Oregon’s public employee retirement fund is massive, sitting at roughly $103 billion. Part of the Public Employee Retirement System, or PERS, the fund is paid for by Oregon taxpayers as those funds are distributed to schools and other government services through the legislature.
It’s also an investment fund. Those taxpayer dollars don’t just sit and accumulate in a big bank account, they’re invested by the Oregon State Treasury in different companies and industries the world over — including, as it turns out, millions in the parent company of FOX News and billions in the fossil fuel industry.
Having the funds invested means that they can grow faster than they would simply by saving them. But it also means they can shrink, and that’s exactly what happened last year.
As of this year, the PERS fund’s unfunded liability — which means the amount of money it has on hand versus what it would need in order to pay out every worker covered by the fund if they retired today — has piled up to roughly $28 billion.
It’s not precisely a riveting subject, but it’s the sort of thing that every Oregon taxpayer should care about, because they’ll likely be paying more to support the PERS fund next year.
Return on investment
The most recent losses came up a few weeks ago at a regular meeting of the PERS board. Matt Larrabee, an expert in government-sponsored pension and retirement programs for the consulting firm Milliman, outlined the issue.
“The 2022 calendar year was not a great year in the investment markets for PERS or any other system,” Larrabee said. “We had a return of between negative-1.5% and negative-2%.”
Because the fund’s investments lost money, the unfunded liability grew by a whopping $8 billion, which brings it up to that total today of $28 billion.
There are only two ways to get that unfunded liability back to zero: either increase taxes to dump more money into the fund, or figure out a way to getter better investment returns.
But should Oregonians be worried about last year’s dismal outcome? Oregon State Treasurer Tobias Read, who is now running for Oregon Secretary of State in 2024, said something to the effect of “yes and no.”
“No one would ever be excited about losing money, but I think it’s important to think about what happened in that year and to place this all in a little bit of context,” Read said. “So let’s go back into that year and think about all the things that we were all reading about — really high inflation, interest rates on the rise, commodities, a simmering war in the Ukraine — so it created a really volatile environment for investing in the world. And that’s the world in which we operate.”
Read said that the PERS fund’s losses of as much as 2% are relatively mild, given the alternatives, even if it does total $8 billion.
“So imagine a portfolio that is a very plain vanilla; 70% stocks, 30% bonds. We use that to compare sometimes … that portfolio would be down about 16% in that same period of time,” Read explained. “Or look at two other pension funds that are really well-regarded and really, really well-run. The state of Wisconsin was down 11%, plus CalPERS, the California Public Employee Retirement System, was down over 6%. So in that context, again, we’re not happy about 1% down but 1% is a lot better than some of those alternatives.”
Thinking long term
At the treasury, Read said that time frames are also a big factor in how they think about losses. They’re less concerned about how investments perform in a single year and more concerned with long-term averages, since Oregon’s retirement obligations extend years into the future.
Read said that over the last decade or two, returns are up more than 8%.
Oregonians shouldn’t be concerned about PERS going broke, either, Read said. He expects that the fund could break even within the next 30 years, in part because there will be fewer “Tier 1” retirees receiving benefits.
“The bulk of that unfunded liability is associated with what’s known as Tier 1, a structure that existed up until 1996,” Read said. “For new entrants since then, the design of the program — which is set by the legislature not by Treasury — changed, and the system is much better funded in Tier 2 and Tier 3, so that continuation of demographic trends will go on and the funded status on current projections and assumptions improves over time.”
In short, Tier 1 and Tier 2 don’t exist anymore. The former only applies to public employees who started working before January 1996, and the latter only for employees who joined between then and the end of August 2003. But there are still employees of the state, or retirees drawing PERS benefits, in these two groups, prior to some of the state’s modern restructuring efforts.
As Oregon’s public workers age, retire and eventually pass away, Read explained, PERS will no longer need to cover those more generous pensions — and at the same time, the state’s investments are expected to grow over time, overall. But that second part comes with the disclaimer that markets fluctuate, and world events can have big impacts on markets.
And then there’s the future cost of state employment contracts. For example, Gov. Tina Kotek approved new contract deals over the summer with the state’s largest unions. Twenty-two thousand state workers represented by SEIU Local 503 got a 6.5% cost of living raise for the current year and another 6.5% raise for next year. On top of that, workers are eligible for step increases as they advance at their jobs. The state also paid out a lump sum bonus of $1,500 for each union member.
Another big union for state employees, AFSCME, negotiated a similar package. According to Read’s office, those contracts added $1 billion to the PERS unfunded liability.