Inflation, expenses, wages, investments to be considered

While some state boards take a break, the Public Employees Retirement System governing board will begin the process of determining the contribution rates that its 925 government employers will have to pay in the 2017-19 budget cycle.

The board has been told that in the aftermath of the April 30 decision by the Oregon Supreme Court against retroactive cost-of-living adjustments, contribution rates will go up for state and local governments — and even more for school districts.

Rates for the current two-year budget cycle were set last fall, and the court decision does not affect them.

About 95 percent of Oregon’s public employees are covered by PERS.

The board already has begun its consideration of what will lead to specific rates. But at its meeting July 31, the board will first decide on the economic and investment assumptions that its actuarial firm (Milliman) will use in crunching the numbers supporting the rates.

Among the economic assumptions to be decided:

• Inflation rate: The current 2015-17 cycle assumes a long-term rate of 2.75 percent annually. Milliman’s preliminary recommendation is to reduce that rate to 2.5 percent annually, more in line with the 2.54 percent that Social Security has for a 30-year period.

• Real wage growth: The current cycle assumes a rate of 1 percent annually, and Milliman recommends no change.

• Plan expenses: Milliman recommends $33 million for the plans covering employees hired before August 2003, and $5.5 million for the plan covering employees hired afterward.

There is one other big number for the PERS board to consider: The assumption for long-term return on investments, which had been 8 percent from 1989 until 2013, when the board reduced it to 7.75 percent.

This number is important because investment earnings account for 73 cents of every dollar paid out in PERS benefits. The remaining 27 cents comes from contributions from government employers. The less that comes from earnings means more comes from contributions.

At its May 30 meeting, the board received three estimates of what that number should be: Milliman, 7.05 percent annually over 20 years; Callan, the firm that works with the Oregon Investment Council, 7.45 percent annually over 10 years; and Horizon, based on a 2014 market survey, 7.32 percent annually over 10 years.

The PERS board sets that assumption, although the Oregon Investment Council oversees investment policies.

Once the PERS board decides on the assumptions July 31, Milliman will present an “advisory” actuarial valuation in September, and “advisory” contribution rates for individual employers in November. Those will be refined so that the board adopts a rate-setting actuarial valuation in July 2016, and actual contribution rates in September 2016.

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