Oregon’s public pension deficit has grown to $25.3 billion, which means schools and local and state governments will need to drain an additional $1.4 billion from their projected 2019-21 budgets to feed the pension beast, according to a new valuation by the system’s actuary.
Though another round of contribution increases was widely expected, the amount is much higher than employers had been led to expect and comes on top of the $900 million jump included in the current two-year budget cycle.
There are several causes. The Public Employees Retirement System Board recently lowered its investment return assumption from 7.5 percent to 7.2 percent, which is the primary reason the system’s unfunded liability climbed from $21.8 billion at the end of 2015 to $25.3 billion at the end of 2016. The PERS Board also has been allowing employers to underfund the system by billions of dollars each biennium, and that unpaid bill is collecting interest and adding to the deficit.
The resulting growth in liabilities also means that the system’s funded status has slipped below 70 percent, breaking a threshold that allows larger rate increases to kick in to prevent further erosion.
The analysis by Milliman Inc. is preliminary. Contribution rates in 2019 will be based on the system’s funded status at the end of this year. But barring benefit modifications or investment returns that significantly exceed expectations, Milliman said, this is what’s coming.
PERS investments earned 10 percent through the end of August — stellar results that could shave rate increases for some employers if they hold up through year’s end. But the effect of that outperformance will be muted because employers still need to absorb so much of the contribution increases that are currently being put off.
“We’re not paying anywhere close to what we should be paying, and if we did it would absolutely decimate schools,” said Jim Green, executive director of the Oregon School Boards Association. “It’s shocking. The numbers just keep going up, and it’s going to take a lot more out of what we’re able to do for kids in the classroom.”
Indeed, school districts alone will have to pay another $530 million into the system, roughly the equivalent of 11 instructional days per year or the fully loaded cost of 2,650 teachers. State agencies face a $385 million increase and other employers, including local governments, will have to come up with additional $500 million.
Nearly 40 percent of those dollars — $530 million — would come out of the state’s general fund. Coupled with another cut in federal funding for Oregon’s Medicaid expansion, the pension increases are almost sure to create another substantial state budget deficit in 2019.
Gov. Kate Brown has empaneled a task force to look for ways to lop $5 billion off the deficit. But that’s only the tip of the financial iceberg and, even if successful, it would leave an unfunded liability in excess of $20 billion, requiring continued high contribution rates.
“Ups and downs in the sizable liability will be with us for the next couple of decades,” said John Tapogna, president of EcoNorthwest, a consulting firm that has worked on PERS issues. “Expect more volatility as Congress takes up tax reform, and the stock market reacts to it.”
The legislative tug of war over PERS reforms and tax increases will doubtless be back before the Oregon Legislature as well, though the governor has shown little appetite for the pension reform discussion in the run-up to her 2018 reelection bid. House Speaker Tina Kotek, D-Portland, also has rejected any new cuts in employee benefits.
Unions have made it clear they don’t want the state solving its budget crisis on the backs of public employees, while a newly invigorated business lobby opposes any increase in corporate taxes in the absence of pension reform.
Green, of the school boards association, says that stalemate is indicative of a lack of leadership. “It’s time for the speaker and governor to step forward and say we need to deal with it.”