The board of Oregon’s Public Employees Retirement System voted unanimously Friday to reduce its long-term assumption about earnings on the pension system’s investment portfolio, a decision that will increase required contributions to the fund from public employers and reduce benefits for a number of employees who have yet to retire.
The board’s rate decision occurs every two years and is inherently political, as even small reductions can have major budget impacts on municipalities, school districts and state government in order to meet pledged pension payments for retirees.
On the other hand, leaving the assumption too high underfunds the system over the long run as it assumes more of the money to cover benefits will come from investment earnings rather than employer contributions.
In part heeding the strong suggestions of investment consultants, the board cut the expected annual rate of return from the state’s pension fund from 7.2% to 6.9%.
The reduction approved Friday, coupled with a slight increase in the inflation assumption for public employee wages that the board adopted, would increase systemwide contributions for the 900 or so public employers who participate in the system by 2.7% of payroll, or about $715 million, over the two-year budget cycle that begins in July 2023.
But the actual impact to employers could be far less if the pension fund continues to yield big investment wins. Year to date, the system’s returns are about 11%, beating assumptions. If that holds until year end, it would offset about half the projected rate increase.
Gov. Kate Brown and state lawmakers in recent years have done their best to limit increases in government employers’ pension contributions stemming from the need to pay back the system’s $24.3 billion funding deficit. In 2019, for instance, they passed controversial legislation to extend the repayment period for that deficit by eight to 10 years to lighten public employers’ pension load.
That move was politically expedient to protect public budgets and services, but is the kind of kick-the-can maneuver that leaves the system deeply underfunded even as its investment portfolio has been generating huge gains during a 12-year bull market.
For years, meanwhile, the pension board has been under pressure to reduce what many consider to be overly optimistic return assumptions that leave employers off the hook for properly funding their employees and retirees benefits. It has slowly reduced the rate over the last decade, but not as aggressively as some think necessary. Lowering the rate also reduces benefit calculations for employees who expect to retire under the system’s money match formula as well as those who choose a beneficiary under its full formula retirement method because the rate is built in both those calculations.
Ostensibly, the board bases its rate decisions on input from its financial advisors, but the rate it chose Friday is markedly higher than those forecasts. Meketa Investment Group, the chief investment consultant to the Oregon Investment Council, the separate citizen panel that oversees PERS investments, is forecasting annual returns of just 6.6% over the next 20 years. The actuary, Milliman Inc., had forecast that the system’s investment portfolio would be even lower, averaging 6.27% annually over the same period.
Matt Larrabee, the chief actuary for the system at Milliman, had previously told the board it was “necessary” to lower the assumed earnings rate to at least 7%, and recommended it go lower to reflect current investment outlooks.
Sadhana Shenoy, the chair of the PERS Board, said during Friday’s meeting that the board’s responsibility was to assure long-term stability for the system, but adjust the rate in a smooth fashion, “without abruptness, without jerkiness, but with a smooth glide path.”
A number of board members explained their decision to go with 6.9% rather than something lower by pointing to higher federal inflation figures than either the actuary or investment consultant built into their forecasts.
John Scanlan, a public school teacher who sits on the board, said he would probably be more comfortable with a rate of 7%.
“Anything below 6.9 I think would really hamper employers from fully staffing their needs,” he said. “As a 30-year K-12 employee, I’ve seen work conditions negatively impacted by understaffing … I don’t know that we have the ability to solve all the financial challenges out there, but we should absolutely avoid creating them.”
Other observers are far less sanguine than the board.
“Here we go for another two years hoping for the best,” said Doug Berg, a retired, private sector information technology manager from Eugene who follows the system closely and submitted written testimony asking the board to heed the advice of its consultants and adopt a more conservative rate.
“It just scares me,” he said. “They’re not hedging their bets. I feel there are political issues going on here because if you do the math, it’s not the right thing to do.”
Jeff Gudman, a former Republican candidate for state treasurer and another public pension watcher, said he would have advocated for a rate of 6.8% or lower.
“I think they’re continuing to go for a hope and a prayer and kicking the can down the road,” he said.
-- Ted Sickinger; tsickinger@oregonian.com; 503-221-8505; @tedsickinger