PERS Panels Grapple with Growing Pension Costs

Published Thursday, August 3, 2017

The 2017 Legislature ended without any meaningful action to address the growing cost of the Public Employees Retirement System (PERS) and limit its impact on future state budgets. But the issue is not going away. Unless the state does something, PERS payments will consume more than one-third of payroll at schools and other public employers by 2021.

The future of PERS was the topic of two important meetings last week: the regular meeting of the PERS Board, which sets PERS rules and policies, and the first meeting of the Unfunded Actuarial Liability Task Force, which was appointed by Governor Kate Brown to look at possible ways to "buy down" the pension fund's unfunded liability.

Here is a look at what happened at each meeting:

PERS Unfunded Actuarial Liability Task Force

In April, Governor Kate Brown appointed a seven-member task force to explore asset sales and other steps that could raise money to reduce the PERS unfunded liability by $5 billion. Last week, the task force held its first meeting and agreed to focus first on big-ticket items that can make a significant dent in the unfunded liability - currently $21.8 billion.

The search for big money limits the options and puts the focus on controversial ideas such as privatizing the Oregon Liquor Control Commission or making changes to SAIF, Oregon's not-for-profit, state-chartered workers' compensation insurance company. 

Reducing unfunded liability obviously is helpful, but it doesn't address the core problem - promised benefits that are projected to grow faster than investment returns. And some of the proposed ideas could create new problems.

Proposals involving SAIF, which likely would generate a one-time windfall but increase future risk, are of particular concern. SAIF, as currently structured and managed, has worked well for Oregon businesses and their employees, contributing to some of the lowest workers' compensation rates in the nation. While operational or ownership changes would not automatically lead to higher rates, they would raise that possibility. And the businesses most likely to be hurt would be small ones. About 75% of the businesses that insure with SAIF have fewer than 10 employees. Many large companies have the ability to self-insure if they find the rates offered by SAIF or a successor company unattractive.

PERS is a broken system; SAIF isn't. Why risk damage to a model program for minor, one-time improvements in a broken one?

More details would have to emerge to reach a conclusion on a SAIF conversion or any other proposal, but the best the Liability Task Force can hope to achieve is to design an effective Band-Aid or two. The real solution will have to come from elsewhere.

PERS Board Rate of Return Decision

Of all the decisions made by the PERS Board, few have as much immediate impact as setting the assumed rate of return. Lowering the rate of return increases the short-term cost to public employers, who must contribute more to the pension fund to offset lower investment returns and continue to meet promised payment levels to retirees. That creates a political disincentive to lower the assumed rate. However, if the assumed rate is higher than what ultimately is earned, the Board creates an even bigger problem to be dealt with in the future.

The PERS Board on Friday lowered the assumed rate of return from 7.5% to 7.2%. Though that rate is higher than some outside experts recommended, the more realistic assumption is an important first step toward unmasking the severity of the problem that rising PERS costs create for our state, schools and local governments - and ultimately for Oregon taxpayers left holding the bill for the pension system's growing unfunded liability.

The change will increase the PERS long-term unfunded liability by more than $2 billion. This is the third time in three years that PERS has downgraded the assumed rate, which previously had been at 8%. And even the lower rate of return could be challenging to meet, at least in the short term. Most investment experts agree that the stock market, a big determinant of investment returns, is due for a correction soon.

Asset sales help shrink the unfunded liability. More realistic investment assumptions increase it. If that feels like treading water, that's exactly what Oregon has been doing for years. It's time to look for real solutions, even if that requires swimming upstream politically.