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State schools, governments face higher pension tab

Some fear increase may result in fewer teachers, schools, police officers
 Posted: 2:00 AM September 29, 2012

TIGARD — With investment returns falling short, the board overseeing Oregon's public pension system voted Friday to lean on schools, cities and counties to make up the difference, putting yet another burden on their already troubled budgets.

Higher pension costs mean less money will be available for the core functions of government, and a parade of frustrated officials described for the board what they expect will be the local effect: fewer teachers, schools and police officers.

"We have cut all our flesh and muscle," said Cathy Miller, a Redmond School District board member. "During these next rounds we're going to be cutting into bones, which for us means cutting teachers and-or school days."

Redmond's pension contributions will rise from 12 percent of payroll to 19 percent for its longest-serving employees. The cost of the higher pension contributions will be equivalent to 28 teachers or 13 school days, Miller said, on top of the nine days that were cut from the current year.

The board's vote was not a surprise. The Public Employee Retirement System is required by law to keep the pension fund solvent, and even the officials frustrated with the decision acknowledged there was no alternative.

This is the second time since the Great Recession that pension costs have risen significantly to make up for devastating investment losses in 2008, which replaced a surplus in the state pension fund with a $16 billion hole. Unless investment returns improve significantly or projected costs drop, another 2.2 percent hike will probably be required in two years, officials said.

Even with the significantly larger pension contributions from public employers, it's expected to take 20 years to dig out of the hole from the 2008 investment losses.

"We're going to struggle this next year and we're going to struggle for some time," Jim Green, deputy director of the Oregon School Boards Association, told board members.

Higher pension contributions will raise costs at the Salem-Keizer School District, where Green is a board member, by $11 million, he said. For its longest-serving employees — those in the pension system's Tier 1 and Tier 2 plans — Salem-Keizer's pension contributions will rise from 12 percent of payroll to 19 percent. The rates are slightly lower for newer employees.

Before the financial crisis, public employers enjoyed lower pension contributions as robust investment growth was able to sustain the pension fund.

The sluggish economic recovery has held back growth in tax revenue, leaving government agencies to deal with costs that continue rising faster than their revenue. Cities and counties have cut back on street repairs, closed space in their jails and made due with fewer police officers.

In Lane County, where jail capacity has already been cut back and sheriff's deputies no-longer patrol 24 hours a day, more public safety cuts will probably be necessary, said Christine Moody, the county's budget manager. The county's pension costs will rise from 12 percent to 15 percent for Tier 1 and Tier 2 workers.

"The situation is dire, and we do fear for the safety of our community," Moody said.

The likely cuts will come from payrolls that are already slimmed down. Despite rising student populations, Oregon school districts and education service districts had 8,300 fewer employees in May than they did in 2009, according to the Oregon Employment Department.

As of last December, Oregon's pension fund was 73 percent funded, meaning it has enough money to pay 73 percent of the lifetime costs for all current and future retirees.

Pension funds are generally considered to be healthy when they're funded at 80 percent.

Only the Legislature and governor can make structural changes to the pension system that would lower its long-term costs to reduce the rates that public employers must pay. Changes are difficult politically because public employee unions wield significant clout in Salem. They're also difficult legally because of a state Supreme Court ruling that nullified some of the 2003 pension system reforms by then-Gov. Ted Kulongoski. The court said the state can't diminish pension benefits that have already been promised to workers.

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