The Commonwealth of Pennsylvania's two main pension plans, SERS and PSERS are staring at a daunting liability. According to actuarial methods the unfunded liability for these two plans is $39.5 billion. I calculate, using a risk-free discount rate, that it is $116 billion. Lawmakers know they have a serious problem on their hands.
Last week I testified at the statehouse on the matter of reform. What is interesting to the current debate in Pennsylvania is how central proper valuation is to establishing a responsible funding policy for defined benefit plans. Like many states, in the boom years, Pennsylvania lawmakers were led to believe the plans were overfunded. But this was really only an artifact of using the expected return on assets to value the liability and thus calculate the annual contribution.
Source: Commonwealth of Pennsylvania State Employees Retirement System (SERS) and author's calculations
Due to rapidly rising contributions, known as the "Rate Spike and Plateau", in 2010 lawmakers chose to "collar" employer contributions. They artificially limited the government's normal cost contribution to the plans and shifted the costs onto the amortization of the unfunded liability. Act 2010-120 instituted an "actuarial fresh start for amortizing liabilities." The end result is not a savings but a shifting. Contributions will still rise steadily placing greater strain on Pennsylvania's budget.