Oregon PERS Policy Options: Effects on Employer Rates and the State General Fund

1. Oregon PERS Policy Options: Effects on Employer Rates and the State General Fund ECONorthwest April 10, 2003

2. Research Questions • To what level are employer rates expected to rise to fund the current system? • To what extent would alternative proposals or policies affect employer rates? • How do employer rates relate to the State General Fund?

3. Cost of Current System • Employer rates will rise sharply • 10.74% Today • 16.5% in July • 26.2% in 2007 • These rates do not include “pick up” of member contribution • Will rise to more than twice the current average employer rate of 10.74% • Peak rate could approach 30% under current rate-adjustment rules

4. Employer Rates Under Current System: Historic and Projected

5. Sources of the Problem • Structural Issues • Guaranteed minimum returns • Crediting more than the minimum guarantees underfunding if actuary’s assumed rate is correct • Excess crediting produces a cascade of funding problems • Internal inconsistencies • 8% market returns are insufficient to fund 8% guarantee • Benefit calculations use out-of-date actuarial tables • Value of 2% COLA is not considered when calculating initial benefit under money match or pension plus annuity • Plan options, members receive greater of: • Full formula • Money match • Pension plus annuity (if active before 1981)

6. Sources of the Problem • Management Issues • Board has credited members with more than the assumed rate in 18 of 26 years; more than twice the assumed rate in 5 years • Board cannot accurately estimate future liabilities with actuarial model • The actuarial model assumes a constant, 8% return each year • Market volatility adds to the plan’s liabilities • The actuarial model accurately estimates Unfunded Actuarial Liability as of a prior date, but decision makers need additional information to understand likely future obligations

7. Policy Alternatives • No new members • Defined benefit plan • Defined contribution plan • Combination of both • Current system overhaul • HB 2003 • Full formula only • Plan termination • Defined benefit plan • Defined contribution plan • Combination of both

8. Policy Alternatives:No New Members • New plans for new hires • Current members continue with existing or modified plan • New hires would be in a new plan, which could be • Defined benefits (e.g., “Macpherson Plan”), or • Defined contribution (e.g., “Fair Plan”), or • Some combination of both

9. Policy Alternatives:Current System Overhaul • HB 2003 • Full and immediate implementation of correct actuarial tables (AEFs) • Suspension of COLA for retirees who received excessive earnings crediting • No more member contributions (“6% solution”) • Member accounts would grow less rapidly, shifting members from money match to full formula over time • New members would all retire on full formula • Convert current plan to full formula only by eliminating money match

10. Policy Alternatives:Plan Termination • Terminate current plan • Fully fund Benefits in Force (BIF) • Members would receive account balances • Vested members would receive twice their account balances • Successor plan would consist of: • Defined benefits, or • Defined contribution, or • Some combination of both

11. Comparing the Costs • Employer rates measure cost • Rates move up and down over time, making it hard to compare differences over time • Levelized employer rates measure the same cost • A rate that, if paid in each year, has the same present value as the stream of actual employer rates • Allow comparison of different policies

12. 25-Year Levelized Employer Rates Under the Policy Alternatives

13. 25-Year Levelized Employer Rates for Proposed Reforms

14. Cost of Terminating Current Planas of January 1, 2003

15. Employer Rates and the State General Fund • State is an OPERS employer • Directly: general services, judiciary, public safety, legislators • Indirectly: K-12 education • DAS assumed a 4-point increase in employer rates between 01-03 and 03-05 • $250 million in additional General Fund spending • Two-thirds related to State School Fund • Employer rates are expected to increase an additional 4 points (8 points in total) if the plan is unchanged

16. Employer Rates and the State General Fund • Rule of thumb: Each percentage-point increase in employer rates will increase 03-05 General Fund expenditures by $63 million, assuming a constant workforce • If OPERS changes do not immediately reduce employer rates, estimated General Fund shortfall could increase by up to $250 million in 03-05 • If plan remains unchanged, rising employer rates would put additional pressure on future budgets

17. Conclusions • Failing to act will result in employer rates to more than twice current rates for next 25 years • Plan alternatives affect employer rates by varying degrees: • Addressing only new hires will have very little effect on employer rates during next 25 years • Overhauling the current system can reduce employer rates but cannot return rates to the current level • Terminating the current system could produce rates that are close to the current level

18. Conclusions • OPERS employer rates are an important driver of State General Fund expenditures • OPERS policies will shape the state’s fiscal position for years to come