Schools, cities, state agencies and other public employers across Oregon will have to pony up an extra $885 million next biennium to fund the state’s public pension system.
That’s about 10 percent higher than previously forecast and a 44 percent increase from the $2 billion per biennium that public employers are currently paying to support the system. And the cost is almost certain to continue climbing, which is prompting a renewed outcry from Republican lawmakers for a reluctant legislature to take up PERS reform again.
The actuary for the Public Employees Retirement System shared an updated valuation of the pension fund’s assets and liabilities at the system’s regular board meeting Friday. The new numbers incorporate the system’s investment returns through the end of 2015, as well as new economic assumptions about future returns and members mortality.
The PERS Board will send employers their new rates in September, though they won’t take effect until July 1.
The news from Friday’s meeting, though widely telegraphed in previous presentations to the board, was sobering. Despite healthy financial markets, PERS investment returns have lagged well behind the system’s assumed rate of 7.5 percent. The Oregon Supreme Court threw out most of the legislature’s money-saving pension reforms from 2013. The PERS Board has tweaked a few underlying economic assumptions to better reflect its real-world experience in the fund.
The result, according to Milliman Inc., is that Oregon’s public pension system now has about 71 cents in assets for every dollar in liabilities, and an unfunded liability of $21.8 billion.
PERS resets public employers’ required payments every two years to pay down any deficit and return the fund to a fully-funded status over a 20-year period.
Even if things go well — meaning PERS’ investment managers achieve their assumed returns of 7.5 percent annually — the actuary told the board that public employer’s required contribution rates will go up by about 4 percent of payroll in 2017, 2019 and 2021, and stay at those higher levels for some time. That would put employer contributions to the system at about $4.5 billion in the 2021-23 biennium, compared with $2 billion in the current biennium.
Higher investment returns could shave the rate increases. Lower would increase them.
But according to John Thomas, a Eugene benefits consultant who chairs the PERS Board, “this is not a situational problem that is going to go away if returns spike a bit.”
“It’s a systemic problem,” he said. “Everything is predicated on a linear 7.5 percent investment return, and that has not been sustainable. It’s a whole different paradigm to what we’ve been use to in the past.”
This year through June, for example, the fund has generated investment returns of 1.24 percent. Last year’s returns were 2.11 percent. And the funds annualized investment return over the last 10 years is 5.91 percent.
PERS investments have historically covered about three-quarters of the system’s benefit payments, and when they fall short, employers need to make up the difference in the form of higher payments.
Next year’s pension cost increase would be a lot worse — as much as $2 billion per biennium — but PERS limits the increase that can take place in any two-year period to protect public budgets from rate shocks. The rules simply defer the cost, however, which accrues interest.
Next year’s pension costs are already a looming headache for public employers, the legislature and taxpayers.
School districts face a $335 million increase in costs next biennium, which Republicans equate to hiring about 2,000 new teachers. State agencies will see their PERS bill go up by $260 million, while other public employers will shoulder $290 million in new expenses.
“Unsustainable and escalating PERS costs will not lead to reducing class sizes, adding school days, or making our communities safer,” Senate Republican Leader Ted Ferrioli of John Day said in a news release sent out Friday.
“We need fair and constitutional PERS solutions that reduce costs, ensure the long-term stability of the system to protect retirees, and allow for investments in education.”
Republican lawmakers have put together a list of money-saving pension reforms that they say are legally viable. But Gov. Kate Brown and Democratic lawmakers ignored the issue in the 2015 legislative session and in this year’s short session.
A popular mantra among Democrats, who are reluctant to cut member benefits, is that lawmakers have done everything legally possible to reduce pension costs.
A union-backed coalition, meanwhile, is pushing a ballot measure in November that would institute a tax on corporations that is projected to raise $6 billion every biennium. Longer term, the PERS cost increases could siphon off a good chunk of those revenues, which are supposed to support education and other services.
“If Gov. Brown, President Courtney, and Speaker Kotek refuse to act before the school year starts, a coalition of education and public safety advocates, schools and local governments, and moderates of both parties will step up and take the lead in solving this PERS crisis,” Ferrioli said.
