Strong investment returns in Oregon’s public pension fund still leaves $14 billion deficit

Proposals to change Oregon’s pension benefits will be argued after the Legislature opens next month.  

Investment returns for Oregon’s public pension fund exceeded 14 percent in 2012, driven by strong returns from stocks and bonds, as well as big markups in the estimated value of illiquid private equity and real estate holdings.

 

Gains like that will help recover a little ground on the $16.3 billion actuarial deficit the system reported at the end of 2011. And the return

Proposals to change Oregon’s pension benefits will be argued after the Legislature opens next month.  

Investment returns for Oregon’s public pension fund exceeded 14 percent in 2012, driven by strong returns from stocks and bonds, as well as big markups in the estimated value of illiquid private equity and real estate holdings.

 

Gains like that will help recover a little ground on the $16.3 billion actuarial deficit the system reported at the end of 2011. And the return number will likely become fodder in the coming debate over reforms to the Public Employee Retirement System when the Oregon Legislature convenes in February.

 

Unions have consistently argued that 2008’s meltdown was an aberration, and that “normal” markets will return the pension fund to a fully-funded status without any intervention by lawmakers that reduces members’ benefits. The unions are gearing up to fight a proposal by the governor to limit cost-of-living increases on retiree benefits, or any other pension reform proposals that gain traction at the Capitol.

 

PERS NOTES

*** The powerful teacher’s union, the Oregon Education Asssociation, is firing up the base to fight Gov. John Kitzhaber’s proposed cost of living limits on public retirees’ benefits. He proposes to limit the COLA to the first $24,000 in benefits, which would reduce pension contributions from public employers by more than $800 million in the coming two-year budget. The OEA emailed teachers a link to a calculator this week where they can plug in starting benefits and life expectancy to see the impact on lifetime benefits. They asked teachers to “contact your legislator, tell them how this impacts your family and encourage them to reject the proposal. Remind them the courts have decided a promise is a promise.”

The pension fund’s historical returns are volatile, depending on the time frame they’re measured over. Its average return over the last four years, for example, is nearly 12 percent, while the five-year number is less than 3 percent because it includes 2008 results.

 

When all is said and done, the pension fund still has an actuarial deficit in the neighborhood of $14 billion. And last year’s returns will have no impact on the $900 million increase in required pension contributions that schools, municipalities and government agencies around the state will face starting July 1. Those rates are reset every two years. Rates will increase 45 percent in July based on returns though the end of 2011. They will change again in 2015 based on the pension fund’s returns through the end of 2013.

 

Oregon Treasurer Ted Wheeler, meanwhile, is using the pension fund financial results to support his own agenda. He issued a news release Friday highlighting the fact that the fund’s total assets now exceed $61 billion, their highest level since the global financial crisis. That’s evidence, the news release said, that the fund needs additional oversight. Wheeler is sponsoring a bill that would move the Treasury division that manages the pension fund into a public corporation governed by an independent board, with the authority to hire needed staff and set compensation levels more competitive with the private sector.

 

In the meantime, the PERS Board is getting ready to examine and potentially reset the system’s assumed earnings rate. That’s a key economic assumption that drives the calculation of the system’s liabilities, required contributions and member benefits under the money match formula. The board is slated to start discussion of the rate in March and adopt a new one in July. Even a half percent reduction in the rate would drive a $550 million increase in required contributions in 2015.

 

The PERS Board typically bases the assumed earnings rate on return assumptions from its actuary and investment consultants. Those forecasts are expected to come in lower than in years past because of lower returns in the bond market, and reduced assumptions on private equity returns.

 

Allan Emkin, managing director of the Pension Consulting Alliance, says his firm’s estimate of the returns PERS can expect on its portfolio is likely to come in closer to 7.5 percent than 8 percent, a result similar to what’s been seen by other large public funds.

 

“If there’s a trend nationally, it has been for folks to reduce that number — 7.5 is the new 8,” Emkin said. “We’ve had a really good run. Where we are today is extraordinarily low interest rates and still a global imbalance in terms of debt load. People’s return expectations are more modest.”

 

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