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Oregon PERS: Money match pension formula benefited retirees, but fueled a deficit

Come July, schools face an additional $380 million in required pension contributions for the following two years. For public agencies statewide, the two-year budget hit starting in July is $900 million. Pension costs could increase again in 2015. The Oregonian

They are two words many Oregonians either love or wish they'd never heard:

Money match.

Much of the chronic strife of Oregon's Public Employee Retirement System stems from liabilities created by its money match retirement formula.

Money match is what allowed thousands of PERS members to retire at full salary and more. It's what left the system facing a massive projected deficit prior to the 2003 pension reforms. And it's responsible for a big chunk of the legacy liabilities that public employers and taxpayers are struggling to pay off today.

2003-2007: Market roars back. PERS returns average 15 percent, but Tier One earning crediting limited to 8 percent.

2008: Market crashes, reducing PERS assets by 27 percent. Deficit is at $16 billion.

2011: About half of retirees still retire under money match formula, as it yields their highest benefit, though the percentage is decreasing. Five percent retire with annual paychecks of more than 100 percent of their final salary. Benefits for retirees with 30 years service average 74 percent of final salary -- driven by money match.Unlike many other states, public employers in Oregon make social security contributions, so employees are eligible for those benefits.

Conventional wisdom is that the 2003 reforms fixed the money match problem. They certainly took the rocket fuel out of it by capping runaway growth in members' retirement accounts. That substantially hit the equity of members on the brink of retirement, many of whom feel they were cheated out of promised benefits. Eventually, the reforms will force all PERS members to go out under a less generous formula based on length of service and final pay.

Yet it will be decades before PERS digests all its money match retirees. For now, the formula is still cranking. More than 5,100 retirees used it in 2010 and 2011, according to pension data released to The Oregonian. In that cohort, benefits for retirees with 30 years and more of service still averaged 90 percent of final pay.

PERS says those numbers overstate money match's largesse today, and include anomalies that skew replacement ratios higher. Those situations would not be repeated under the current law, it says. Its best salary replacement figures show career employees retiring with 74 percent of final pay, about 50

percent higher than the Legislature's original pension target. Money match still drives that number, but it declines each year because of reforms.

Yet would-be PERS reformers think the 2003 reforms left plenty of fat to trim. Further money match changes -- all perfectly legal, they believe -- would cut PERS $16 billion unfunded liability and public employers' annual costs.

PERS and its actuary are working up the numbers on several options. It's not clear they'll have enough support in the Legislature. And further money match changes would be fought with religious zeal by employees if they undermine benefits again.

But here's what's cooking.


Lower the interest rate used to calculate annuities under the money match formula.


A vote of the PERS Board, or an explicit change to statute.

In a system where there's little new under the sun, this novel recommendation came from a research committee at the City Club of Portland that spent months in 2010 examining the PERS problem.

When an employee retires under money match, the state doubles the balance in the member's account, which includes pre-2003 employee contributions (most "picked-up" by public employers) and the associated investment earnings. The retiree can choose a lump-sum payout or convert the balance into an annuity, which provides a monthly payment.

The overwhelming majority of retirees choose the annuity because the calculation assumes a member's remaining account balance continues to earn PERS' assumed earnings rate -- currently 8 percent -- as it is drawn down during retirement.

That's an amazing deal. Life insurance companies that sell annuities use a "risk-free" return comparable to yields on Treasuries and highly rated corporate bonds. Today, that might be 3.5 percent.

The difference between those rates amounts to a 44 percent increase in benefits over 20 years for PERS retirees -- and more when you include an annual cost of living adjustment.


* PERS $16 billion unfunded liability would decline by $1.7 billion if PERS lowered the annnuitization rate from 8 percent to 6 percent, according to a 2010 analysis by the system actuary. A lower rate would save more, but PERS alternative full formula retirement option provides members with a benefit floor, so only so much can be saved by lowering the rate.

* Employer contributions would decline only slightly, as savings on money match retirements would be offset by additional costs for retirees shifting into the full formula option.

* Members would feel the pain.

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