Oregon PERS board moderates rate hikes, warns of trouble to come
By Mike Rogoway
The Oregonian
January 29, 2010

The board overseeing Oregon's employee pension fund voted Friday to give schools, state agencies and other public employers a break on their upcoming pension contributions.

The 4-1 vote eases those employers' pain in the state's upcoming budget cycle, but does nothing to ease the long-term agony inflicted by the stock market's 2008 crash.

The Oregon Public Employees Retirement Fund lost $17 billion during the market's slide. It recovered three-quarters of that during last year's rally, but remains about $14 billion underfunded.

"Because of the big investment downturn in 2008, all our stakeholders in the state are moving into a new scenario that we all have to adjust to," warned James Dalton, chairman of the PERS board.

PERS rules limit employers' rate increases to 3 percent of their total payroll in each biennium, provided their individual funds are at least 80 percent funded. Below that, the rate of increase jumps up to 6 percent.

With government budgets crimped by the downturn in tax revenues that came with the recession, public employers and unions urged the board to adopt a graduated system of increases instead of the "cliff" that employers hit at the 80 percent threshold.

An analysis by actuarial consultant Mercer LLC found that the change would have little long-term effect on PERS' funding status. So board members voted to adopt the graduated approach, beginning with the state's next fiscal cycle in 2011.

The lone dissent came from board Vice Chairman Thomas Grimsley, a teacher in the Bethel School District. He favored lowering the maximum increase to 5 percent of payrolls to reduce pressure on schools during the next budget cycle.

Regardless of the change, employers' PERS contributions will rise sharply beginning next year, and will likely keep rising rapidly for many years to come.

Even if the state's investments average a hearty 10.5 percent return over the next decade, Mercer forecast that employers' PERS costs will top out at 20 percent of their total payroll in 2014 -- up from 12 percent this year.

If investments perform less well, and average the 4.5 percent return they did over the past decade, pension costs will rise steadily and eat up more than a third of public employers' total payroll by 2022.

Additionally, many employers pay other costs to finance bonds used to cover their pension obligations.

PERS board member Brenda Rocklin, CEO of SAIF, a workers' compensation fund, said she was tempted to vote against the graduated increase Friday to send a message about the pension fund's dire straits.

"Let's do the cliff," she said, before relenting. "Because then people can start to get that there's a problem here."

Dalton, a former Tektronix executive, shared the sentiment but also voted in favor of the graduated increase. "These rates are going to go up," he said, "and they're going to stay up for a long period of time."

-- Mike Rogoway