State officials say Oregon cannot earn enough through investments to buy its way out of billions and billions pending in public-pension liabilities, even if the U.S. economy under President Donald Trump grows much faster than it has in recent years.
John Skjervem, Oregon's chief investment officer, says long-overdue increases in interest rates — which the Federal Reserve has held close to zero until last year — are likely to slow any accelerated economic growth.
Meanwhile, the projected 20-year actuarial liability of the system is close to $22 billion — and the pension fund is $70 billion.
Skjervem told a Friday Forum of the City Club of Portland that Oregon cannot do much about large-scale economic changes.
"We take the returns that are available in global financial markets … and if we are really good, we add a little bit extra."
He likened it to take-and-bake pizza.
"You order a pizza that comes with the crust, the sauce and the cheese," he said. "We — me, my staff, the Oregon Investment Council — put the toppings on it. If we are good, we put pepperoni, olives and mushrooms. If we are bad, we put anchovies on it.
"If the crust, sauce and cheese are not good, there is really no control."
Oregon's public-pension fund, one of the nation's largest, earned 6.9 percent in 2016. Although its national ranking is pending this week, its performance of about 2 percent in 2015 — not a good year generally for financial markets — led public-pension funds.
Skjervem said over the past 10 years ending in 2015 — he has been chief investment officer at the Oregon State Treasury for four — Oregon's performance has led public funds of its type.
"There isn't another gear on the investment side," Skjervem said. "Where do you go from No. 1?"
Oregon was among the first states to invest in the 1970s and the Oregon Investment Council — the state treasurer plus four members appointed by the governor — still observes a prudent-person rule for investments, which have diversified over time.
Friday's program was the first of two to explore the Public Employees Retirement System (PERS), which was the subject of a City Club research report in 2011. The Feb. 17 program will feature a panel to explore solutions and effects.
Good, but not enough
Investment earnings account for about $7 of every $10 PERS pays in benefits. Most of the rest comes from contributions by the 900-plus government employers.
The public-pension fund topped $70 billion in December and has recovered from its low point in March 2009, when the crash of financial markets caused a loss percent in fund value.
But earnings performance during the past two years lags behind the assumed rate of 7.5 percent set by the PERS board in 2015.
The board was overhauled in 2003 so that three of its five members have no direct ties to the system, unlike previous boards. There is one public retiree and one public manager.
Once fixed at 8 percent for more than 30 years, the board reduced the rate to 7.75 percent in 2013, and to the current 7.5 percent in 2015. The board will set a new rate in July for the next two years — and a lower rate only increases the system's liabilities.
Coupled with greater longevity among Oregon's 130,000 public retirees and a 2015 decision by the Oregon Supreme Court barring retroactive reductions by lawmakers in annual cost-of-living increases, the system's 20-year liability has ballooned to almost $22 billion.
"It's like a mortgage," said John Thomas of Eugene, PERS Board chairman. "If you are not paying the interest as it should be paid and your interest is continuing to accrue, you are building up (a burden) down the road."
Given all those factors, PERS executive director Steven Rodeman said, "you do the math."
The PERS board boosted pension contribution rates by government employers for the two-year state budget cycle that starts July 1 — and additional rate increases will be spread over the next two budget cycles through 2023.
Total contributions will jump from about $2 billion in the current budget cycle to almost $2.9 billion in 2017-19 — and accounts for a sizable share of the $1.8 billion gap in the next state budget.
The firm that does actuarial work for PERS, Milliman, projected in November there is a one in two chance that contributions will reach 30 percent of public payroll costs in a few years.
Asked by a Parkrose High School student who was one of the City Club's Civic Scholars what that will mean for students, Rodeman said "it is obviously a diversion of resources" that otherwise would go to teachers and school programs.
During the question-and-answer period, the panel discussed the possibility of converting the system into a purely defined-contribution plan, under which individual workers assume the risk of investing for retirement, such as a 401(k) plan that is increasingly common in the private sector.
Such a shift was proposed in 2003, but lawmakers chose not to make it part of an overhaul of the system, which for public workers hired after August 2003 blends a traditional defined-benefit plan and a defined-contribution plan. Almost half of Oregon's 200,000 current public workers are covered by that blend, although pre-2003 workers with more generous benefits account for two-thirds of pension liabilities.
PERS Chairman Thomas said he doubted the board would endorse such a change, which would be up to the Legislature.
"It will not provide sufficiency equal to what we currently get," he said.
Skjervem said the size of Oregon's public-pension fund works for retirees and current public workers.
"The beneficiaries of the PERS system get access to the best managers in the world," he said. "They can never get that access on their own through a 401(k)."
Story revised to move liability projection of $22 billion closer to top.