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

ECONorthwest 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?

ECONorthwest 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

ECONorthwest 4 Employer Rates Under Current System: Historic and Projected

ECONorthwest 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problems Internal inconsistencies 8% market returns are insufficient to fund 8% guarantee Benefit calculations use out-of-date actuarial tables Value of 2% COLA is not considered when calculating initial benefit under money match or pension plus annuity Plan options, members receive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)

ECONorthwest 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

ECONorthwest 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

ECONorthwest 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

ECONorthwest 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

ECONorthwest 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

ECONorthwest 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

ECONorthwest Year Levelized Employer Rates Under the Policy Alternatives Reform Estimated Employer Rate Current 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 % Full formula only13.8% Plan Termination and DB (8% normal cost)13.1% Plan Termination and DC (6% normal cost)11.1%

ECONorthwest Year Levelized Employer Rates for Proposed Reforms

ECONorthwest 14 Cost of Terminating Current Plan as of January 1, 2003 Actuarial Value of BIF$17,747,000,000 BIF Assets14,301,000,000 Cost to Fully Fund BIF$3,446,000,000 Value of Vested Member Accounts9,736,000,000 Match9,736,000,000 Value of Unvested Member Accounts300,000,000 Amount Needed to Liquidate Member Accounts$19,772,000,000 Member Assets10,036,000,000 Employer Assets8,671,000,000 Assets Available$18,707,000,000 Cost to Liquidate Member Accounts$1,065,000,000 Net Cost to Terminate Plan$4,511,000,000

ECONorthwest 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 and $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

ECONorthwest 16 Employer Rates and the State General Fund Rule of thumb: Each percentage-point increase in employer rates will increase 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 If plan remains unchanged, rising employer rates would put additional pressure on future budgets

ECONorthwest 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

ECONorthwest 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