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Analysis: Pension changes would result in some savings

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But PERS accrued liability would remain in the billions for decades.


A new analysis says that several proposals would pare, but not reduce significantly, Oregon’s growing unfunded liability for public pension costs over the next few decades.

Assuming that lawmakers passed all of them — and the changes withstood legal tests — the report says that they would shave about one-third of an unfunded actuarial liability of $18 billion projected at the end of 2014. (Based on final data for 2015, that liability figure is likely to be still higher.)

The analysis was prepared by consultants for Milliman, the actuarial firm that contracts with the Oregon Public Employees Retirement System. Findings were made public at a PERS Board meeting Friday (Jan. 29).

“The consultants who worked on this assignment are pension actuaries,” said its authors, Matt Larrabee and Scott Preppernau.

“We have not explored any legal issues with respect to these change concepts. Milliman’s advice is not intended to be a substitute for qualified legal or accounting counsel.”

Although the analysis was conducted at the request of PERS director Steve Rodeman, neither PERS nor Milliman are putting forth their own policy changes to lawmakers, who have the ultimate say over benefit levels.

But business groups floated some proposals Dec. 11 during the Oregon Business Summit, and they have been incorporated into a bill sponsored by Sen. Tim Knopp, R-Bend, and introduced in the current legislative session.

“I am trying to get the public’s attention,” says Knopp, who as House majority leader in 2003 was one of the key players in crafting an overhaul of the system.

Problems and prospects

The system covers about 200,000 active workers — about 95 percent of Oregon’s public workforce — and 130,000 retirees. Although about half the active workers have been hired since August 2003, when lawmakers overhauled the system, the other active workers and virtually all of the retirees are covered by more generous benefits under previous plans.

The Oregon Supreme Court, in opinions in 2005 and 2015, has ruled that changes in the public-pension system cannot be retroactive.

After the court’s 2015 decision disallowing cost-of-living payment reductions on benefits earned before October 2013, Milliman recalculated the system’s unfunded actuarial liability from $9 billion at the end of 2013 to $18 billion at the end of 2014.

For the 925 government employers in the system — state government, counties, cities, schools and special districts — contribution rates are projected to jump from an average of 18 percent to 30 percent of payrolls by 2021-23 to fill the gap.

Unless lawmakers get started now, Knopp says, the looming increase in payroll costs for state agencies and schools — which get the lion’s share of operating costs from state aid — will combine with other factors “to result in a whole lot less” of a public workforce in the 2017-19 budget cycle.

But House Speaker Tina Kotek, D-Portland, says lawmakers are more likely to wait until their 2017 session.

“We passed what we thought was the most legally fair proposal in 2013, and the Supreme Court shot most of it down,” she says. “Senator Knopp has his bill, but that doesn’t mean they are viable proposals.”

A closer look

The analysis warns that adding up projected reductions from all of the proposals would not yield the full totals.

“Instead, the interactions between the various benefit modifications would produce a liability reduction of smaller magnitude than the sum of the reductions shown below,” it says.

“If more than one concept will be incorporated into a legislative proposal, a separate analysis should be conducted to study the combined effects.”

The concepts in brief, and Milliman’s estimates of their projected separate effects:

• Redirection of the 6 percent employee contributions that now go into the Individual Account Program, which lawmakers set up in 2003 for all active workers. The money instead would fund pension benefits for pre-2003 employees ($1.4 billion reduction in liability) and for post-2003 employees ($2 billion), assuming the contributions were redirected starting in January 2017.

• Use of a market rate, which the analysis assumed at 3.5 percent starting in 2017, instead of the PERS assumed rate of return (now 7.5 percent) on long-term investments, that PERS uses to calculate monthly lifetime annuities paid out under Money Match for pre-2003 employees. Total liability reduction is estimated at $900 million to $1.1 billion.

Post-2003 employees are not eligible for Money Match.

• A cap of $100,000 on an employee’s final average salary, which is used to calculate benefits for post-2003 employees. The cap would not be indexed to future inflation. This provision would avert a repeat of the outside contributions that inflated the final average salary of Mike Bellotti, Oregon head football coach from 1995 to 2009. His monthly PERS pension is $41,341, or nearly $500,000 annually.

Total liability reduction ranges from $800 million to $1.2 billion, the smaller figure excluding police and firefighters from the cap. But for accrued liability, the projected reductions are much smaller at $350 million to $500 million.

• Reduced or eliminated use of accumulated unused sick leave by pre-2003 employees to boost their final average salaries — they can now use half that value if their employers participate — or lump-sum payments for accrued vacation by pre-1996 employees. Employees hired after August 2003 are ineligible for either option.

Projected reductions in total liability are $350 million to $700 million, and in accrued liability, $300 million to $600 million. The smaller totals assume cutting sick leave and vacation accruals in half; the larger figures, eliminating their use.

pwong@pamplinmedia.com

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