Here is my testimony I submitted for the July 23 PERS Board meeting, where they are deciding where to set their assumed rate of return on PERS investments for the next two years.

I emphasized the same points I made in my testimony for the board’s June 4 meeting and in my op-ed published in the Oregonian/OregonLive on July 11.

I also included more technical sections that I did not have space for in my op-ed. These parts are pretty wonky, but you may find them interesting.

I included a section on how an assumed rate of return that persistently exceeds what PERS investments can reasonably produce has a very large negative impact on how well their policies function in reducing the unfunded liability.

I also showed how their rate collaring policy for smoothing employer contribution changes actually functions as just another tool for keeping employer contributions too low, further exacerbating their funding situation.

Here’s my testimony:

Members of the PERS Board:

In my written testimony to the board on June 4, 2021, I urged you to take advantage of a rare confluence of good news and substantially reduce the assumed rate of return.

I contended an historically high valuation of PERS investments and a state projection of $1 billion in additional revenue over the next biennium allow you to cut the assumed rate substantially with a minimum of pain to public employers.

I am back today to ask you to seize this opportunity and go beyond your actuaries’ minimum recommendations in cutting the assumed rate.

In my op-ed published in The Oregonian/OregonLive on July 11, I showed how your policy of amortizing the unfunded liability over a period of years is hamstrung when the assumed rate is substantially higher than the growth of PERS investments.

In a balanced system, the recent stellar investment growth would have translated to a sharply lower unfunded liability. But on March 9, Milliman’s estimate of the unfunded liability was $24.3 billion, little changed over the last two years. Why so little change?

When the assumed rate persistently exceeds the growth of PERS investments, the amortization policy is applied to an unfunded liability figure that doesn’t match the real world. And the mismatch between a realistic unfunded liability figure and the mythical one reported by Milliman is not small.

If we extrapolate Milliman’s preliminary unfunded liability calculations at various assumed rates (March 29 board packet, page 128), a much more realistic figure for the current unfunded liability comes into focus. Using Milliman’s projections of future returns of 6.27%, we see the unfunded liability is actually about $35 billion.

So it should be no surprise that PERS investments can grow an astonishing $17.4 billion over the last two and a half years yet the unfunded liability barely moves. The system is seriously out of balance, and it should now be crystal clear to you that unless you act to increase employer contributions, a burdensome and dangerous unfunded liability will be with us for decades to come.

But there is another policy that misbehaves when the assumed rate is persistently too high: your policy for collaring employer contribution rates.

As you know, the rate collar was conceived to be a smoothing influence on employer contribution changes from period to period. It would prevent a large upward spike in contributions when PERS investments drop significantly and, equally importantly, prevent a dramatic decrease in contributions when investments post a large gain. Put another way, when investment returns increase substantially, your calculations should produce a large decrease in contributions. The collar then kicks in and prevents contributions from falling too far. It puts money back in the bank, so to speak, for the day when investments decline.

Over the nearly 12 years of rising values of PERS investments, the rate collar has never worked that way. The closest it has come is right now, where uncollared employer contributions and collared contributions are virtually identical. But it took that historic surge in PERS investments to get even that far. This should be a huge red flag to you. With investment returns like these, your calculations should have produced a substantial reduction in employer contributions. 

The rate collar has become the evil twin of the original policy. Unlike the amortization policy, which is merely ineffective, the rate collar has actually made things a lot worse in recent years.

The system’s calculations have produced employer contribution increases year after year on rising investments because it is mathematically attempting to correct its serious imbalance. It is literally screaming at you that significant contribution increases need to happen. The evil twin collar has instead allowed you to keep contribution increases to an unsustainable minimum under the guise of “just following policy”. And you have done so for years.

It should be unconscionable to you to go on setting contribution rates using policies that only serve to exacerbate the very problems they were designed to correct. You need to accept that employer contributions must rise to the point where your policies at least begin to gain traction.

I note that in today’s meeting you are considering modifications to the rate collar policy that appear to make it a little less evil. I applaud this effort. However, it remains to be seen if this change will result in the increase in employer contributions that is needed to make a significant difference in the health of the system.

Today you can choose how those contributions should rise over the next few years. You can choose a chaotic, head-in-the-sand path by continuing to hold contributions dangerously low and hoping for the best. On this path, when the next big drop in PERS investments occurs, the unfunded liability could spike to such a level that not even the evil twin collar will be able moderate the increases. Your actuaries would not permit it. To keep the system solvent, they will insist on immediate and painfully large increases in contributions no matter what the collar says.

Or you can set the system on a path of measured contribution increases over the next few years until your policies once again can work as intended and hope you are not too late to avert a crisis.

It is time finally to right the badly-listing ship that is PERS and set the system on a sustainable course for the future.

Douglas Berg