Douglas Berg
Berg is a retired information technology professional and a longtime observer of Oregon’s PERS board. He lives in Eugene.
On July 23, the Oregon Public Employees Retirement System Board will meet to make its most important decision for the next two years – setting the assumed rate of return on PERS investments. This is a key parameter PERS actuaries use to calculate both the size of the unfunded liability and the amount Oregon public employers will be required to pay into the system next biennium.
It’s no secret PERS investments have had a stellar run for nearly two and a half years: the Oregon Public Employees Retirement Fund totaled nearly $90 billion as of May 31, up $17.4 billion since the end of 2017.
While this is very welcome news to policymakers, returns like these do not mean that PERS is out of the woods with respect to its long-term funding. Far from it.
At its March 29 meeting, PERS actuaries estimated the unfunded liability – the shortfall between what PERS is estimated to have and what it is estimated to owe retirees – remained stubbornly high at $24.3 billion, little changed from its level in 2019. This is a stark reminder that the PERS Board cannot rely on investment returns alone to grow its way out of its funding problem. It must also require public employers to make ever-increasing contributions.
Why has the PERS Board has been so unsuccessful in taming the unfunded liability even though it has a long-standing policy for amortizing, i.e., paying off, the unfunded liability over a period of years?
The simple answer is that the assumed rate of return is set too high.
The importance of the assumed rate in calculating the unfunded liability cannot be overstated. It is educated guesswork, and if the future shows that the guess was higher than what PERS investments can reasonably earn, the unfunded liability they are trying to pay off is calculated to be too low. This, in turn, causes the system to calculate contributions from public employers that are also too low.
Currently, the PERS Board assumes that investments will earn 7.2% per year. However, PERS investments from 2008 through 2020 have returned about 6.25%. This mismatch not only nullifies the amortization schedule, but also leaves the PERS system highly vulnerable when (not if) the next bear stock market arrives.
At the board’s 2019 meeting, new chairperson Sadhana Shenoy cast the deciding vote in an unusual split decision to keep the assumed rate unchanged. This was after three consecutive rate setting cycles where the board, under then-chairman John Thomas, steadily reduced the assumed rate from 8.0% to 7.2%.
The Oregonian/OregonLive recently reported that PERS actuaries are now sounding urgent alarms about the high level of the assumed rate. The actuaries stated at the June 4 meeting that if the board were once again to leave the rate unchanged, they would likely attach an actuarial disclaimer to their report on the PERS system. This could have far-reaching negative effects on the system.
In my written testimony to the board at their June 4 meeting, I pointed out that with PERS investments at historical highs and 2021 state projections predicting $1 billion more revenue than expected, the board has a rare opportunity to do something historic: go beyond actuarial recommendations and cut the assumed rate substantially. With today’s rare confluence of good news, public employers likely would not struggle to absorb the resulting increase in contributions.
A little additional pain today will go a long way toward alleviating a far worse situation when PERS investments face the next bear market. The PERS Board should seize this unique opportunity and take decisive action at their July meeting.
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July 11, 2021 at 07:46PM
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