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Governments will pay more into Oregon public pension fund

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Oregon Capital Bureau

State and local government employers will still have to pay out more to support Oregon’s public pension fund in the next two-year budget cycle.

But the increased contributions, which the board of the Oregon Public Employees Retirement System approved Friday, Sept. 30, were cushioned by healthy investment earnings at the end of 2021.

Although the figures do not say much by themselves, the base contribution rate will increase by an average of 1.07% of payroll in the two-year period starting July 1, 2023 — and the net contribution rate will increase by an average 0.68% of payroll. But contribution rates will vary widely, depending on the mix of employees within a government.

Higher pension contribution rates, which are not optional, will mean there is less money for around 800 member governments to spend on employee pay and other benefits and direct services for the public.

PERS is now funded at 80%, or if “side accounts” by some member governments are included, 86%. At the same point two years ago, PERS was at 72% without side accounts, 79% with side accounts. Side accounts, which some employers lack, are amounts of money set aside to cover part of a government employer’s pension liability.

The board changed its policy in 2021 so that increasing the funded status of the system to a specified target of 90% takes priority over lowering contribution rates for government employers.

An analyst with Milliman, the firm that does the actuarial work for PERS, said one other reason for the increases is the board’s decision last year to reduce the assumed rate of return on future investments from 7.2% to 6.9% over the next two years. The board has dropped that rate gradually since 2013, when it was at 8%; it had been at 7.2% for two budget cycles since 2019.

“Since we think we will get less wind in our sails from investment returns in the future, that means we can have a little bit more money coming from employer contributions,” Matt Larrabee told the board.

“We are not lessening our rates in response to good investment results,” he added, because of the board’s goal of 90% funded status.

But rates are “collared,” which means that increases or decreases are limited during any two-year cycle. The board approved a change in 2021 in how rates are calculated for the collar.

How rates shape up

After the board vote, PERS released a 20-page list of the current and proposed rates for each state and local government employer.

Rates are affected by the size of the workforce, when the employees were hired — those hired before August 2003 are covered by more generous pension plans — and the number of police, firefighters and others in public safety, whose benefits are higher than for general employees. (State law defines who can qualify as a public safety employee.)

Larrabee and Scott Preppernau of Milliman focused their presentation on how the changes affect state agencies, which account for around 30% of the PERS total.

The current contribution rates for state agencies are 22.38% for employees in pre-August 2003 pension plans, 17.29% for general employees in the post-August 2003 plan, and 21.65% for public safety employees.

The new contribution rates, which take effect in July 2023 and run for two years, are 22.91% for employees hired before August 2003, 18.28% for general employees hired after August 2003, and 23.07% for public safety employees.

The overall average rate for state government will be 19.8% of payroll.

Assuming an $8.36 billion payroll for the 2023-25 budget cycle, pension contribution costs for state government are estimated at $1.66 billion, up from $1.47 billion in the current two-year cycle.

Employer and employee contributions plus investment earnings from the PERS fund pay for the pensions of about 160,000 public retirees in the system. Oregon’s PERS fund, one of the nation’s largest public pension funds, has cracked the $100 billion mark twice — $100.4 billion in December and $100.5 billion in March. It was at $96.8 billion in August.

Unfunded liability remains

Actual returns on PERS investment by Dec. 31, 2021, were 20%. Unfunded liability for the system dropped from $24.6 billion at the end of 2019 to $20 billion, or from $19.1 billion to $13.4 billion if side accounts are included.

On Jan. 31, when the PERS board learned of the preliminary investment returns for 2021, Chair Sadhana Shenoy said: “This shows that one good year gives us a little bit of respite.”

A July report from Pew says Oregon’s unfunded pension liability amounted to 7.8% of state personal income in 2019, when the 50 states had a collective liability of $1.25 trillion. The average was 6.8%. It was not the worst — 10 states exceeded 10% each, with Hawaii, Illinois and New Jersey at the bottom — or the best. (Washington state’s unfunded liability was less than 1%, putting it among the top five.)

The report says:

“For most states, unfunded pension liabilities are the largest of three major long-term obligations weighing on their future finances, ahead of unfunded retiree health care benefits for public employees and outstanding debt.

“Although still sizable, the gap between what states collectively have set aside and what they owe in public pension benefits narrowed after financial markets surged in fiscal year 2021, according to Pew projections.”

Public pension costs have been a political topic in Oregon for more than 25 years. The Legislature approved a less generous plan for public employees hired after Jan. 1, 1996 — though it was still a defined-benefit plan — and then overhauled the system in 2003 so that all employees would be in individual account plans that blend defined benefits and defined contributions.

As of Dec. 31, Milliman reported that 77.4% of 180,000 public employees are now covered under the post-2003 plan, the remaining employees under the two earlier plans. However, 81.3% of the 160,000 retirees get higher pensions under the pre-1996 plan, and 12.6% under the pre-2003 plan; they are known as Tiers 1 and 2.

In 2019, lawmakers redirected some of the money from the individual account plans created in 2003 to the defined-benefit plans that serve pre-2003 retirees. Public employee unions went to court to challenge that move, but the Oregon Supreme Court upheld the change in 2020.

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