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PERS board favors stability, holds key rate-setting factor steady
A divided Public Employees Retirement System board voted to hold steady a key factor in determining public employers’ payroll rate.
The board met Friday morning to review issues with Senate Bill 1049, a PERS cost-containment measure, and for preliminary approval of actuarial methods and assumptions, which include the assumed rate of return for PERS' investments.
PERS’ employer rates are governed by the “fundamental cost equation”: Benefits = contributions + earnings.
Demographics and payroll determine benefits, and they are fairly predictable. The Oregon Supreme Court has ruled that the Legislature cannot change benefits already accrued. The Legislature can only tinker with future benefits or the employer contribution.
The board predicts earnings with its long-term assumed rate of return on the PERS Fund. Employer contribution rates rise or fall every two years to meet the expected benefit cost based on how well the fund has met its earnings assumption. If the assumed earnings rate is moved, the employer rate must move in the opposite direction to add up to the benefits.
In the past three biennia, the board lowered the assumed rate to match falling market returns. Although fiscally responsible, it contributed to rising employer payroll rates. School district rates have more than doubled since 2015 to around 30%, excluding side accounts.
Milliman, PERS’ actuary, presented the ramifications of lowering the assumed rate again.
This year, each tenth of a percent the assumed rate is lowered would increase the unfunded actuarial liability about $900 million, which could lead to a 0.7% increase in the average uncollared rate, according to Milliman.
The uncollared rate is what PERS calculates is needed to meet actual costs before rate “collars” kick in that spread out steep rises or falls in the rate.
Investments did poorly in 2018 and have jumped up in 2019, but PERS is looking at results over decades. Employees just starting out now could be collecting PERS benefits in the next century.
The Milliman report offered three projections for the PERS Fund. Oregon Investment Council consultant Callan predicted a 7.32% return. Milliman predicted a 6.87% return. A 2018 Horizon survey of capital market assumptions put it at 6.64%.
The median assumption for large public systems is 7.25%, according to Milliman, with more than half having lowered their assumptions in the past three years.
Milliman’s Matt Larrabee told board members that based on market returns it would be fiscally reasonable to hold the rate at 7.2%. He commended the prudent management of PERS in recent years.
If the PERS Board sets the assumed rate too high and the fund doesn’t meet its target, then there is not enough money coming in to pay benefits and the unfunded actuarial liability goes up. That in turn forces employer rates even higher to keep the plan from becoming insolvent.
Two of the five board members supported lowering the assumed rate to stay on the safe side.
Board Chair Sadhana Shenoy cast the deciding vote with an eye toward predictability and stability.
“Our objective today is to prudently select the best estimate of future returns,” she said.
Under current assumptions, PERS rates are predicted to climb again in 2021 before starting to slowly drop over the next 15 years.
School districts will find out average advisory 2021-23 PERS rates in October and employer-specific advisory rates in December. Official 2021-23 rates will come out in fall 2020.
Friday’s vote was only preliminary because SB 1049 requires the PERS board to report to the Legislature 30 days before it can finalize changes to actuarial methods and assumptions.
The board also preliminarily adopted a Milliman recommendation to update demographic assumptions, which would increase the system-average advisory 2021-23 uncollared rate 0.3%. Larrabee said that worked out to an increase of about $150 to $200 per active member in the system.
PERS staff are scrambling to work out the rules for the far-reaching changes in SB 1049. The law is expected to lower average PERS employer rates about 5.4 percentage points, although they are still expected to go up for the 2021-23 biennium.
SB 1049 derived most of its savings from extending the payback period on some PERS debt. Essentially, employers would have to pay a lower bill but over a longer period. Milliman’s projections show SB 1049 holding rates below what they would have been until about 2035.
SB 1049’s cost containment provisions included redirecting into PERS part of employees’ 6% contribution to individual accounts. During the meeting, Milliman confirmed that it is treating the redirect as a direct offset of employer rates. An employer’s rates would fall by 2.5% for Tier 1 and 2 employees and 0.75% for Oregon Public Service Retirement Plan members.
SB 1049 also includes new work-back requirements and a $195,000 cap on salary used in benefit calculations.
PERS staff expect a challenge to the law to be filed by the Aug. 12 deadline.
SB 1049 also appropriated $100 million to the Employer Incentive Fund to match up to 25% of employer deposits in a side account. These side accounts have helped some districts lower their employer rate.
The application window for matching grants is expected to open within weeks so deposits can be counted in the 2019 system valuation.
- Jake Arnold, OSBA