Investment returns for the Public School Employees' Retirement System were half of what was budgeted for the fiscal year ending in June.
The lower rate of return means that the pension system's unfunded liability increases, Jeffrey B. Clay, PSERS executive director, told The (Scranton) Times-Tribune during an editorial board meeting Tuesday.
And with returns of 3.43 percent instead of the 7.5 percent the fund budgeted, the loss will eventually need to be covered by additional earnings or an increase in contributions by employees or school districts. PSERS unfunded liability is now $26.5 billion.
As school districts brace for the "pension crisis," with contribution rates increasing from last year's rate of 8.65 percent to more than 26 percent in five years, superintendents have feared their districts will near bankruptcy.
PSERS is funded through investment earnings and employer and employee contributions. Investment earnings are the largest source of funding.
But pension reform, which is likely to be a major issue addressed by the Legislature in the coming year, will not solve how to pay for the system's unfunded liability, Clay said.
The system's underfunding occurred because of a variety of short-term and long-term causes, including two recessions, benefit enhancements and the underfunding of PSERS by employers, Clay said.
While some reforms have been made to the system, including a 2010 reform that increases employee contributions, a long-term solution must be found, he said.
Any reforms made would not affect the benefits of current employees because of case law regarding the contract clause of the Pennsylvania Constitution, Clay said. Even if a court challenge is successful, it will not resolve the current problem of the system being underfunded, he said.
PSERS is now a defined-benefit plan, which means regardless of investment performance, members know how much their benefits will be. Reform could include creating a hybrid plan that combines a defined-benefit plan with a defined-contribution plan, which is like a 401(k).
"All options are on the table," Clay said.
Solutions to the funding problem could include finding a dedicated funding source or one-time cash infusions from the sale of assets. It is unlikely the system can resolve itself through investment earnings alone, Clay said.
On another note, the system has started to see the effects of teacher furloughs across the state. The fiscal year ending in June was the first in which the number of PSERS enrollees and their total salaries both decreased, Clay said. PSERS has 589,000 members.