SALEM — State and local governments will soon know how much more each of them will have to pay into Oregon’s public pension fund in the next two-year budget cycle.
Combined, they will have to come up with some $885 million more, due to a court decision overturning most of a pension benefits cut passed by the Legislature, plus tepid investment returns.
Based on a report presented last Friday to the Public Employees Retirement System Board, their total contributions to the fund will jump from $2 billion in the current cycle to $2.9 billion in 2017-19.
Board Chairman John Thomas warns there will be similar jumps in at least the next two budget cycles — through 2021-23 — because government agencies would be unable to absorb the full increases in a single cycle.
“There is only so much we can assess (employers),” Thomas says. “The rest is kicked down the road. That is the reason this is not going to go away for probably the next 20 years.”
The pension cost increases are likely to eat into money available for other programs and for employee pay increases.
The report says the projected increases amount to $260 million for state agencies, $335 million for schools, and $290 million for all other government employers.
However, the possible hit to the 2017-19 state budget is likely to be close to $500 million, if the state continues to pick up two-thirds of the operating costs of school districts.
Senate Republican Leader Ted Ferrioli of John Day renewed his call for legislative action to curb future public pension costs.
“Unsustainable and escalating PERS costs will not lead to reducing class sizes, adding school days, or making our communities safer,” he said in a statement released before the PERS Board heard the report. “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.”
Individual rates due
Based on the report prepared by Milliman, the system’s actuarial consultant, the board is scheduled Sept. 30 to approve specific contribution rates for each of the 925 government employers, which will take effect when the new two-year cycle starts on July 1, 2017.
The rates paid by each government will vary based on three factors: the number of workers hired before and after August 2003, when lawmakers set less generous pension benefits for new hires; their share of public safety employees, who qualify for greater benefits, and whether they have set aside money, known as “side accounts,” to cover part of their future pension liabilities.
School districts are likely to face higher-than-average rates, and most state and local governments less than the average.
State and local government employers received preliminary rates several months ago, in an earlier report by Milliman based on 2014 data.
Friday’s report, which is based on an analysis of 2015 data, will lay the groundwork for the final rates.
“Most employers, particularly in the state and local government retirement pool, do not pay the average,” says Milliman’s Scott Preppernau.
Tthe system’s average “collared” net rate will rise by roughly one-third, from 10.61 percent to 14.23 percent of payroll. That’s roughly the same cost as giving employees a 3.6 percent pay raise. Ninety-five percent of state and local governments’ 200,000 employees are covered by PERS.
The rate is “collared,” because government employers will face similar increases spread over the next two budget cycles, through 2023. The practice of collaring cushions the effects of a big increase over two or more budget cycles.
Unfunded liability grows
Oregon’s PERS obligations had been funded at 86 percent at the end of 2013 — among the best in the nation — but two years later, it’s down to 71 percent. (With side accounts included, the numbers are 96 percent and 79 percent.)
PERS’ unfunded actuarial liability over the next 20 years — the shortfall in funding future obligations — more than doubled. At the end of 2013, it had been $8.5 billion — excluding the money in side accounts — but Milliman says it is now $21.8 billion as the end of 2015.
A big chunk of the new liability ($5 billion) resulted from a 2015 decision by the Oregon Supreme Court, which ruled that lawmakers cannot retroactively pare cost-of-living increases to 130,000 retirees based on benefits earned before 2013. That’s when the Legislature agreed to make those reductions.
The court decision did not affect 2015-17 contributions by government employers, whose rates were set by the PERS board in 2014, before the court ruling.
Although post-August 2003 hires account for just under half of Oregon’s 200,000 public workers, greater pension costs are incurred for those hired before then — including virtually all of the current 130,000 retirees.
According to the Milliman report, most of the new increase in unfunded liability ($2.6 billion) came from weak returns on PERS investment. The fund gained 2 percent in value last year, far short of the assumed rate of 7.5 percent used to set pensions. The PERS Board reduced the assumed rate from 7.75 percent last year.
Also, retirees are living longer than forecast, accounting for a $300 million increased gap.
As of June 30, the PERS fund held investments valued at $68.9 billion, down from $70.4 billion a year ago, but up from $66.2 billion in February.
Investment earnings account for about 70 percent of what PERS pays out to retirees, and contributions from government employers supply most of the rest.
Although the stock market has improved in 2016, PERS Board Chairman Thomas says the unfunded liability could grow even more if actual investment returns fall short of the assumed rate this year.
“Assumptions for the future of capital markets are not as they were three or four years ago,” Thomas says. “So there could be the likelihood of an adjustment.”