TIGARD — The board of the Public Employees Retirement System voted unanimously Friday to lower the assumed rate of return on the pension fund’s investments to 7.2 percent a year.
The reduction, from 7.5 percent, will add an estimated $2.4 billion to PERS’ $22 billion unfunded liability — worsening the retirement system’s already-dire long-term outlook.
The move will translate into more long-term budget pain for Oregon school districts and other public agencies.
Lower assumed investment returns mean public employers have to pay more into the overall system every year to make required pension payments to retirees. Actual returns from the stocks and bonds that PERS funds are invested in are used to cover the balance of those benefit payments.
Money that government agencies pay from their property and other tax receipts into PERS reduces the amount the agencies have available to fund services to the public, from teachers in the classroom and police on the streets to library hours and parks maintenance and safety.
Because of limits the PERS board has set for how fast public employers’ pension costs can grow, however, Friday’s decision is unlikely to substantially increase individual agencies’ payments into PERS until 2021 or 2023.
The system’s big unfunded liability means agencies already were facing PERS cost increases of the current maximum allowed of 20 percent of total payroll costs in 2019 and likely in 2021, as well.
The avalanche of coming pension costs has prompted business interests and others to push for reforms that would curb PERS benefits for government workers in a variety of ways.
But court rulings have greatly hamstrung cost-curbing ideas. Because of legal restrictions, more than 80 percent of PERS’ total liability is basically untouchable by lawmakers, lawyers on both sides of the issue agree.
Reforms that are legally viable would primarily hit younger, newer public employees, who already are in line for less generous pensions because of previous reforms.
The 2017 Legislature punted on the PERS issue entirely, passing no substantial changes.
At Friday’s meeting, PERS board members universally agreed on the need to lower the assumed rate. But they debated whether to reduce it to 7.2 percent or 7.1 percent.
“It’s difficult to make determinations about the future,” said Lawrence Furnstahl, a financial executive at Oregon Health Sciences University. “The stock market is strong now and will likely go down.”
Friday’s vote marked the third time since 2013 that the PERS board has lowered its assumed rate of return. Before that, the system’s assumed return rate was set at 8 percent for 23 years.
The board’s actuary, Milliman, recommended another reduction this year to bring the rate more in line with how investment managers expect the stock and bond markets to perform over the next 10 to 20 years.
Long-term market projections that Milliman compiled from four financial companies would have set the median annual return rate anywhere from 6.7 and 7.6 percent.
“There clearly needs to be an adjustment on the downside,” said John Thomas, PERS board chairman and the CEO of the Eugene-based Financial Pathways Group.
Using an inflated assumed return rate simply pushes pension pain into the future for public agencies and the public they serve: One way or another, ultimately the agencies have to pay up the total cost of providing pensions to government retirees. And using an unrealistically high rate could threaten the bond ratings of Oregon state governments and other public agencies.
Board member Steve Buckley, of the Portland law firm Brownstein Rask, said keeping the 7.5 return rate “could have an adverse impact on (the PERS) annual financial audit.”
Brighter Oregon, a coalition of business interests, said that it “appreciate(s)” the PERS board’s decision and urged state lawmakers to take up more cost-curbing PERS reforms.
“A more realistic assumption is an important first step toward unmasking the severity of the problem these 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,” spokesman Pat McCormick said in a prepared statement.
PERS costs for Oregon employers are locked in now until 2019. Next year, the board will set contribution rates for the 2019-21 biennium, based in part on actual investment returns.
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