West Linn-Wilsonville School District readies for PERS increases
Oregon's Public Employees Retirement System (PERS) is the financial elephant in the room, and it's quietly continued to grow in recent years. That elephant is now too large to ignore, as the West Linn-Wilsonville School District and other state entities will begin paying increased rates starting in the 2017-19 biennium.
Altogether, PERS totals an estimated $21.8 billion of unfunded liability in Oregon. In an attempt to provide relief, the Oregon Legislature passed a package of cost reforms in 2013, but the Oregon Supreme Court subsequently ruled against the package in 2015. So while the school district, and the rest of Oregon, enjoyed two years of cost reforms, the ruling meant that money would have to be paid out after all, as the Oregon Supreme Court stated that lawmakers could not make cuts to benefits that had already been accrued.
For all school districts across the state, employees are divided into three groups of PERS: Tier 1, Tier 2 and Oregon Public Service Retirement Plan (OPSRP). Tier 1 (those hired before Jan. 1 1996) and Tier 2 (those hired between 1996 and 2003) earn one PERS rate while ORSRP employees (those hired after Jan. 1 2004) earn a different, lesser rate. Pension benefits are significantly higher for Tier 1 and Tier 2 employees, which has led to funding problems as earning rates on PERS accounts have decreased while more and more of those employees have retired.
WL-WV Business Manager Doug Middlestetter says PERS is a problem school districts have anticipated for a while, though there's little way of knowing exactly just how significantly costs will increase in the coming two to three bienniums. When PERS was benefiting the most from high stock market performance prior to 2008, funds were earning rates upwards of 20 percent in some years. The state saw the high returns and was contractually obligated to pay public employees an 8 percent return on their money, which backfired when stock market volatility and low interest rates began to cause earnings on the same PERS investment fund to decline. The burden was passed on to PERS employers, like WL-WV and other school districts.
"That's what started to put the stress on the system, when those earnings started to go down," Middlestetter says.
For West Linn-Wilsonville, that means increased PERS contributions in the 2017-19 biennium. Tier 1/Tier 2 employees will jump from 20.72 percent to 26.56 percent — the percentage of an employee's salary the district is required to pay to PERS — while OPSRP employees will grow from 16.3 percent to 21.23 percent. Those numbers will mean an estimated $2,591,000 in additional PERS payments in the 2017-18 fiscal year alone — an increase of 5.5 percent from 2016-17. The PERS payment would equal approximately 12-13 percent of the district's total general fund budget.
When PERS was first established, returns north of 8 percent were accrued and paid to employees at the time for employees who qualified for earnings at the time.
"So essentially the reserves were totally inadequate to meet the future needs. The assumption was this fund was always going to make 8 percent, and if it made more then so be it," Middlestetter says. "So when it started making less than 8 percent it created this vacuum and all of a sudden it's, 'Oh my goodness, where are we going to get this money?'"
The total amount of unfunded PERS liability has been largely affected by those decreasing earning rates coupled with increasing life expectancy of retirees. Because of the Oregon Supreme Court's 2015 ruling, Middlestetter isn't sure the state can do much in the way of reform for the short term.
"If you shut the system down today, you still owe 60-70 percent of the money because (retirees) still have a lot of years left to live. Those are the complexities of it," Middlestetter says. "As much as we talk about changing this or that, they are slow fixes, and I'm not sure there's any way we're going to fix anything in the next six years. There might be something that can help, but the rates are going up and I don't think there's anything that can fix the problem or take the rates down."
Middlestetter says the district has been able to plan for the increased rates over the past few years, as the PERS Board locks in the interest payout rates for twoyear periods. School districts were notified of the changing 2017-19 rates about six months ago, and WL-WV has a PERS reserve fund of roughly $1.5 million that is the result of the now-eliminated PERS relief package from 2013 — the district set that money aside knowing such a ruling might come about. Middlestetter says he hasn't decided exactly how the district will use that reserve fund over the coming biennium, but that it's likely it will be spread out over time.
"The reality is — and it's sad — is that it becomes, 'How do you manage your home budget when you know your payment is going up?' You know you have a roof replacement and the payment is coming, and that you have to cut back somewhere else," he says. "That's the reality. We're not a utility company that can raise the garbage rate to pay for it. … Our revenue is decided by Salem and we take what they give us.
"This community, with the local option tax, (shows that) the community has stepped up and said they want to help do a little more than (what Salem provides). We're lucky and blessed to be in this environment. But rest assured we didn't go out for a local option tax so that we can pay PERS. That money is used to hire new teachers."
Relative to the overall PERS landscape, Middlestetter says WL-WV is in a good place, and that rates should taper off in the next two or three bienniums. He says the PERS increase will undoubtedly make an impact, but that funding from the state will be even more important in the next few years.
"We're not going to be laying off staff. (PERS) may keep us from doing things, it may keep us from reducing class sizes — and our goal is always to reduce class size and enhance the teaching we're doing — and there will be limitations and things we can't do," he says. "There may be some retirements we don't fill … but we're not in crisis mode to where we have to cut staff.
"But we also don't know where the funding will land, and depending on what this coming biennium looks like, (PERS) will have a big impact on the next one. We're in it for six years with no reserve, so it's going to get tough out here. But we'll get through it."