Decrypting PERS employer contribution rates

by Dan Lucas

There has been some good news from Oregon PERS recently. A week ago actuaries let the PERS board know that the PERS unfunded liability had dropped from $16.3 billion in 2011 to $8.5 billion in 2013.  The $7.8 billion reduction in the unfunded liability was achieved by $6.4 billion in better returns on PERS investments (on the $68 billion PERS fund) and as a result of 2013 legislative changes (SB 822 & 861) that lowered projected retiree benefits.

All of that meant that the dramatic increases in employer contribution rates have slowed considerably. Ted Sickinger at the Oregonian reported “the average base contribution rate for public employers is set to creep up by only 1 percentage point of payroll.” That’s good news for employers who contribute to PERS – school districts, the state and local governments.

So what are the new employer contribution rates?

The Statesman Journal reported on Tuesday that “Employer contribution rates across the PERS system are expected to be about 10.61 percent of payroll in 2015.”

On Wednesday the Oregonian reported that “bottom line, the average base contribution rate for public employers is set to creep up by only 1 percent starting in July 2015, to 17.5 percent of payroll.”

So which is it? Are the new average employer contribution rates 10.61% or 17.5% of payroll?

Well, both are true – but both are also deceptive. PERS employer contributions only represent a portion of the PERS costs for school districts, the state and local governments.

The Statesman Journal’s 10.61% is the Collared System Average Net Rate and the Oregonian’s 17.5% is the Collared System Average Base Rate. (The “Collared” refers to PERS rate increase “collars” – restraining like a dog collar – a mechanism to soften the impact of employer rate increases.)

The difference between the two percentages – net and base – is PERS side accounts. Side accounts are when PERS employers prepay on their unfunded PERS actuarial liability. Most such prepayments are funded with pension obligation bonds – government agencies (including school districts) “Sell low-interest bonds to the public, invest proceeds in riskier, higher-yielding assets [in PERS-managed accounts], and use the profits to reduce annual pension contributions.”

Since the government agency still has to pay for their prepayment one way or the other – such as having to pay back their bond holders – the Oregonian’s 17.5% is a more honest number in the public discourse.

More honest, but not completely honest. As mentioned earlier, PERS employer contributions only represent a portion of the PERS costs for school districts, the state and local governments.

Let’s look at Salem-Keizer School District as an example.

The Salem-Keizer School District 2013-2014 PERS employer overall contribution rate would be around 13% of payroll based on a Tier 1/ Tier 2 Payroll rate of 14.28% and an OPSRP General Service Payroll rate of 12.28%. And yet in their 2013-2014 Budget the Salem-Keizer School District reported their “total PERS rate down from approximately 31% to 27% of payroll. The District’s overall rate includes the rate charged by PERS, the rate for the debt service on its PERS bonds, and the 6% employee pickup agreed to by the District.¹” And the “rate charged by PERS” that Salem-Keizer is talking about includes what they have to pay to PERS for retiree health care.

So when looking at what the PERS costs were for Salem-Keizer School District in their 2013-2014 budget, it was 27% of payroll, not 13%. And payroll (salaries & benefits) is 87% of the Salem-Keizer budget.

PERS employer contribution rates are an “internal” number – a number that makes sense to discuss in school board meetings, government budget meetings, etc., but when they’re shared with the general public it is extremely likely to leave a deceptive impression – unless they’re accompanied by a GREAT DEAL of explanation. It would be far more honest and useful to the public discourse to talk about total PERS costs for schools and government entities in Oregon.

¹The 6% employee pickup goes to an IAP for the employee (“The IAP is similar to 401(k)-style plans common in the private sector.“)

To read more from Dan, visit www.dan-lucas.com