09/22/2016

Oregon’s Retirement Conundrum

by

Tim Iltz VP, Municipal Bond Credit Analyst

Tim Iltz
VP, Municipal Bond Credit Analyst

Oregon’s Public Employees Retirement System (PERS) has once again become front page news in anticipation of the release of the 2017-19 contribution rates. The headline making news this week is that PERS now has an unfunded liability which has reached $21.8 billion or $16.2 billion when including side accounts. However, it is important to keep in mind that approximately 900 public employers participate in Oregon’s PERS, including school districts, special districts, cities, counties, and state agencies. Each of these participants has a different contribution rate and surplus or liability. System wide, rates are estimated to increase by 4.66% or 3.62% on a weighted basis.

While none of this is good news for participating Oregon local governments, it does not impact all participants equally. For example, Junction City School District and South Lane School District are both located in Lane County, and both serve the mission of educating K-12 students. However, Junction City School District has a total net contribution rate of 22.33% of covered payroll for tier-one/tier-two employees while South Lane School District has a net contribution rate of 4.37% of covered payroll. These rates are also affected differently by the proposed increases; Junction City School District’s contribution rates are estimated to increase an additional 4.61% to 26.94% while South Lane School District’s rates are estimated to increase 3.69% to 8.06%. Due to the large variance in rates and liabilities, we review each holding on an individual basis rather than resorting to broad generalizations.

The good news is that local governments will not be surprised by this news since the advisory rates have been available since last year. Furthermore, the new PERS rates are for the 2017-19 biennium, which begins on July 1, 2017, affording local governments significant time to prepare for their budgets in 2017. In addition, many local governments have PERS reserve accounts or other rainy day funds that have been set aside for this increase. The bad news is that no matter how much time they are given, some local governments do not have the resources or flexibility to absorb the increases without either spending reserve funds or reducing staff and services.

PERS has been an important component of our credit research for the last several years, and as a result we have been selective about the credits we have decided to hold and acquire in the Aquila Tax-Free Trust of Oregon. As this news is released over the next couple of weeks it is important to keep in mind that local governments do not all pay the same contribution rate and that many governments have made significant preparations for this increase. Overall, we do not expect this news to have a significant impact on the Fund outside of the headline risk.