What is the PERS crisis?

by Dan Lucas

Oregon PERS Crisis 101 – Part 1: What is the PERS crisis?

The crisis in the Oregon Public Employee Retirement System (PERS) has been in the news again recently. PERS announced hundreds of millions of dollars in higher pension costs in the budget that starts next summer; the result of an unfunded liability that has grown to $16 billion. That means that PERS is projecting it will have to pay out $16 billion more in retirement benefits than it will have in investment income and employer contributions. The investment income comes from investment earnings on PERS’ $55 billion in holdings, and the employer contributions come from most of the state and local government agencies within Oregon, including school districts.

PERS assumes an average investment earnings of 8%, but last year those earnings came closer to 2%, continuing a trend that started when investment earnings began dropping in 2008. To make sure there’s enough money to pay the pensions of PERS retirees in the future, PERS is raising the amount that the government employers have to contribute. For next year’s budget, that means contributions for all of the PERS employers will increase by a total of $1 billion; about $130 million of that just for the General & Lottery Fund portion for the 51,000 employees in the state budget.

That’s a double whammy for K-12 schools. The $130 million of increased state PERS costs will come from the $15 billion state General & Lottery fund, which provides a major source of K-12 funding ($5.8 billion statewide), and the school districts will also directly bear the impact of their own PERS increases. For example, Hillsboro School District (HSD) is paying 18.5% of payroll for PERS now and they are expecting an increase to 24.5% next summer.

The total payroll budget for HSD is $91 million, and so that increase from 18.5% to 24.5% represents an increase of $5.1 million dollars, or 70 teachers. So next summer just to pay for PERS increases, Hillsboro will have to lay off 70 more teachers, or more taxes will have to be collected or investment returns will have to increase – thus reducing how much HSD, as an employer, has to pay PERS. But PERS doesn’t see employer payments coming down “for the rest of our working years.”

Additionally, the reduction of 70 teachers is before the impact of the $130 million of increased PERS costs to the state General & Lottery fund is factored in. If the state has to absorb an additional $130 million cost in its $15 billion budget, it could further reduce the $5.8 billion K-12 state school fund. That would reduce how much the Hillsboro School District receives from the K-12 state school fund. If the cuts were applied evenly across the board in the state budget, it would result in the reduction of about 14 more Hillsboro teachers. That would be the equivalent of a total of 84 teachers laid off next year just for the Hillsboro School District to pay for PERS increases.

Part 2 of this three-part Oregon PERS Crisis 101 series will look at “What’s causing the PERS crisis?”, and Part 3 will look at “How do we solve the PERS crisis?” – Click here for a PDF that contains the entire 3-part series: Oregon PERS Crisis 101.

NOTE: Discussions and articles throughout 2012 have referred to next year’s PERS statewide increase as $1 billion. In articles in the last few weeks, the $1 billion PERS increase has been revised to $900 million. The $1 billion reference in this article is informational only – it was not used in any calculations.