SALEM — The board of Oregon’s Public Employees Retirement System voted unanimously Friday, July 23, to reduce its long-term assumption about earnings on the pension system’s investment portfolio, a decision that will increase required contributions to the fund from public employers and reduce benefits for a number of employees who have yet to retire.

The board’s rate decision occurs every two years and is inherently political, as even small reductions can have major budget impacts on municipalities, school districts and state government in order to meet pledged pension payments for retirees.

On the other hand, leaving the assumption too high underfunds the system over the long run as it assumes more of the money to cover benefits will come from investment earnings rather than employer contributions.

In part heeding the strong suggestions of investment consultants, the board cut the expected annual rate of return from the state’s pension fund from 7.2% to 6.9%.

The reduction approved July 23, coupled with a slight increase in the inflation assumption for public employee wages that the board adopted, would increase systemwide contributions for the 900 or so public employers who participate in the system by 2.7% of payroll, or about $715 million, over the two-year budget cycle that begins in July 2023.

But the actual impact to employers could be far less if the pension fund continues to yield big investment wins. Year to date, the system’s returns are about 11%, beating assumptions. If that holds until year end, it would offset about half the projected rate increase.

Gov. Kate Brown and state lawmakers in recent years have done their best to limit increases in government employers’ pension contributions stemming from the need to pay back the system’s $24.3 billion funding deficit. In 2019, for instance, they passed controversial legislation to extend the repayment period for that deficit by eight to 10 years to lighten public employers’ pension load.

That move was politically expedient to protect public budgets and services, but is the kind of kick-the-can maneuver that leaves the system deeply underfunded even as its investment portfolio has been generating huge gains during a 12- year bull market.

For years, meanwhile, the pension board has been under pressure to reduce what many consider to be overly optimistic return assumptions that leave employers off the hook for properly funding their employees and retirees benefits. It has slowly reduced the rate over the last decade, but not as aggressively as some think necessary.

Lowering the rate also reduces benefit calculations for employees who expect to retire under the system’s money match formula as well as those who choose a beneficiary under its full formula retirement method because the rate is built in both those calculations.