With budget talks on horizon, West Linn prepping for PERS hikes
In describing how West Linn will deal with rate hikes associated with the statewide Public Employees Retirement System (PERS) funding crisis, City Manager Eileen Stein turned to a metaphor from the animal kingdom.
"It's kind of like the snake swallowing a rat — or maybe something bigger than a rat," Stein said. "And there's this big bulge that's going to make its way through the snake over time."
The rat, of course, is PERS — and it is indeed more like a mutant sewer rat that you might find in New York City.
On the whole, PERS faces an unfunded liability of at least $21.8 billion, according to the most recent estimates. In 2013, the Oregon Legislature passed a package of cost reforms intended to address the problem, but much of that package was eliminated by the Oregon Supreme Court in 2015. That decision stated that lawmakers could not make cuts to benefits that had already been accrued and thus could only make changes that would affect current and future employees.
PERS employees are broken into four groups: Tier 1 (those hired before Jan. 1 1996), Tier 2 (employees hired between 1996 and 2003) and two levels of the Oregon Public Service Retirement Plan (OPSRP) — one for general employees and another for police officers. OPSRP passed the Legislature in 2003 and accounts for anyone hired after January 2004.
Pension benefits skew significantly higher for Tier 1 and Tier 2 employees, and funding problems have arrived as more and more of those employees retire. Stock market volatility and low interest rates have caused earnings on the PERS investment fund — which, through 2010, accounted for just over 70 percent of PERS funding — to decline, thus forcing PERS employers like the City of West Linn to foot more of the bill.
In the next biennium (2017-19) West Linn PERS contributions will increase by an average of about 32 percent, according to Interim Finance Director Cathy Brucker. Rates for Tier 1 and 2 employees will increase from 15.64 percent to 20.48 percent, while OPSRP-General Employee rates move from 8.61 percent to 11.68 percent and OPSRP-Police Officers go from 12.72 percent to 16.45 percent.
"The impact to the City is about a half a million dollars a year (over the current 2016-17 budget)," City Manager Eileen Stein said. "We can absorb most of the increase in the first year of the biennial, but we really start to see an impact on our budget in the second half of the biennium."
And that will carry into the next biennial budget for 2019-21, when the impact will rise even higher to about $1 million.
"We don't have set rates past (the 2017-18 biennium) but the general consensus is they will continue at about that rate of increase (20 percent) at least for the following biennium," Brucker said. "Past that, it will depend on what the market does, and what the Legislature does."
It is 2019 and beyond that has Stein most concerned.
"Given that we carry about a $1 million contingency in our General Fund, we're looking at some pretty serious impacts to the City budget and the General Fund in particular," Stein said. "The way we spread money out, we have different funds, but we'll have to be looking at the impact to those programs that are essentially supported by the General Fund — so library, police, administration costs, planning and community development programs."
The good news, of course, is that this is not a new problem and the City still has some time to prepare for what it sees on the horizon.
"With this budget (for 2017-19) that we're preparing, we're trying to identify cost savings where we can, so we can build up a better reserve for the next biennium," Stein said.
And as those years play out, the City will continue to do outreach in the community in search for more solutions.
"I want to engage the (City) Council and the budget committee and ultimately the community over these next two years to prepare ourselves for the next biennial budget (in 2019-21)," Stein said. "We're going to start having conversations about service priorities at the City, if we don't get any relief from the State of Oregon somehow.
"And the state is facing its own deficit as it figures out how to pay for state employees and schools."
Stein is unequivocal: These choices could be very difficult, and a city that has already shifted "from Nordstrom to Costco" in its budget may have to cut back even further.
"Everything is going to have to be on the table," Stein said. "So it's important for the community to understand that we're going to have to be talking about service priorities, potentially, which is very unpleasant for all the obvious reasons. If you close libraries, or you have a lesser police patrol, they're hard decisions.
"But I'm glad we're in a position that — through past cost-saving measures and conservative budgeting — we have been able to identify at least some breathing room in these next two years."
Both Stein and Brucker also say that, in theory, this problem should be temporary.
"There's kind of a bell-shaped curve here — we'll experience large rate increases over several years and then the actuarial projections indicate lower rates," Stein said. "It's about a six-year period of time where we have to absorb these higher rates, and then they should begin to go down again."
This is because OPSRP rates are significantly lower, and as time passes there will be fewer and fewer employees retiring under either Tier 1 or Tier 2 benefits.
"That's what gets us out," Brucker said.
The Legislature also continues to search for PERS solutions, and several bills are being discussed in the ongoing 2017 session. But Stein said she wasn't particularly encouraged when she and other city officials took a recent trip to Salem and spoke with local legislators.
"By and large, I think the feeling in Salem is there's not a whole lot that can be done to make further reforms to the PERS system in order to get ourselves out of this problem in any significant way," Stein said. "So it's really going to be a matter of looking at new revenues, and time.
"The only comforting fact is we're not alone."