns, employee contributions, and employer contributions. Therefore, to overcome the losses - future investment returns must exceed the 8% expected return. Also, the contribution rate for both the employer and employee can/will be increased to 13.5% in July of 2009. [Note: Missouri law states that the contribution rate cannot increase more than 1% per year]. We must examine how much higher the contribution rate can go before actives – especially beginners – and school districts say “no more”.

Is it time to examine freezing the employee contribution while passing the increase on to employers? What goes out……currently benefit payments are approximately $1.6 billion annually. This cost is expected to grow significantly as salaries increase, people live longer, and larger numbers retire.

What percentage of the system’s annual income comes from investments?
60% - Investment returns
20% - Employee contributions
20% - Employer contributions

Will there be changes if these declining investment returns continue? Yes. Both contribution rate increases and benefits could be re-examined. It is important to note that contract law protects the benefits of current retirees. Attorneys for PSRS indicated they believe contract law protects the benefits of actives for service rendered….BUT benefits could be adjusted for future service and for those not yet hired.

Let’s talk about contribution rates: Despite long-term investment returns above 8%, contribution rates have continued to rise to pay for benefit improvements. In 2004 the employee and employer paid a contribution rate of 10.5% for a total income to the system of 21%. However, the rate has steadily increased and will hit 13.5% for both employee and employer in July 2009 for a combined rate of 27%. Actuaries predict that the contribution rate will continue to increase by 1% per year for several years. If things don’t change, this could create a combined contribution rate of 42% equally split between employee and employer (21% each) by 2018.

Some active benefits that could be examined for change:

1) Retirement eligibility (age 60, 30 years, 25 and Out, vesting).

2) Increased multiplying factor beyond 30 years of service

3) Buy-back costs

4) Interest paid on employee accounts

5) COLA promises for future retirees may need to be adjusted. (All benefits could potentially be examined – but these were mentioned.)

What else could go wrong? There are government agencies that set standards for public pension systems. If the Governmental Accounting Standards Board (GASB) adjusts the actuarial standards for public pension systems, it could negatively impact our actuarial studies creating an increased unfunded liability. This could trigger even greater future contribution rate adjustments or future benefit adjustments. Committees are reviewing the GASB Standards and PSRS is actively opposing changes. Stay tuned.

In summary, Missouri NEA understands the seriousness of the challenges presented at the meeting. Our energy will be spent finding solutions to these problems, rather than creating panic. The PSRS Board will meet again February 9, 2009 and Missouri NEA will be there.

Respectfully submitted,
DeeAnn Aull
Director of programs and public relations