Average school district PERS rate to increase about 1 percentage point in 2023
Tuesday, July 19, 2022
The average school district pension rate will tick up just more than a percentage point for 2023-25. Even with a small increase, the Public Employees Retirement System will claim $1.3 billion of schools’ budgets, and the average rate will be roughly double what districts paid in 2009-11.
Milliman, the state’s actuary, will present its investment report to the PERS board on Friday, July 22. This valuation determines employers’ rates for 2023-25, which will be presented to the PERS board for adoption Sept. 30.
According to Milliman, the average school district collared base employer rate will be 25.9%, up from 24.9%. Individual school district rates could be significantly higher or lower depending on staff demographics and side account investments.
After a decade of soaring PERS rates, legislative tinkering supported by education advocates, including OSBA, provided a dip in 2021 and has helped flatten the trajectory. This time around, though, opposing economic forces were pulling at the rate.
Last year, the PERS Board decreased the long-term assumed rate of return for investments to 6.9%. Lowering the assumed rate ensures long-term stability, but in the short term, it raises employers’ rates. If less money is expected from investments, employers must pay a greater share to meet fixed benefit costs. When adopted, the assumed rate change was expected to raise employer rates an average of 2.7% of payroll.
Extraordinary 2021 investment returns have blunted that, though. Investment returns above 20% knocked a chunk out of the system’s debt, helping to lower employers’ rates. At the end of 2021, PERS was 80% funded, excluding side accounts, up from 71% at the end of 2020. The unfunded actuarial liability is estimated at $20 billion as of 2021, down from $28 billion.
The good returns would have actually lowered schools’ costs if not for PERS’ “rate collar.” The collar keeps rates from soaring too much when times are bad, but it also keeps rates from dropping too quickly after the system has a good year. Current rules won’t let rates fall until the system is 90% funded. It hasn’t been above 90% since 2008.
School district side accounts that help pay PERS costs also soared in value, which helps lower the net rate for some districts. Of course, what goes up, may also come down. Stock values have been hammered this year, with the Dow Jones Industrial Average down 14%. This year’s stock values, though, won’t be factored in until it’s time to set the 2025-27 rates. Stocks have another 18 months to recover before the next rate-setting valuation.
PERS costs will be a key part of next year’s legislative debate over the State School Fund. PERS costs are one of the main differences between the estimates by schools and the Legislature for how much money it takes to maintain schools’ current services.
In 2021, school business officials said districts needed a $9.6 billion State School Fund. Legislative analysts said school districts only needed $9 billion. Falling PERS rates was one of their explicit reasons for holding the current service level virtually unchanged from the previous biennium’s State School Fund.