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Agency bracing local governments for jumps in pension costs

Advisory rates will be disclosed Nov. 20; court decision a key factor in increases for 2017-19.

School and local government officials are being prepared for the bigger shares of payrolls, amounting to $800 million, that they will have to contribute to Oregon’s public pension system in the 2017-19 budget cycle.

A shortened version of that presentation was offered at Wednesday’s meeting of the Oregon Investment Council, whose five members oversee earnings generated by the $70 billion Oregon Public Employees Retirement Fund.

Those earnings account for more than 70 cents of every dollar paid out in pension benefits. But they are not enough to cover a projected gap that widened with an April 30 decision by the Oregon Supreme Court.

The court ruled that while lawmakers could reduce future cost-of-living payments as of mid-2013, those reductions cannot apply retroactively to most of the 133,000 public retirees, who will continue to receive a maximum of 2 percent annually. For those who retire after mid-2013, the 2 percent maximum will apply to their pre-2013 employment, and 1.25 percent for service after mid-2013.

“No one ever says let’s pay PERS more,” says Steve Rodeman, director of the public pension system.

“But what the Supreme Court clearly said, unanimously, is that you cannot touch benefits that are owed to people who are already in the system. The Legislature cannot touch the big problem.”

The decision boosted the system’s unfunded actuarial liability over 20 years by $5.1 billion — and contributed to a gap that widened from $8.5 billion at the end of 2013 to a projected $18 billion at the end of this year.

With investment earnings in 2014 falling short of the assumed rate of return — and with a July 31 decision by the PERS board to reduce that assumed rate from 7.75 to 7.5 percent for the next two years — Rodeman says the only alternative is to raise contribution rates for the 925 government employers in PERS.

Rodeman and the PERS staff are on a circuit of meetings with government employers across Oregon through Dec. 4. Several meetings will be in the metro area, including one at 1 p.m. Nov. 9 at PERS headquarters in Tigard.

Advisory rates for specific governments will be disclosed at a Nov. 20 meeting of the PERS board. Those rates will be based on 2014 data, and are being prepared by Milliman, the actuarial consultant used by PERS.

The board will adopt actual rates for the 2017-19 budget cycle in fall 2016, based on 2015 data.

While average contribution rates are projected to go up about 4 percentage points for schools and 3 percentage points for other local governments, those will translate into far larger increases in payroll costs – between 15 and 20 percent.

Rates for specific governments will vary depending on their mix of employees hired before and after August 2003 — when lawmakers overhauled the public pension system — and their proportions of general service and public safety employees.

For state agencies, the projected increase in pension costs will amount to $225 million in 2017-19; for school districts, $290 million, and for other local governments, $285 million. Schools may have some of their costs absorbed by the state budget, which pays the lion’s share of operating costs for the 197 districts.

“Ultimately, the taxpayers are paying the deficit,” says Rukaiyah Adams, vice chairwoman of the Oregon Investment Council.

“Or they will see a cut in services,” Rodeman responded.

But shrinking public payrolls may not help. Rodeman says if their total payrolls go down, governments will have to spread higher costs over smaller bases.

Rodeman says those higher costs will continue into the 2019-21 budget cycle because the rate increases are likely to be spread over a couple of cycles, rather than all at once.

PERS now has more than 200,000 active employees, about half of which fall under the less generous post-August 2003 pension plan. But about 100,000 employees hired before August 2003 will still account for the highest share of future pension costs. Rodeman says that even in 2045, a projected $2 billion will be paid out to pre-1996 employees and their beneficiaries.

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