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Estimates are that Newberg and other government entities will see a steep increase in PERS costs

Oregon state and local officials are now receiving specific projections of how much more governments must pay for contributions to the Public Employee Retirement System. That includes the city of Newberg. Officials there explained that the report is an annual valuation that establishes advisory rates for the 2019-2021 biennium.

"This is for information only," Matt Zook, the city's finance director, explained. "PERS will release another report in December 2018 that finalizes the rates for the 2019-2021 time period."

Zook added that the city received the state's official report on Dec. 7 and that it indicates the PERS rates will increase, but that he has "not yet analyzed the specific impact using these new rates."

The city of Newberg has about 70 employees included in the 2017-2018 budget that are covered by PERS.

"The city is obligated to pay these rates and absorb the cost into the annual budget," Zook said. "The impact of PERS increases adds additional pressure to the (city's) limited resources."

As an example, Zook said if the city were to apply the just-released 2019-2021 advisory to this year's budget, it would cost an additional $165,000 in PERS cost on top of the $1.3 million already budgeted.

And the challenging fiduciary news doesn't stop there for the city. Zook explained that in 2004 the city joined more than a dozen other Oregon governments that pre-funded some "retirement costs in an effort to provide additional retirement funding at a lower cost, essentially to keep the city of Newberg's rates lowers."

The bond service payment that resulted from the move, he said, was $248,000 in the current budget, an expenditure of "4 to 5 percent on top of the published PERS rates."

And that phenomenon stands for city and county governments across the state: most rates are going up by 4 or 5 percent of employee salaries for the budget cycle that starts in mid-2019 — and higher contributions mean less money for other employee benefits or public services.

The good news: The rates may not be as high when the Public Employees Retirement System board sets final numbers next fall, because rates will be based on the system's investment values as of Dec. 31.

Investments of Oregon's public-pension fund rose in value from $69.2 billion in November 2016 to $76.4 billion in October, the board learned Dec. 1, when preliminary 2019-2021 rates were released. The final 2017 valuation will be unveiled Feb. 2.

The growing value of the PERS fund also may shave the system's unfunded long-term liability, pegged at $25.3 billion at the end of 2016, by a billion or two by the end of this year. That liability is spread out over a few decades.

Still, PERS Board Chairman John Thomas said, given that large number, "This problem is not going to go away."

Board member Stephen Buckley added: "We need to look at ways to address the funding issues other than simply continuing to increase employer contributions."

About $7 of every $10 paid out in pension benefits comes from investment earnings. Most of the rest comes from government employers.

Rates dribbling out

More than 900 government employers that are members of PERS will get detailed reports through mid-December. The reports were prepared by Milliman, a firm that does the actuarial work for PERS.

The rates are based on several factors, including the mix of workers hired before and after August 2003, when lawmakers overhauled benefits; the share of police and fire employees who qualify for greater pensions than other workers; and whether government employers have set aside money, known as "side accounts," to offset some of their pension liabilities.

The PERS board is scheduled to set final 2019-2021 rates at its Oct. 5 meeting next year.

The projected rates are "collared," so that much of the increase is spread over the following four years.

PERS Executive Director Steve Rodeman said the agency consulted with an employer advisory group about the possibility of letting the rates jump over a single budget cycle instead of spreading out the increase.

Without collaring, "The big jump we would see in 2019-2021 would be even bigger," he said, and the idea was dropped.

Biggest beneficiaries mostly retired now

At the end of 2016, far more public employees (107,262) were covered by the post-August 2003 pension program, which is less generous than those in Tire 1 hired before 1996 (26,964) and those in Tier 2 hired from 1996-2003 (38,257).

However, the vast majority of PERS retirees (124,171) qualify for the more generous Tier 1 benefits.

The PERS board did vote to transfer $186.9 million not needed for contingencies into the fund that pays out benefits to retirees. Combined with a similar action April 3, the board has added a total of $532.7 million to the fund.

That's about 10 percent of a $5 billion target set by Gov. Kate Brown to reduce the system's unfunded liability.

That number was chosen because it is the estimated amount of loss that resulted from a 2015 decision by the Oregon Supreme Court, which ruled that reduced cost-of-living adjustments approved by the Legislature in 2013 cannot be made retroactive to benefits earned before 2013.

Reducing liability

A task force named by Brown submitted proposals to raise money to reduce that liability in a Nov. 1 report. It did not recommend any specifics, which will be up to Brown and the Legislature to consider.

"We are not a legislative body. But we do understand the math," Thomas said. "We are going to do what we have to do to maintain sustainability."

The PERS board oversees the pension system, and the Oregon Investment Council oversees its investments. But Thomas said neither can tackle the bigger questions about long-term liabilities.

"This is not something that can be unilaterally fixed," he said. "It's going to be something that various constituent groups need to get together on, do some brainstorming and look at the long-term issues. This is not going to go away. It needs to be addressed."

Among the seven task force members was Lawrence Furnstahl, chief financial officer of Oregon Health & Sciences University and a PERS board member.

Although news of increased investment earnings is welcome, Furnstahl said PERS also must prepare for worst-case scenarios outlined in Milliman's latest report.

Although the PERS fund has made substantial gains in the past year, it lost 28 percent of its value during the recession.

PERS Board member Steve Demarest agreed with Furnstahl that it is prudent to be prepared: "But let's keep our fingers crossed and hope for the best."

Projected PERS employer rates

Numbers below show actual 2017-2019 PERS rates, as a percent of employee salaries, followed by projected 2019-2021 rates. The numbers are broken down to reflect those hired before and after a 2003 reform that cut benefits; and for public safety workers, who qualify for greater pension benefits.

-- State of Oregon: Pre-2003, 18.67 to 23.83 percent; post-2003, 10.78 to 16.25 percent; public safety, 15.55 to 20.98 percent.

-- Multnomah County: Pre-2003, 19.55 to 24.86 percent; post-2003, 11.29 to 16.81 percent; public safety, 16.06 to 21.54 percent.

-- City of Portland: Pre-2003, 17.62 to 22.76 percent; post-2003, 10.69 to 16.25 percent; public safety, 15.46 to 20.98 percent.

-- Portland Public Schools: Pre-2003, 6.66 to 13.07 percent; post-2003, 1.33 to 7.45 percent; public safety, 6.10 to 12.18 percent.

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