In the midst of the pandemic, the subject of public pension funding seems to have gotten lost amid all the headlines. However, pension funding remains a relevant topic in state and local government finance, and continues to be a significant component of government liabilities and payroll-related expenses. Oregon’s Public Employees Retirement System (“PERS”) administers a range of retirement programs on behalf of more than 900 public employers throughout the State. PERS provides programs to a wide array of entities, including: state agencies, universities, community colleges, public school districts, cities, counties, and other local government units.

Oregon’s Public Employees Retirement System

Despite the pandemic, PERS has benefitted from healthy investment earnings over the past year, currently estimated by PERS at 20.05%, which has resulted in a declining projected unfunded liability. Investment earnings have propelled PERS beyond $100 billion for the first time in its 75-year history. Valuation estimates prepared by PERS indicate that the Plan has an unfunded actuarial liability of $19.7 billion, and is estimated to be 80% funded, excluding side accounts—and 85%, including side accounts. For reference, as of December 31, 2020, the unfunded actuarial liability of PERS was $28.0 billion, and the funded status was 71%. Side accounts exist for PERS employers that have issued pension bonds or used other cash resources to make lump sum payments to PERS. For most municipalities, these lump sum payments have been deposited into a “side account” that is amortized over a fixed period and used to reduce the annual contribution rate of the municipality making the deposit.

In addition, PERS recently announced in its February 2022 Employer News report that it is estimating the unfunded actuarial liability of the Plan may decline below $0 by the end of 2036. The improved outlook is due to a new rate collar methodology adopted by the PERS Board in July 2021 that prevents the unfunded actuarial liability rate from decreasing below the 2019-2021 rate, and uses any excess earnings to accelerate the funding of the Plan until the funded status is at 90%. This new methodology is expected to be applied to the 2023-2025 rates, which are expected to be set later this year at the September 30, 2022 meeting.

The Importance of Pension Funding

Given recent declines in the equity markets, it is likely that pensions will again become a headline worthy topic. Nevertheless, the portfolio management team of Aquila Tax-Free Trust of Oregon views pension funding an integral consideration in our proprietary credit research process, and is reviewed individually for each holding and detailed in a written report to our credit committee.

It is also important to note that not all of the over 900 government employers in PERS have established side accounts, and contribution rates vary significantly by employer. For 2021-2023, annual PERS contribution rates, including side account offsets, range from 0.05% of valuation payroll for Lincoln County School District and the City of Gaston to 78.37% of valuation payroll for Keno Rural Fire Protection District. Employers that have issued pension bonds to finance side accounts also have debt service payments due on their bonds.

In our security selection process, we continue to place a high degree of importance on pension funding and pension contribution rates. Our internal credit assessment includes not only the impact of the pension liability, but also the impact of the pension obligation bonds as it relates to payroll.

This article is for informational purposes only and not intended to represent a solicitation to buy or sell any particular security. Opinions shared are those of the portfolio managers and do not necessarily reflect those of the Investment Adviser of the Fund.

Mutual fund investing involves risk; loss of principal is possible. Investments in bonds may decline in value due to rising interest rates, a real or perceived decline in credit quality of the issuer, borrower, counterparty, or collateral, adverse tax or legislative changes, court decisions, market or economic conditions. Trust performance could be more volatile than that of funds with greater geographic diversification.

The Fund seeks to provide as high a level of income exempt from state and federal income tax as is consistent with capital preservation. For certain investors, some dividends may be subject to federal and state taxes, including the Alternative Minimum Tax. Consult a tax professional.

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