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

ECONorthwestApril 10, 2003

2 ECONorthwest

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?

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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

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Employer Rates Under Current System: Historic and Projected

12.67%

14.81%

13.55%

12.79%13.71%

25.23%

19.87%

11.43% 10.48%

28.97%

10.47%

25.49%

29.14%

9.28%

10.82%

0%

5%

10%

15%

20%

25%

30%

35%

1977-1981

1982-1986

1987-1991

1991-1996

1997-2001

2002-2006

2007-2011

2012-2016

2017-2021

2022-2026

2027-2031

2032-2036

2037-2041

2042-2046

2047-2051

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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Internal inconsistencies• 8% market returns are insufficient to fund 8% guarantee• Benefit calculations use out-of-date actuarial tables• Value of 2% COLA is not considered when calculating initial benefit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)

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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

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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

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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

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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

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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

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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

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25-Year Levelized Employer Rates Under the Policy Alternatives

ReformEstimated

Employer RateCurrent System (for comparison) 23.9%

No new members and DB (8% normal cost) 23.2%

No new members and DC (6% normal cost) 22.3%

HB 2003 15.3%

Full formula only 13.8%

Plan Termination and DB (8% normal cost) 13.1%

Plan Termination and DC (6% normal cost) 11.1%

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25-Year Levelized Employer Rates for Proposed Reforms

0%

5%

10%

15%

20%

25%

30%

Current Plan NNE + 8% DB NNE + 6% DC HB 2003 Full FormulaOnly

Termination +8% DB

Termination +6% DC

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Cost of Terminating Current Planas of January 1, 2003

Actuarial Value of BIF $17,747,000,000

BIF Assets 14,301,000,000

Cost to Fully Fund BIF $3,446,000,000

Value of Vested Member Accounts 9,736,000,000

Match 9,736,000,000

Value of Unvested Member Accounts 300,000,000

Amount Needed to Liquidate Member Accounts $19,772,000,000

Member Assets 10,036,000,000

Employer Assets 8,671,000,000

Assets Available $18,707,000,000

Cost to Liquidate Member Accounts $1,065,000,000

Net Cost to Terminate Plan $4,511,000,000

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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

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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

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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

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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