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Report: State, local governments face jump in pension contributions

Estimates for specific employers awaits report due to pension board on Nov. 20.

State and local governments are one step closer to learning how much more they will have to spend on pension contributions for public workers in the 2017-19 budget cycle.

Although it will set final contribution rates a year from now, Oregon’s Public Employees Retirement System board was advised Friday that average net rates for school districts will jump at least 4 percentage points — and for other state and local governments, by 3 percentage points.

That amount will translate into the 925 government employers paying a total of $800 million more than they are in the current two-year budget cycle that started July 1 — and that money is likely to be drawn from other operating expenses.

The estimates were generated by Milliman, the actuarial firm that advises PERS.

“We’re back to a similar situation” comparable to 2011, before lawmakers acted in 2013 to reduce the system’s unfunded liability, said Milliman’s Matt Larrabee. The bulk of those changes involved reduced cost-of-living increases for 130,000 public retirees.

But as a result of an April 30 decision by the Oregon Supreme Court that largely upheld a union-backed legal challenge to those changes, Oregon PERS’ funded liability dropped in Milliman’s latest report from 96 to 84 percent — and when some accounts are excluded, liability dips further into the mid-70s.

Milliman is preparing estimated contribution rates for specific state and local government employers for the PERS board meeting on Nov. 20. They will be estimates based on 2014 data. The actual rates that the PERS board will set next year will be based on 2015 data.

Why rates will jump

The projected average net rates of 13.39 percent for school districts and 13.62 percent for other government employers are based on a couple of assumptions laid out in Milliman’s report. A portion of the higher rates required to fund the system will be spread over into the 2019-21 budget cycle, and government employers have set aside part of their unfunded accrued liability in “side accounts” — although not all of them have taken this step since 2003.

Without those assumptions, the report said, school districts would face an average increase in contribution rates from 20 to 29.83 percent, and state and local governments from 17.45 to 25.62 percent.

The average net rates are a blend of much higher contributions for employees hired before Aug. 28, 2003, and less for workers hired after lawmakers overhauled the system. The newer public workers now outnumber those hired before August 2003, but relatively few of them have retired.

Contribution rates to PERS will vary widely, depending on the mix of workers within a specific state or local government. Governments with more pre-August 2003 employees, or with more police officers and firefighters eligible for early retirement, are likely to pay more than those with a workforce of mostly post-August 2003 hires.

While the numbers from Milliman are new, the trends are not, especially given the decision by the Supreme Court to bar retroactive reductions that lawmakers approved in 2013 in annual cost-of-living adjustments for public retirees. The court ruled that reductions in COLAs can apply to benefits earned after mid-2013.

Other factors

Other factors have contributed to a reduction in Oregon’s funded liability for its public pension system, which has slipped from 96 to 84 percent with "side accounts" — and from 86 to 76 percent without them. Unfunded accrued liability is now estimated at $9.5 billion, $5.1 billion of which is attributable to the Supreme Court decision.

Among the other factors are lower investment earnings from the PERS fund in 2014 — those earnings are generated through the Oregon Investment Council and the Oregon State Treasury — and greater projected longevity of retirees based on a new mortality table.

In a separate report, the PERS board learned that the PERS fund stood at $68.5 billion as of Aug. 31, its lowest point in the preceding 12 months. The high point was at the end of March, when it stood at $71.1 billion.

The PERS board on July 31 also reduced the assumed rate of return on investments for the next two years from 7.75 to 7.5 percent — and 2015 earnings, given current fluctuations in the markets, are not projected to meet even that target.

“The message is simply that there is a much higher ceiling that rates are going to hit now,” said PERS Director Steve Rodeman.

“This board has only one lever, and that is (government employer) contributions. The Supreme Court pretty much took the other lever off the table with the benefit changes.”

Of the $800 million projected increase in PERS pension contributions — from $2 billion in the current cycle to $2.8 billion in 2017-19 — state agencies are liable for $225 million, school districts $290 million and other local governments $285 million.

Because the state budget has picked up the lion’s share of school operating costs after Oregon voters limited local property taxes in the 1990s, lawmakers are faced with an additional $200 million liability from school districts.

Rodeman said PERS plans a series of meetings with local officials in advance of Milliman’s Nov. 20 report to explain why pension contribution rates will take a big jump.

Retirees get one-time payments

About 130,000 Oregon public retirees will soon get one-time payments that will represent cost-of-living adjustments required by a decision of the Oregon Supreme Court.

For the bulk of retirees (119,639) who earned their benefits before May 2013, those amounts will be paid at the end of October. The court ruled April 30 that lawmakers could not retroactively pare their annual increases of 2 percent.

For about 7,000 who retired after May 2013 but before January 2014, their amounts will be paid Feb. 1. The final group to be paid will be about 3,800 who retired after Jan. 1, 2014. For these two groups, and future retirees, the court allowed the Public Employees Retirement System to reduce cost-of-living adjustments based on the proportion of their service before and after May 2013.

The total payments of $63.4 million will be drawn from the $600 million available in a Public Employees Retirement System contingency fund.

PERS’ Mary Dunn said some retirees received supplemental payments as part of the 2013 legislation, and those amounts will be deducted from the checks due them. Some may owe money to PERS, but Dunn said PERS will carry out the decision of the court first.