Money Lost from Pension Fund Investments Last Year, Reports Oregon PERS. What This Means for Public Employers

Last year was a fairly poor one for financial markets all over the world. This was a combination of a bout of inflation, fluctuating prices on commodities, a giant spike in interest rates, and, of course, the war in Ukraine. This has been a fact in a great majority of countries, and Oregon is no exception whatsoever.

After the worst investment performance in over a decade, Oregon’s public pension system had their deficit grow by an astonishing $8 billion. That means that last year the Oregon Public Employees Retirement System (PERS) ended with a total of $28 billion in unfunded liability to meet its projected pension obligations. This has the potential to put some serious strain public employers within the next several years. After all, about three quarters of members’ retirement benefits have been funded by the system’s investment portfolio. Now, however, employer contribution rates have been pushed over time to more than 25 cents per dollar, a historic high, just to make up for the deficit.

They could cut the deficit; however, it would require both higher investment returns and raising the amount of money contributed by government employers such as schools, local governments, and even libraries. For many years, lawmakers have been discussing methods and taking the steps to keep these financial contributions in check. However, with how much the deficit has increased and with such meager investment returns, things are undoubtedly going to become more complicated in the future. Despite the lawmakers’ attempts to keep things in check, consultants for the state have started to become more bullish on the future as the deficit grows.

According to the system’s actuary as they spoke to PERS board members this Friday, although Oregon lost 1.55% of its pension fund value last year, it regained ground and increased 3.86% this year through August. State officials projected 6.9% each year. Then there’s the higher expected payroll growth, which has also increased projected liabilities, and thus it’s further widened the funding gap.

Oregon’s pension system had almost been fully funded before the Great Recession, but in the past eight years, the deficit has made its home around the $20 billion mark. I would be remiss not to mention the fact that investment returns have averaged around 10% since said recession, and yet the deficit is now what it is today. In fact, there were two years in which investment returns were hovering around 20%, which made a huge dent in Oregon’s unfunded liability deficit and gave many hope that there would be some cost relief for public employers.

According to retired information technology consultant Doug Berg, who has been keeping a close on PERS obligations, had his criticisms to make when submitting a written public testimony for the meeting on Friday. He’s always been an open critic of the board, and once again he made sure to point out the fact that the board had missed opportunity after opportunity to raise employer contribution rates when investment returns were in the green, thus losing the chances to shore up the system’s funded status before it was too late.

The PERS board itself does not respond to any public comments during its meetings. If any of these members had any concerns regarding the investment returns, as well as the potential implications on public employers’ budgets, none of them had bothered to speak up during Friday’s meeting.


So what caused the negative outcome anyhow?

You see, the pension fund within Oregon includes a large amount of investments that are managed by both the Oregon Treasury and a few outside investment firms. According to data from the treasury, many of the stocks and bonds that were traded performed poorly, and when paired with a flat performance from private equity partnerships, things quickly went down into the negatives. This is even despite the fact that there was a fairly strong performance with its real estate investments and some smaller asset classes.

So why are we learning about this now? Well, this information had been available for some time, but it wasn’t until the meeting on Friday that its potential impact on public employers was really brought to people’s attention. Now people know that there is potentially more pain to come for said employers.

The PERS board resets public employer contribution rates every two years, and despite a good return during both 2020 and 2021, rates had unfortunately been bumped up during July. The rates for the next two-year cycle, which starts July 1st, 2025, is going to be based on the valuation of the system’s liabilities and assets when the year ends; this includes investment returns.

Based on the financials at the end of 2022, the 900 plus employers in the system may expect their contribution rates to rise by 1.7% of the payroll, which is 27 cents per dollar and translates to roughly $1.3 billion in contributions in the next cycle, a historic high.

At Friday’s meeting, the board adopted new actuarial assumptions to be used for the upcoming rate setting period; this will include a best guess as to what returns Oregon’s investments will make within the next two decades.

The expected rate of return has been continuously decreasing since 2014, going from 8% to the current 6.9%. Each time it lowers, it increases the present value of the system’s liabilities and funding deficit. During this meeting, the board decided unanimously to keep the 6.9% assumption.

Many employers are already facing structural budget problems, which increased pension costs will no doubt make worse. People are hoping that last year was simply an anomaly and not the new standard. If the market can recover, so can public employers. Some are suggesting that the only thing to do in this case is to just put in more money, but it’s not as easy as it sounds. Until a proper answer is found, we await with bated breath.


Morning Brief Newsletter
Sign up today for our daily newsletter, a quick overview of top local stories and Oregon breaking news delivered directly to your inbox
You can unsubscribe at any time

Comments are closed, but trackbacks and pingbacks are open.