PERS rate decision could hit local governments hard
Lower rate of return means higher contributions from school districts, cities, counties
A lower assumed rate of return on investments will result in higher future contributions by state and local governments to Oregons public-pension system and slightly smaller payments to pre-1996 workers who retire after Dec. 1.
The decision Friday by the Public Employees Retirement System board also starts the process by its actuarial firm to calculate what those employer contribution rates will be in the 2017-19 budget cycle. Preliminary numbers, known as advisory rates, will be released later this year. The PERS board will approve the actual rates in fall 2016.
Several factors are involved in the calculations, but the assumed rate of return is key.
The board settled on an assumed rate of return of 7.5 percent, down a notch from the 7.75 percent rate of the past two years. For the 24 years before then, the rate was 8 percent. Oregon has had an assumed rate since the 1970s, when it began investing in what is now a retirement fund of almost $71 billion as of June 30.
Government employers already face higher contribution rates as a result of an April 30 decision by the Oregon Supreme Court, which ruled that lawmakers could not pare cost-of-living increases to retirees retroactively. The Legislature did so in 2013 as part of an attempt to reduce the systems future liability over the next 20 to 30 years.
Milliman projects the average rate increase for school districts at 5.3 percentage points of total payroll for workers hired before August 2003; for all other governments, 3.8 percentage points, and for coverage of the post-August 2003 workers, one-10th of a percentage point.
The projected increases will apply in the next budget cycle. Rates for the current two-year cycle, which began July 1, were set in fall 2014 before the Supreme Court heard legal challenges to the 2013 changes.
With the approval of a lower assumed rate of return, the PERS board is likely to collar contribution rates so that overall increases are spread over several budget cycles, instead of all at once.
About 73 cents of every dollar Oregon pays out in public pensions comes from investment earnings. Most of the rest comes from contributions by the 925 employer members of PERS, which covers about 95 percent of Oregons public employees.
There are roughly 130,000 retirees.
The change in the assumed rate was not unexpected, although the board chose the highest of three scenarios.
Milliman, the Seattle actuarial firm contracted by PERS, had projected scenarios of 6.99 percent, 7.32 percent and 7.45 percent. Millimans was the lowest; Callan, the San Francisco firm that advises the Oregon Investment Council, was the highest.
Californias pension system reduced its assumed rate from 7.75 percent to 7.5 percent in 2012.
According to a recent survey by the National Association of State Retirement Administrators, about a third of the 126 statewide retirement systems it surveyed still retain an 8 percent rate. But since the financial-markets crash in 2008, the mean has dropped to 7.68 percent, and the median -- the point at which half the systems are above and half below -- is equal to Oregons former rate at 7.75 percent.
The assumed rate also is used to credit annual earnings of public employees hired before Jan. 1, 1996, otherwise known as Tier 1. If employees in that group retire by Dec. 1 of this year, the 7.75 percent rate will still apply. Those who retire afterward will be subject to the 7.5 percent rate, which takes effect on Jan. 1.
Under an example offered by the PERS staff, someone who retires on March 1, 2016 – after the lower rate takes effect – will earn the same pension benefit as someone who retires by Dec. 1 of this year.
Before Fridays meeting, two employees filed comments urging the board not to change the current rate.
Having to work six extra months just to get to where you would have been before is just not right, said Tammy Noeske of Salem.
Oregonians who work in government are weary of all the recent changes that keep moving the goal line for retirement, said Doug Crumme of Corvallis.