By July, the little John Day School District in eastern Oregon will have to make a startling increase in its mandatory PERS contributions, which would amount to over 14% of its whole payroll expenses.
Any anticipated gain in state support for schools will most likely be outweighed by the $900,000 increase in donations, which accounts for about 10% of its general fund budget. Furthermore, it won’t be evident what kind of funding rise the state decides on until the Legislature concludes its budget discussions in June, just a few days before the planned increases take effect.
Thus, the local school board gave administrator Mark Witty permission to begin searching for possible cuts last week.
“We want to protect programs as much as possible,” Witty stated. However, this could have a significant effect on what we can offer our children.
It’s not like the district is alone. Even while the base contribution rates for the 900 public employers that take part in PERS are expected to increase by 1.4% of payroll in July, many employers are dealing with much larger increases in their pension expenditures, which can double, triple, or even surpass the increases in some situations.
The system’s poor investment performance over the past two years and inflation-driven payroll growth that significantly exceeded projections are two of the many reasons for the increases, both of which call for larger employer contributions.
The main factor influencing individuals who are subject to the biggest hikes, however, is the decline and impending expiration of the so-called side accounts they had previously set up with PERS, where they used borrowed funds to make a side wager on the system’s financial performance.
Over 100 government employers in the state placed these wagers between 2003 and 2008. In order to invest alongside the pension system’s portfolio of stocks, bonds, real estate, private equity, and other assets, schools, cities, counties, community colleges, and even the state itself issued more than $6 billion in pension obligation bonds. The proceeds were then sent to the Oregon Treasury.
Employers were essentially betting that the returns on the borrowed funds would be more than the bond payments they had to make, leaving a surplus that PERS could utilize to bring down the employer’s pension expenses.
And it was successful. The gambles paid off, with the exception of a few employers who took out loans right before the 2008 financial crisis and saw their side businesses collapse.
For example, the John Day School District borrowed $3.6 million in 2003 and has saved about $3 million on its pension expense over the next 20 years. The savings, which went straight toward funding public services, total more than $1 billion for the entire state.
However, that pension holiday is ending. Due to investment underperformance and PERS’s process of depleting the remaining account balances, over 140 employers will notice a significant decrease in their side account offsets in July.
They will then be forced to pay the fully freighted PERS rates in 2027 after the accounts are depleted.
As the system attempts to reduce its unfunded liabilities, which increased from $1.5 billion at the end of 2007 to $29.4 billion at the end of last year, those contribution rates are now at all-time highs. For PERS companies, pension expenses currently account for an average of almost 25 cents of every payroll dollar, rising to 27 cents in July.
To safeguard employers against uncontrollable cost fluctuations and guarantee the system’s consistent funding, the PERS Board has implemented a system of rate collars that normally restrict permitted rate changes within a two-year period. However, side accounts are exempt from such collars.
Depending on their unique financial shortage, workforce mix, and whether they have a side account, individual businesses’ real rates can differ significantly.
For instance, over the past 20 years, Portland Public Schools has saved over $400 million in costs because to four distinct side accounts. Due to the rate offsets they offer, its PERS contribution rate is currently almost nothing.
However, its contribution rate for Tier 1 and Tier 2 employees (those employed before to August 2003) would soar to 8.6% of payroll come July. Employees employed since will see a 5.4% increase.
According to Myong Leigh, the district’s temporary chief financial officer, it represents a $30 million cut for the two-year budget cycle starting in July. Then, in 2027, two of its side accounts and the rate offsets they offer—which amounts to roughly 15% of the district’s payroll expenses—expire.
Leigh believes that since the debt service on the bonds that financed them would also disappear, the impact that year will be lessened. However, prices will rise once more.
It will have an impact of $20 million for Salem-Keizer Public Schools and $19 million for the Beaverton School District in the upcoming biennium.
Beaverton K-12’s chief financial officer, Michael Schofield, stated, “We have taken certain steps to lessen the impact.” However, we will continue to sense it.
The system’s actuary, Milliman Inc., estimates that businesses will lose an additional $1.8 billion as a result of rate hikes over the next two years. As previously reported by the Oregon Capital Chronicle, the $670 million boost for schools is more than enough to offset the $600 million increase in funding that the governor pledged to maintain existing service levels.
Gladstone School District is expected to experience the most significant rate increases among school districts, with an astounding 16% of payroll, or $2.75 million, on the horizon. The district’s superintendent, Jeremiah Patterson, stated that’s before any step or cost of living increases take effect.
According to Patterson, the school earned $2.4 million this biennium for all integrated programs, including school improvement funds from the Legislature’s enactment of the Student Success Act in 2019 and voter approval of Measure 98 in 2016.
“We’ve done great things with these, which are the hallmark investments the state has made in education over the last several years,” he said.
The gap is not filled by raising the present service level.
“I’m really worried about the next two years,” he remarked. We will experience a significant force reduction if legislation is not passed, and I fear that this will happen too late for those of us at the tip of the spear.
In fact, there aren’t many simple ways to deal with the impending cost hikes, and the ones that are available are cumbersome from a political standpoint.
For employers issuing pension obligation bonds, Carol Samuels, a managing director at Piper Sandler, is the preferred municipal banker. According to her, the current climate makes it difficult for employers to create new side accounts by taking on additional debt.
This is because the underlying gamble is riskier due to the excessively tight disparity between current interest rates and PERS expected investment earnings. Although interest rates may drop, the system’s long-term expected profits rate, which has been lowered from 8% to 6.9% since 2015, has also decreased.
In the meanwhile, the Legislature has limited choices for enacting new system changes that would significantly alter PERS expenses while still being acceptable to the courts.
According to Samuels, this is a financial issue that must be resolved by someone in order to fulfill the commitments made by the authorities thirty years ago.
In order to counteract the impending rate shock, Gladstone Superintendent Patterson suggested that lawmakers use the state’s Rainy Day or Educational Stabilization monies. However, both funds have limitations, such as requiring a three-fifths majority approval from lawmakers. Furthermore, since the majority of PERS companies have been paying their entire payment and do not have any side accounts, it is unclear how such funds will be distributed fairly.
Legislators’ plans to shift the state’s income tax kicker in order to reduce the overall deficit of the system are no different. A supermajority vote is necessary. How the funds would be distributed fairly is unclear. Voters also enjoy receiving their reimbursements.
In order to lower their rates, the Legislature did create an incentive fund in 2018 that matches employers’ new side account deposits with PERS by 25%. In order to receive a $300,000 match from the state, the Black Butte Ranch Rural Fire Protection District, which employs nine people and will see significant increases in July, intends to deposit $1.2 million in a new side account.
According to Chief Dan Tucker, that should significantly lower our rates.
More employers are being urged to follow suit by PERS. However, it’s unknown how many have the reserves necessary to contribute at all, let alone one large enough to drastically lower their rates.
Since their new rates were announced in October, PERS’s actuarial manager, Jake Winship, has been fielding calls from worried businesses. He claimed that because investment performance was so good during the prior rate-setting period, which increased side account balances and the associated offsets, employers had previously been a little complacent.
He claims that he now feels like a hurricane forecaster.
He predicts that before it becomes less intense, it will be more intense. For certain employers, the 2025–2027 biennium will be a very unpleasant time.
Similar increases will occur in the upcoming biennium, but 150–200 additional employers will be impacted, he added.
Winship stated that there is a great deal of astonishment, alarm, and awareness of the impact at this time.
-One of the reporters on the investigative team is Ted Sickinger. 503-221-8505, [email protected], or tedsickinger are his contact details.
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