Oregon's public pension system will continue to take a bigger chunk of payroll costs of state and local governments for the next couple of years.
But the director of the Public Employees Retirement System and the chief financial officer of the Hillsboro School District, Oregon's fourth largest by enrollment, say 2019 legislation and greater investment returns are likely to offer a little relief to the upward trend in the next two-year budget cycle.
Kevin Olineck of PERS, which is based in Tigard, and Michelle Morrison of Hillsboro schools spoke Monday, Jan. 13, at the Washington County Public Affairs Forum.
The Legislature sets benefit levels, the PERS board decides contributions by its 906 member agencies and the Oregon Investment Council and State Treasury manage the $80 billion PERS Fund, which covers a range of investments, including stocks and private equities. It's one of the nation's largest public pension plans.
Oregon PERS unfunded liability at the end of 2018 was estimated at $27 billion. That means the system is well short of the amount it needs to meet its pension obligations over the next 20 years.
But Olineck said that preliminary 2019 returns — estimated at 12.19% as of November — could reduce that projected liability by about $3 billion, according to PERS actuarial consultant Milliman. Including "side accounts," money set aside by governments to reduce their future pension liabilities, he said that total could drop to around $19 billion.
Returns in 2018 were a dismal .48%, and in 2017, 15.3%.
"We are trending in the right direction," Olineck said. "But every year, you have different rates of return and that affects your long-term funding."
He expects that the funded status of PERS will increase from 75% at the end of 2018 to about 80% at the end of 2019.
"When we look at pension-plan funding, we do not look at it on a quarterly or year-by-year basis," he said. "We look at it on the basis of a decade or generation — what is going to happen in the next 20 or 30 years. One thing I love to preach to everybody is patience, because you cannot change a huge public-sector pension plan on a dime."
The PERS board will receive a final 2019 valuation, which will shape the contribution rates for state and local governments in the next two years.
Rates still rising
Still, Olineck said, their total contributions are projected to increase from $4 billion in the current two-year budget cycle to $5.16 billion in 2021-23. Some of that increase is driven by pay increases for current employees and new hires.
According to preliminary rates for the 2021-23 budget cycle — the PERS board will set final rates in the fall — average contribution rates for member governments will rise from 25.23% to 28.39% of payroll costs. Actual rates for individual governments will hinge on their mix of pre- and post-August 2003 employees — the latter group has a less generous pension plan — and their number of police and firefighters, whose pensions are higher than general employees.
Legislation in 2019 extended the period for pension liabilities of workers covered by pre-2003 plans from 20 to 22 years. Olineck said the move will reduce contribution rates for member agencies by about half of what they could have been. But Oregon will still have an unfunded liability in 2037 of about $8 billion.
"It's like re-amortizing your home mortgage," he said. "You will pay over a longer period."
For the Hillsboro School District, Morrison said, every one-point increase in contribution rates means the district must pay $1 million more — the equivalent of eight teachers. From 2017-19 to the current cycle, she said, the increase of 5.2 points cost the district more than $10 million, money unavailable for other purposes.
She said overall payroll costs other than wages amount to about 30%. PERS contributions account for 10%, she said, and debt service on PERS bonds for future pension liability 5%. Much of the rest (11%) is insurance costs.
"PERS is a major consideration for us when it comes to budgeting, no matter what the funding source is," she said.
Although some member agencies still pay the 6% employee contribution as well as the 6% employer contribution into the public pension fund — a remnant from the late 1970s, when high inflation made it easier for governments to increase future benefits — Morrison said Hillsboro schools no longer do so.
Before she came to Hillsboro, Morrison worked in Yamhill-Carlton schools, which enroll about 1,000 students.
A big challenge
Oregon's pension payments to about 150,000 public retirees are based on contributions by the member agencies and earnings on the PERS Fund. Virtually all of those retirees (144,000) are entitled to higher benefits earned before systemwide changes took effect in August 2003.
"Those benefits are crystallized," Olineck said. "What that means is that you cannot take away those benefits. Some say if you change the benefits, you can fix the funding problem. But you would not."
The Oregon Supreme Court overturned some of the 2003 changes, and also a tighter cap on cost-of-living increases that lawmakers passed in 2013. The court held that changes cannot affect pension benefits already earned, but can apply to the future.
The 2019 Legislature enacted more changes, some of which face a legal challenge by public employee unions because it channels some money from the individual account program under the post-2003 plan into the current defined-benefit plan for retirees who are under the pre-2003 plan.
Most of Oregon's 200,000 current public employees were hired after August 2003 and are under a less generous pension plan. But Olineck said about 70,000 hired before then are still in the public workforce and entitled to higher benefits when they retire.
According to "PERS by the Numbers," a report that the agency updated last month, the average pension payment as of a year ago was $31,719. The median payment — half above and half below that figure — was $25,178.
Olineck was hired in mid-2018 to succeed Steve Rodeman, who retired. He was a vice president for nine years at British Columbia Public Employees Retirement System Pension Corp., and worked nine years at Alberta Pensions Services.
Olineck said half of public pension systems are in better shape than Oregon's — and half are worse.
He said he came to Oregon "because I was looking for a challenge. I do not have to say that I found it," as the audience laughed.
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