What Is PERS And Why Does It Impact Ashland’s Budget?

What is PERS? PERS stands for the Public Employee Retirement System and constitutes the retirement pension system for Oregon public employees including, but not limited to, our police, fire fighters, and school teachers. Oregon PERS is currently underfunded by $27 Billion dollars statewide1. Subsequently for most municipalities, 25% of total payroll costs are allocated to cover the PERS funding obligation2,3 for current and retired employees.

PERS began in Oregon in 19464 and the structure is not unlike a 401K retirement account. Employees made their contributions and those contributions were invested in conservative government bonds. When an employee retired, they received the sum total of their contributions, plus the interest earned on the conservative bonds. This amount was then matched by the employer and paid out as a monthly benefit. The monthly payment uses a formula that accounts for life expectancy, and the interest earned on the account, as the monthly payments are drawn down.

Under this structure, the low interest rates on the pension investments resulted in low benefits for public employees. This outcome motivated changes to the PERS system, including the ability to invest contributions in higher risk instruments like stocks. Then, starting in 1975, the plan implemented a built-in guaranteed rate of return of 7%-8%5. The guaranteed rate means regardless of investment performance the pension will pay a minimum of 7%-8%. Said another way, if the PERS investment portfolio only earns 4% in a given year, retires will earn the locked in 7%-8%.

PERS portfolio investments, up until 2000, performed very well and yielded returns expected of higher risk, higher return stocks. On average the investments earned a 15% return6 annually. Rather than save the returns in excess of the guaranteed 7%-8% rate, and plan for inevitable market down turns, the PERS Board directed the employee accounts be credited 12% of the 15% on average6. This is 5%-6% greater than the guaranteed rate. Employers then had to match the employee contributions, and above average earnings. In addition, the employer also pays the guaranteed rate of return (7%-8%) on the balance of the account as the monthly payments are drawn down over the course of an employee’s retirement.

Time marches on then comes the 2000 dot com bust followed by the 2008 recession. These market events greatly reduced the value of the investment portfolio supporting PERS thus creating an underfunded pension.  An underfunded pension plan is defined as a retirement plan with liabilities greater than the value of the underlying assets.

Fast forward to today and Ashland faces funding its’ share of the PERS obligation in the amount of $10.3M for the 2019/ 2021 biennium, a $2.1M increase over the prior biennium7. The total obligation makes up 23.6% of total wages budgeted to be paid in the current biennium7. This trend will continue as we enter our next budget season in the Spring of 2021. Remember PERS benefits are outlined in public employee contracts that have been agreed to and executed. Therefore the benefits must be honored. Couple the growing PERS obligation, with likely reduced revenues due to Covid-19, and our council, city staff, budget officer, and the budget committee need to make challenging choices to meet these growing cost obligations.

Endnotes:

  1. https://www.opb.org/news/article/pers-ballot-measures-withdraw-oregon-2020/
  2. https://www.opb.org/news/article/oregon-state-supreme-court-pers-pension-cuts/
  3. Page 1-4 of the Ashland 19-21 Budget Message https://www.ashland.or.us/SIB/files/Administrative%20Services/2019-21%20Budget%20Document/City_of_Ashland_2019-2021_Biennium_Budget.pdf
  4. https://en.wikipedia.org/wiki/Oregon_Public_Employees_Retirement_System
  5. https://www.oregonlive.com/business/2017/02/pers_9_myths_about_oregons_pub.html
  6. https://www.oregonlive.com/business/2017/02/pers_9_myths_about_oregons_pub.html
  7. https://www.ashland.or.us/SIB/files/Administrative%20Services/2019-21%20Budget%20Document/City_of_Ashland_2019-2021_Biennium_Budget.pdf

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