The Oregon Public Employees Retirement System ended last year with a $28 billion unfunded liability to meet its projected pension obligations. Cutting the deficit would require some combination of higher investment returns or raising the amount of money contributed by employers like schools, libraries and local governments.
Lawmakers and policymakers for the state’s PERS Board for years have taken steps to keep financial contributions by employers in check. Meager investment returns could complicate those efforts, although consultants for the state have recently become more bullish on the future.
Oregon’s pension fund lost 1.55 percent of its value last year and has increased only 3.86 percent this year through August, the system’s actuary told members of the PERS Board at their regular meeting Friday. State officials projected 6.9 percent gains in each year. Higher expected payroll growth also increased projected liabilities, further widening the funding gap.
Oregon’s pension system was nearly fully funded before the Great Recession but its funding deficit has hovered at or above $20 billion for the past eight years. This despite investment returns that have averaged nearly 10 percent annually since that recession, including a massive 20 percent gain two years ago that sliced Oregon’s unfunded liability down from its previous high of $28 billion and raised hopes of some cost relief for public employers.
Doug Berg, a retired information technology consultant who for years has closely tracked PERS obligations, submitted written public testimony for Friday’s meeting. As he has in the past, he criticized the board for squandering opportunities to shore up the system’s funded status earlier by failing to adequately raise employer contribution rates when investment returns were good.
“Just one year of bad returns, coming at a time of inflationary pressures, has erased what meager progress there was in taming the unfunded liability, underscoring how easily the system can fall into crisis,” he wrote.
The PERS board doesn’t respond to public comments at its meetings. And if board members have concerns over the investment returns or their potential impact on public employers’ budgets, none voiced them on Friday.
Oregon’s pension fund includes a vast array of investments managed by the Oregon Treasury and outside investment firms. Its negative return last year is rooted in poor performance in publicly traded stocks and bonds, and a flat performance from private equity partnerships, Treasury data shows. Those outcomes were partially offset by strong performance of its real estate investments and some of its other smaller asset classes.
Last year was a poor one for financial markets globally, driven by a surge in inflation, a spike in interest rates, volatile commodity prices and the war in Ukraine.
Oregon’s 2022 investment return figures have been available for some time, but Friday was the first time the actuary, Milliman Inc., presented the board with an early heads up on how they could impact public employers in the next budget cycle.
About three quarters of members’ retirement benefits have historically been funded by the system’s investment portfolio. But to make up the funding deficit, employer contribution rates have also been pushed to historic highs in the last decade and now stand at more than 25 cents of every payroll dollar systemwide. Friday’s presentation suggested there was more budget pain to come.
The PERS Board resets those employer contribution rates every two years. The rates bumped up again in July, despite sturdy investment returns in 2020 and 2021. And rates for the next two-year budget cycle, starting July 1, 2025, will be based on a valuation of the system’s assets and liabilities at the end of this year, including full year investment returns.
Based on the financial picture at the end of 2022, Milliman told the board that it could expect average contribution rates for the system’s 900-plus employers to rise by 1.7 percent of payroll, pushing the average rate above 27 cents in every payroll dollar. That would be their highest levels ever and require an extra $1.3 billion in contributions from employers in the next two-year budget cycle – money that would otherwise be available to spend on public services.
At the meeting Friday, the board also adopted new actuarial assumptions that will be used in the upcoming rate setting period, including its best guess on what returns its investments will generate over the next 20 years. The assumed earnings rate is the lynchpin actuarial assumption in the system, used to calculate the present value of its liabilities, older members’ benefits and, by association, the contributions that government employers must make to the system.
Since 2014, the board has gradually ratcheted down the expected rate of return from 8 percent to the current 6.9 percent, based on estimates by consultants predicting lower returns. But that’s a painful process, as each time it lowers the rate, it increases the present value of the system’s liabilities and its funding deficit, which leads to even higher contribution rates for employers.
This time around, the board decided unanimously to stand pat and maintain the 6.9 percent assumption for the next two years. Board members described the decision as conservative in light of projections from investment consultants that, for the first time in years, suggest the pension fund’s average returns could be higher than its current assumed rate – thanks in large part to inflation driving higher interest rates on bonds.
Scott Winkels, a lobbyist for the League of Oregon Cities, said many of his members are already facing structural budget problems that an increase in pension costs will exacerbate. Courts have largely slammed the door on further legislative reforms to the pension system to save money, he said, so employers are hoping last year was an anomaly and markets will soon recover.
“The only real solution we have is to put more cash in the system,” he said.
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