SALEM — Oregon’s projected unfunded liability for public pensions apparently shrunk significantly last year, mostly attributable to healthy investment earnings that pushed the fund past the $100 billion mark for the first time in its 75-year history.

A final accounting will come later this year, but preliminary numbers for 2021 peg the unfunded liability at either $19.7 billion or $14.4 billion, depending on whether “side accounts” are excluded or included. Side accounts are amounts of money that participating governments set aside to cover part of their future pension liabilities, but not all of the 900 government employers in the Public Employees Retirement System have set up such accounts.

The comparable figure for 2020 was $28 billion.

The PERS fund was at $85.4 billion in December 2020; the preliminary figure one year later is $100.4 billion. Its investments go beyond common stocks, which PERS started back in 1973, to other things. Oregon has one of the nation’s largest public pension funds.

“It’s a good marker to know what the investment returns of last year did,” said Scott Preppernau of Millman, the firm that does the actuarial work for the system, in a Jan. 31 report to the PERS board. “Clearly a strong asset year makes a significant improvement in these results over a one-year time frame.”

A decade ago, under then-Treasurer Ted Wheeler, the Oregon Investment Council changed its strategy so that the PERS fund will not grow as much when financial markets surge, but also does not drop as much when markets plunge. The change emerged after the Great Recession, when the PERS fund lost 28% of its value as it declined from $66 billion in December 2007 to a low of about $48 billion in March 2009. It took several years for the PERS fund to get back to its pre-recession level.

PERS Board Chairwoman Sadhana Shenoy said Oregon’s long-term liability for public pensions hasn’t gone away, given that the funded status of the system is still below a target of 90%.

“We have a long way to go,” she said. “But this shows that one good year gives us a little bit of respite.”

Rate-setting is next

The valuation of the PERS fund as of Dec. 31 will be a factor when the board sets pension contribution rates for the 900 participating governments for the 2023-25 budget cycle, which starts July 1, 2023. The board will likely set those rates at a Sept. 30 meeting.

However, the average rate of 17.9% is likely to be maintained, instead of reduced. The board changed its policy last year so that increasing the funded status of the system to a specified target of 90% takes priority over lowering contribution rates.

The “average rate” is a misnomer, because no participating government pays it.

Rates are determined by the mix of employees within a government agency, based on when they were hired and whether they are classified as public safety employees, who qualify for higher pensions upon retirement but also require higher rates than other employees for pension contributions. State law defines “public safety employees” for pension purposes.

Rates tend to be higher for governments with a greater share of employees hired before August 2003 — although those numbers have declined because of retirements — or those with more public safety employees, such as police, sheriff’s deputies and firefighters.

Of the 228,000 public employees covered by the system as of mid-2021, PERS reports that more than 162,000 of them were hired after the Oregon Legislature overhauled the system in 2003. The rest, all hired before then, fall into more generous defined-benefit plans from prior years.

But of the 156,500 retirees as of the end of 2020, most of them (130,000) get benefits under a pre-1996 plan and are classified as Tier 1. Another 18,000 get benefits under a plan (Tier 2) that is in effect from January 1996 to August 2003.

The retirement plan that applies to most now blends contributions from employees and their employers in what are known as individual account plans.

Contribution rates for participating governments also are “collared,” which means part of the increase is carried over into future budget cycles, so that participating governments do not get hit with the full amount in a single cycle. The board approved a change last year in how rates are calculated for the collar, which limits what a rate increase would be otherwise.

“Emotion is not part of being an actuary,” said Matt Larrabee, also of Millman. “But we are happy that the rate-collar structure is performing for this first biennium (two-year cycle).”