PERS board lowers earnings outlook, which will raise employer rates

Public pension costs are likely going up again in 2023, despite strong investment returns and legislative tinkering.

The Public Employees Retirement System board voted Friday to change some of its underlying methods and assumptions. Milliman, the state’s actuary, urged the changes for the system’s long-term health, but in the near term, the new calculations will increase PERS debt and employer contributions. 

Although PERS is one of the most complex public pension systems in the country, it comes down to a pretty simple formula: Benefits = Contributions + Earnings. 

Benefits are set by the Legislature, and courts have been clear the state must pay what has already been promised. If PERS’ investment earnings go down, employer contributions must go up to maintain those benefits. PERS sets the contribution rate by predicting its earnings using the “assumed rate of return,” basically a yearly average over a long period. 

The board voted Friday to lower the assumed rate from 7.2% to 6.9%. That will raise average employer costs 2.7% of payroll, according to Milliman. If the stock market’s recent higher-than-expected returns continue, it could blunt that increase but isn’t projected to wipe it out entirely.

The board has been steadily lowering the assumed rate since it sat at 8% for 2014-16. It lowered it in each successive biennium until it held it steady for 2021-23.

That was the same biennium average employer rates went down after soaring rates had more than doubled school contributions since 2017. 

PERS cost containment has been a key OSBA goal, as soaring rates have been steadily eating up a larger piece of the State School Fund pie. Schools will spend about $1.28 billion this biennium on PERS. 

A booming stock market and legislative modifications in Senate Bill 1049 (2019) supported by OSBA translated into average school district base rates falling 4 percentage points to 24.9% in 2021. Such a cut is unlikely to come again anytime soon after the PERS Board adjusted its rate-setting methods.

PERS uses a “rate collar” that keeps rates from swinging abruptly up or down too far. On Friday, the board voted to revise its collaring rules. The new collar won’t let rates fall until the value of PERS' assets approaches 90% of its liabilities. At its last valuation, PERS was 72% funded and has been below 90% since 2008. 

Lowering the assumed rate effectively increases the unfunded actuarial liability, the difference between assets and the benefits owed. According to Milliman, the assumed rate change will increase the debt roughly $3 billion. At Milliman’s last investment check at the end of 2020, the UAL was about $25 billion. 

Lowering the assumed rate will also lower benefits for a small portion of workers who are in Oregon’s most generous plans, but mostly it raises costs for public employers. 

School districts’ rates vary widely depending on their workforces’ ages and whether they have side accounts that help lower the net rate. 

Public funds around the country have been lowering their assumed rates in recent years. 

Milliman said the assumed rate should drop to at least 7% and recommended it should be lowered more to reflect current outlooks. The Oregon Investment Council predicted a 6.6% return for the next 20 years, and Milliman predicted 6.3%.

Board Chair Sadhana Shenoy said during the meeting that although the board is charged with maintaining a stable and viable system for decades to come, it also wants to create a “smooth glide path” and not yank rates around too much.

Friday’s vote was a preliminary adoption before starting the administrative rules process for October passage. The PERS board will release advisory rates for 2023-25 in the fall and the final rates in the summer of 2022.

Investment consultants have been warning for years that employers need to absorb the short-term pain of a lowered assumed rate to help the system get a grip on its debt, the long-term solution to bring employer rates down. 

If the analysts are right that the rate should be much lower, dropping it to 6.9% just “kicks the can down the road,” said Carol Samuels, Piper Sandler & Co. public finance managing director.

The assumed rate change combined with the Legislature’s setting the State School Fund at $9.3 billion this year could be a bad recipe for schools in 2023. School leaders asked for $9.6 billion to maintain services, but legislative analysts said schools only needed $9 billion for current service levels because of falling PERS rates this biennium. 

The renewed climbing of PERS rates in 2023 will be harder to absorb with schools' building off a lower State School Fund floor. 

PERS board member John Scanlan, a Pendleton teacher, argued against too dramatic a drop now because of its effect on public budgets. 

“Anything below 6.9, I think would really hamper employers from fully staffing for their needs,” said Scanlan during the meeting. “As a 30-year K-12 employee, I’ve experienced work conditions negatively impacted by understaffing. It’s certainly challenging for employees, but it’s also challenging for the people they serve, in my case students.”

- Jake Arnold, OSBA
jarnold@osba.org