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Executive summary of the PERS challenge

What is the problem?

The PERS fund lost nearly half its value in 2008. Employer contributions are currently the only way to make up for market losses. As a result, in July 2013 school district contributions will rise from about 19% of payroll to about 27% of payroll.

How did we get here?

  • Oregon's $22 billion pension hole: How did we get here? - Published by The Oregonian, this video addresses the most frequently asked questions about the financial fiasco in Oregon's public pension system.

  • Market Losses - The 2008 economic recession caused the PERS fund to lose nearly half its value. Earnings on the PERS fund since 2008 have not been high enough to meet the PERS fund obligations.

  • Smaller staffs - Layoffs and retirements have reduced the dollars from contributions.

What are the obstacles to change? (how do we solve the problem)

  • Contract Law - Generally, the PERS benefit is part of the school district's contract with its employees. Therefore, contract law severely limits the changes that can be made to those benefits without the consent of the employees.

  • Current retiree benefits - PERS members who have already retired make up 66% of the PERS fund obligations. Benefit amounts for these members cannot be significantly changed.

What happens if we do nothing?

Employer contribution rates will continue to rise. In order to balance their budgets, districts will need to cut programs and staff. The reduction in staff reduces the actual dollars contributed to PERS which increases the need to rates even further.

Top 6 things everyone should know

  1. 66% of the current PERS obligation is for payment to already retired PERS Employees.

  2. Employee contribution rates are set at 6% in statute and don’t change, leaving investment returns and employer rates to fund the PERS system.

  3. Employer rates change every two years.

  4. Tier one has a guaranteed 8% return on their accounts.

  5. All other PERS accounts are credited with the return the fund makes. (no guarantees)

PERS Background

At one time, most companies offered employees a pension plan as a way of keeping employees at the company for an entire career. The idea was to protect the company’s investment in training that employee. Since the 1990s, career paths have changed and most employees will work for several companies over the course of their careers. As a result, companies have shifted toward funding 401(k) plans which give employees control over their financial future.

Government agencies have been less successful in making this shift, in large part due to resistance from public employee unions. Oregon made significant reforms in 2003 to move away from a system that rewards years of service with a defined pension benefit. However, Oregon is contractually obligated to provide the retirement benefit promised to employees at the time they are hired. In order to provide this benefit, current government agencies pay a percentage of their qualified payroll to PERS. The percentage is set by the five-member PERS board every two years.

PERS rate calculation process

The PERS board uses information from the actuarial value of the PERS fund to determine the percentage of payroll employers must pay. A valuation is a mathematical calculation of the financial health of a pension plan. Although the actuary prepares a PERS valuation every year, only the odd-year valuations are used to set rates. The even-year valuations are only advisory information.

Valuations are released approximately 1 year after the end of the valuation period. The rate changes take effect 18 months after the valuation date. Therefore, the payroll rates that took effect July 1, 2011 are based upon the December 31, 2009 valuation. These payroll rates will be in place until July 1, 2013. As a result, the rates paid in June 2013 are based on data which is almost 4 years old.

Employers within PERS are grouped in one of four ways and each have their own valuation:

  • School Pool – All K-12 school districts are aggregated in a single pool for purposes of actuarial modeling and payroll rate calculations.
  • State and Local Government Rate Pool (SLGRP) – All state agencies, community colleges and some local governments are grouped in a single pool. However, since SLGRP was created in 2004, not all participants started at same place, meaning single rates are subject to adjustments.
  •  Independent – Some local governments are valued independently of all other jurisdictions.
  • Judiciary – state judiciary.

All school districts pay the same rate even if every employee at the district is in OPSRP or if every employee is in Tier 1.

Components of the employer payroll rate

Payroll rates are divided into three components:

  • Normal cost – the money the actuary believes is needed to pay benefits
  • UAL – the difference between the normal cost and reality
  • Health care – post retirement health care cost

In order to help smooth rates over time, PERS rate calculations include a rate “collar” limit. The collar increases or decreases rates by the greater of 3% or 20% of the previous rate, unless the system is funded at greater than 120% or less than 80%. It increases to a maximum of the greater of 6% or 40% of the previous rate, if the funded status is less than 80% or more than 120%.

More resources

Recommended Resources

PERS information center

The latest PERS rates and information along with a high-level overview of the PERS challenges.

PERS resources

Links to PERS resources

PERS background information

A summary of the PERS challenges including clips from the 2012 Summer Board Conference workshop on PERS.

PERS glossary

Terms to help you understand the PERS challenge.

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