To say the 2022 Actuarial Valuation Results presented at the September 29, 2023 PERS Board meeting was astonishing in the amount of bad news it contained scarcely captures how awful it was. It is by far the worst I have seen since I have been following the rate setting cycles. Everywhere you looked, it was bad:

  • Increase in unfunded liability of $8 billion, back up to $28 billion, including $1 billion due solely to the big payroll increase passed by the legislature this year.
  • Drop in funded status of 7%, down to 79%
  • Increase of 3.08% in average net employer contribution rates, bringing the rate to a record 21.69 percent of payroll. This will add $1.3 billion to the contributions required of the public employers for the two-year period starting in 2025, coming at a time when state revenues will be falling back to earth after the pandemic surge and the record-setting kicker refund exceeding $5 billion.
  • Full year Oregon Public Employees Retirement Fund (OPERF) 2022 returns of -1.55%, the first negative year since the 2008 financial crisis.
  • OPERF year-to-date regular account returns +3.79%. Unless these returns come up to the assumed rate of 6.9% for the full year, there will be more pain to deal with when setting the final 2025-2027 rates next year.
  • All of this without even reducing the assumed rate from two years ago.

These facts should give us all much to reflect upon.

Since the financial crisis, relatively good investment returns have provided PERS boards much leeway in setting the assumed rate. It allowed boards, including the current board, to hold the assumed rate steady at times without triggering a crisis, even though it was never the right thing to do after 2008.

We are now in a different environment, one I have warned about many times. Just one year of bad returns, coming at a time of inflationary pressures, has erased what meager progress there was in taming the unfunded liability, underscoring how easily the system can fall into crisis.

It didn’t have to be this way.

One should contemplate the different situation we would be in if the assumed rate had been reduced steadily from 2009 to now. Instead of 6.9%, the assumed rate would likely be around 6.3% coming into this year, close to OPERF’s 15-year returns. The funding situation would clearly be in a lot better shape because a lot more money would have come into the system, with steady but moderate employer rate increases.

Instead, boards played politics with the assumed rate, and now the system is facing its biggest crisis since 2008.

All of this leaves this board with no good options. With both a big increase in employer rates AND a big increase in the unfunded liability, the board’s dual mandate of providing predictable employer rates while managing the unfunded liability is not achievable. The board now finds itself in the unique situation where anything it does will make matters worse. It’s an epic mess, a culmination of years of squandered opportunities for boards to do what was right instead of what was expedient.

Of course, this situation will ease if OPERF investment returns recover soon. But while we wait, the experience of this year’s situation should give everyone involved in PERS a newly chastened view of how fragile the system is and how quickly it can spiral out of control.

See Ted Sickinger’s excellent article in the Oregonian/Oregonlive for more background about how PERS got to where it is today.