Oregon’s pension board projects lower returns, still rosy compared to real market estimates
(The Center Square) – Saddled with billions of dollars in IOUs, Oregon’s pension system is poised to see lower returns than expected, putting more pressure on municipalities and prospective retirees in the process.
Oregon’s Public Employees Retirement System (PERS) is a pension plan for state employees guaranteeing monthly payments, lump sums or a combination of on retirement. The plan is paid for by taxpayers at the city, county and state level and pooled into investments managed by the Public Employees Benefits Board (PEBB) appointed by Gov. Kate Brown. The board’s five members hail from the public and private sectors, consult financial advisers, but still make calls through a primarily political process.
On Friday, the board voted to lower the system’s projected return on investment from 7.2% to 6.9%. The decision underscores age-old criticisms that the board’s bullish forecasts have kept the system underfunded as payroll contributions from public employers have failed to align with rising payouts.
Since the Great Recession, Oregon’s PERS has seen double-digit returns for most of the 11-year bull market on Wall Street that ended in 2020. In that time, the system incurred $23.4 billion in unfunded liabilities, leaving its more than 900 member agencies responsible for making up the difference.
Systemwide, public employers are projected by PEBB to see payroll contributions jump by 2.7% or $715 million over the next two-year budget cycle that starts by July 2023. If the state’s average annual return of 11% holds steady, that could offset payroll hikes and reduced retiree benefits.
Friday’s revised forecast highlights the divide between PEBB and scores of actuaries who have projected more conservative returns. The Meketa Investment Group, which crunches the numbers for the state Investment Council overseeing PERS investments, estimated annual returns of 6.6% over the next two decades. The system’s actuary, Milliman Inc., forecasts even lower returns of 6.27% over the same 20-year period.
State lawmakers have tried to ease the pain for local governments. In 2019, they extended the deadline to cover that deficit from eight to 10 years. PERS critics contend the problem lies with government priorities.
Doug Berg, a retired IT manager from Eugene, is among the observers who have written extensively on the subject. Testifying to PEBB, he argues contributions to PERS must go up if the forecasts continue to fall out of line with market realities.
“The system is seriously out of balance, and it should now be crystal clear to you that unless you act to increase employer contributions, a burdensome and dangerous unfunded liability will be with us for decades to come,” Berg said.
Like other defined benefit plans, PERS is dependent on when Oregonians want to retire. Between 1990 and 2020, the average monthly PERS payment was $3,732 per month for retirees with 30 years of service. In 2020, the average retiree was 62 years old with 26 years of service under their belts. Over the past 20 years, more than 10% could claim 30 years of public service and the most generous PERS benefits.
Oregon was among the top ten states with unfunded pension liabilities going into the pandemic. Based on independent nonprofit Pew Charitable Trusts data, the state’s public pension plan was 83% funded as of 2019.
Attempts to reform PERS have seen mixed results. In 2019, Senate Bill 1049 set a stricter threshold for payroll deductions, redirecting 6% of employee gross pay over certain monthly salary thresholds to pension accounts.
Introduced this past session, Senate Bill 845 would have created another PEBB seat representing health care providers. However, unions alleged the new seat would have hurt labor representation on the board. The bill died in committee last month.
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