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by Dan Lucas
There has been some good news from Oregon PERS recently. A week ago actuaries let the PERS board know [2] 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 [3]) 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 [4] “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 [5] 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 [4] 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 [6]. 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 [7].”
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 [8] 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 [9] 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 [9].
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. [10]“)
To read more from Dan, visit www.dan-lucas.com [11]