Public pension costs projected to reach 30 percent of payroll

Oregon’s public-pension contribution rate has an 80 percent likelihood of exceeding 30 percent of payroll within the next few years, according to an analysis presented to the system’s governing board.

The projection was offered by Milliman, the firm that does the actuarial work for the Public Employees Retirement System, as the agency and lawmakers consider how they can deal with rising costs.

Those increased payroll costs will mean less money available for other government services, or potentially higher taxes.

The PERS board and agency staff say that policy changes are up to the Legislature, but through Milliman, they can analyze potential effects of various proposals. Milliman has offered such reports already.

A legislative work group has reviewed proposals for the 2017 session, which gets down to business starting Feb. 6.

The base rate set by the board for employer contributions the 2017-19 budget cycle is already at 20.8 percent. Although none of Oregon’s more than 900 government employers pays that rate, it is an indicator of upward trends – more than 3 percentage points greater than the current rate.

Actual rates paid by employers hinge on the mix of employees hired before and after August 2003 – when lawmakers made pension benefits less generous for future workers – and the employer’s proportion of public safety employees, who qualify for greater benefits.

The board on Sept. 30 set final rates for the 2017-19 budget cycle, which starts in mid-2017. Those figures are close to the preliminary rates projected about a year ago, so government employers have had time to prepare for the increases.

Although the state budget cycle is for two years, virtually all local governments budget for a single year.

The base rate actually would have been up to 29 percent, but the rate was “collared,” so the increase is spread out over the following two-year budget cycles in 2019-21 and 2021-23.

Although government contribution rates are limited this cycle, the PERS board said the full amounts are necessary to make up the gap between investment earnings — which account for seven of every 10 dollars paid out — and promised pension benefits.

Board Chairman John Thomas said Oregon has no intention of underfunding the system, unlike what has happened in states such as Illinois and New Jersey.

“As a board we are going to continue to stay current with the actuarial liabilities, as far as promised benefits are concerned,” Thomas said.

Still, a combination of factors has led to a growing long-term actuarial liability of $22 billion for Oregon PERS and a decrease in funded status to 71 percent as of the end of 2015. Funded status was 96 percent at the end of 2013, when lawmakers made further changes in the system, and 84 percent at the end of 2014.

A 2015 decision by the Oregon Supreme Court struck down the heart of 2013 legislation that would have pared cost-of-living increases for about 130,000 current retirees. The court ruled that the reductions cannot be applied to benefits earned before 2013, so $5 billion in projected long-term savings were nullified.

The court upheld a provision barring out-of-state retirees from collecting payments intended to offset Oregon taxes on their pensions. But that provision will result in a fraction of the savings envisioned from the reduced cost-of-living payments.

Among other factors in Oregon PERS growing liability are investment returns lagging behind the assumed rate of 7.5 percent for the next two years — the board dropped the rate in 2015 from 7.75 percent — and updated mortality tables based on retirees living longer.

Current retirees account for about 64 percent of long-term liabilities, and still-active workers hired before the August 2003 changes, 25 percent. But almost half of Oregon’s 200,000 current public employees are under the post-August 2003 pension system.

Steve Rodeman, who became PERS executive director in fall 2014, quoted an observation by his predecessor, Paul Cleary, to put recent developments into context: “Nothing very good — or very bad — lasts for very long.”

pwong@pamplinmedia.com

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