Analysts predict 3 percentage point public pension cost increase

Early estimates show school districts’ pension costs climbing a sizeable 3 percentage points in 2023, costing Oregon schools an additional $335 million for the biennium. 

The Public Employees Retirement System Board meets Friday, Oct. 1. The meeting agenda packet includes a PERS presentation from Milliman, the state’s actuary, that shows PERS rates on the rise again. 

In 2020, PERS’ assets made a 7.18% return, just shy of the system’s 7.2% assumed rate of return, according to Milliman. The trend is falling returns, though, and the PERS Board is scheduled to adopt a rule lowering the assumed rate to 6.9%, which in turn will likely drive up PERS rates for public employers. 

Analysts said the assumed rate needed to be lowered for the system’s financial stability, and some suggested it should be even lower. 

PERS benefits are paid for by employee contributions, employer contributions and the return on PERS investments. PERS uses an “assumed rate of return” based on long-term expectations to calculate the level of contributions needed to meet benefits. If the rate of return goes down, contributions must go up because courts have ruled promised benefits can’t be changed. Because employee contributions are set in rule, employers must pick up the difference. 

Milliman predicts the average collared base school district rate, not including the rate offsets from side accounts, will increase 3 percentage points to 27.9%. 

The current system estimates are only advisory, and Milliman will offer employer-specific advisory rates at the December meeting. The actual rates for 2023-25 will be set in September 2022. The final rate change will depend on the 2021 investment performance, which right now is returning more than 16%. A good 2021 could blunt the increase but is not expected to wipe it out. 

OSBA has been working with the Legislature for years to arrest the soaring PERS rates that eat up funds that could be spent in classrooms. Schools will spend about $1.26 billion this biennium on PERS. That is projected to increase to $1.6 billion for 2023-25.

In 2019, the Legislature passed changes to PERS that contributed to an average 4 percentage point rate drop for 2021-23. Such a large rate cut will be hard to arrange again anytime soon, as the change in the assumed rate will also increase PERS' unfunded debt approximately $3.4 billion to $28 billion. 

- Jake Arnold, OSBA
jarnold@osba.org