The OSBA PERS information center contains the latest information about PERS and a high-level summary of the PERS challenge.
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:
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%.
Understanding the PERS tiers
|The Oregon Department of Education's November 2011 information release includes a two-page table explaining the different tiers.|
Timeline of PERS reforms
2003 - UAL calculated at $17 billion; 2003 Legislature approved modifications to reduce UAL as follows:
- Crediting rate for Tier 1 could not exceed guaranteed rate (8%) unless gain/loss reserve is fully funded for 3 years
- Shifted 6% employee contributions to IAP, significantly limiting money match.
- Modernized mortality tables
- Created new, 5-member board, where PERS members can only hold one seat.
- OPSRP created: “hybrid” benefit plan with both DB and DC elements.
1997-2007 - over 95 districts used bonds to pay down their share of the UAL
2007 - Valuation funded status reached 112%; employer rates reduced by 3%
2008 - System lost 27% of value going from $65 billion to $46 billion.
2009 - Rate of return was 19.12%, higher than expected.
2010 - Rate of return was 12.44%, higher than expected.
2011 - Estimated rate of return 2.21%, 66% of the system’s total accrued liability is for members who are no longer working in covered employment (and therefore they are no longer paying anything to cover their benefits).