NEWS RELEASE
For Immediate Release
Contact: Ivan Anderson 717-787-1381
SERS Audit Text
PSERS Audit Text
Click here for IFS SERS Report II and IFS PSERS Report II
Comments from the State Employees’ Retirement System
Comments from the Public School Employees’ Retirement System

Auditor General Jack Wagner Urges General Assembly, Governor To Shore Up Two Largest Public Pension Plans

HARRISBURG (Sept. 26, 2006) – Auditor General Jack Wagner said today that the General Assembly and the governor should act immediately to head off a potential funding crisis in Pennsylvania’s two largest public pension plans, the State Employees’ Retirement System and the Public School Employees’ Retirement System.

He also suggested five steps that the General Assembly and the governor should take without delay to help the funds.

“Now is the time to act, to make sure that the state’s pension obligations do not escalate into a financial crisis that threatens the economic competitiveness of Pennsylvania or the long-term prosperity of its residents,” Wagner said. “Time is money.”

Wagner made the comments at a press conference today to announce the results of his performance audits of the two pension funds. The audits were conducted through the Bureau of Special Performance Audits, and were the result of agreements reached in April 2005 that settled a lawsuit between the auditor general and the two pension funds.

Generally, the Department of the Auditor General conducted special performance audits that tested whether the funds were complying with certain policies and procedures. At the same time, Independent Fiduciary Services Inc., a Washington, D.C., firm experienced in analyzing public pension funds, conducted fiduciary reviews that compared the funds’ policies and procedures with best practices at leading public pension funds in other states. IFS prepared two reports regarding each of the funds. Report I, addressing many of the same objectives as the auditor general, is included as an appendix to each of the audit reports issued today by Wagner; Report II on each of the funds, addressing additional objectives not covered by the auditor general, is issued separately.

The reports issued today cover the period Jan. 1, 2001, to Dec. 31, 2004, for both funds.

Wagner said that both funds were managed effectively and professionally. Nevertheless, he identified several areas of administrative weakness that need to be tightened. Among the recommendations:

• Improvements to how individual board members monitor and report conflicts of interest to improve transparency in governance.
• Formalization of professional training for board members.
• Improvements to the structure of internal audit operations to improve independence.
• Changes to state law and fund policies to ensure that all board members are subject to a modern legal standard for judging their investment decisions.

“I strongly urge both boards to implement all of our recommendations in order to strengthen the investment operations of both funds,” Wagner said.

SERS, with about 110,000 active and about 101,000 retired plan members as of the end of 2005, has an 11-member board composed of elected and appointed officials. PSERS, with about 255,000 active and 157,000 retired plan members as of June 30, 2005, has a 15-member board composed of elected and appointed officials.

Wagner said that actuarial records disclosed that neither plan was fully funded at the end of last year. SERS was 93 percent funded and PSERS was 85 percent funded. SERS and PSERS were more than 100 percent fully funded in 2002. But their total assets declined because of stock market losses and a 2001 decision by the General Assembly to increase employee retirement benefits while not addressing employer contributions, Wagner said. The action appeared reasonable at the time because of favorable economic conditions.

Because of increased pension benefits enacted by Act 9 of 2001, investment losses, and low employer contributions, each pension plan’s total assets were lower at the end of 2005 than in 2001. Auditors said the two pension plans were underfunded by an aggregate $11 billion, with PSERS accounting for about $9 billion of the shortfall.

Wagner said that, without action, the shortfalls will begin to widen significantly by 2012, when the number of retired state employees is projected to expand from about 101,000 to about 115,000 and the number of retired public school employees is expected to widen from about 157,000 to 210,000.

According to the audits, the state government’s contribution to the SERS pension plan may rise eightfold, to as high as 23 percent, by 2013. In addition, school districts contributing to the PSERS pension plans face up to a fivefold increase in contribution rates, to 22.52 percent, by 2013.

Wagner suggested five steps that the General Assembly and governor should consider taking immediately. They were:

• Impose a moratorium on adding new retirement benefits until the pension funds’ shortfalls are fixed.
• Return the vesting period to 10 years, from five years, for new hires.
• Identify other sources of revenue, such as gaming income and any other new funding sources that may be available in the future, to help fund pension costs.
• The General Assembly should establish a rainy day fund that would make additional contributions to the pension funds during years of budget surpluses.
• The General Assembly should pass a statute that requires the commonwealth to make annual contributions to SERS beyond 2007.

“A pension solution will not be easy or painless,” Wagner said. “But whatever the General Assembly, the governor, and the pension funds do, they should strive to meet two objectives: first, that the solution is financially prudent; and second, that is fair to employers, retirees and taxpayers alike.” The full reports, which include comments from the funds and IFS, are available at www.auditorgen.state.pa.us.

Auditor General Jack Wagner is responsible for ensuring that all state money is spent legally and properly. He is the Commonwealth’s elected independent fiscal watchdog, conducting financial audits, performance audits and special investigations. The Department of the Auditor General conducts more than 5,000 audits per year. To learn more about the Department of the Auditor General, taxpayers are encouraged to visit the department’s Web site at www.auditorgen.state.pa.us.

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