By GREG HARTMAN

PERS Coalition Attorney

It was an ill-kept secret that the PERS Board would announce an increase in 2013 employer rates at its most recent meeting. That indeed happened, along with the expected subsequent calls for a decrease in the system's assumed earnings rate, which has been 8 percent for two decades. Incidentally, this rate has been incorrectly — but frequently — referred to as "the 8 percent guarantee" for Tier 1 members, simply because the rate has been 8 percent for so long. In fact, Tier 1 members are guaranteed whatever the assumed rate is, but the PERS Board does have the authority to drop (or raise) that figure.

This is going to be a topic of discussion over the coming months, particularly once the 2013 Oregon Legislature convenes early next year. One of the most difficult things to explain to those who are not familiar with PERS, or with pension plans in general, is the relationship between the assumed earnings rate and the employer contribution rate. When discussing this relationship it is often useful to first explain how a more traditional, defined benefit pension plan works, and then that PERS fundamentally works the same way, although "Money Match" and "Pension Plus" annuity benefits create a unique layer of complexity.

In a traditional, defined benefit pension plan, which bases benefits on years of service and final average salary (like "Full Formula" and the PERS Tier 3 OPSRP plan), this relationship is relatively clear. The sole purpose of an assumption about earnings is to estimate how much an employer needs to pay into the system to make sure there are sufficient funds to pay for the benefits owed to employees when they retire. This is the case because the only sources of funding for employee benefits are:

• Employer contributions; and

• Earnings made by investing those contributions.

Therefore, if an actuary assumes earnings made by investing contributions will earn less in the future (i.e., lowers the assumed earnings rate), then current employer contribution rates have to be increased to cover the funding shortfall to pay the benefits owed to employees. Conversely, if the actuary assumes the earnings on investing contributions will be higher in the future (i.e., increases the assumed earnings rate), then current employer contribution rates can be lowered because the earnings on investments are assumed to cover a greater share of the cost of the benefits owed to employees.

As in so many other instances, in PERS there is an added layer of complexity. In PERS, the assumed earnings rate also affects the calculation of both "Money Match" and the annuity portion of "Pension Plus" annuity benefits. These benefits are tied to this assumption because the guaranteed rate sets the rate that Tier 1 member accounts are credited with earnings in an amount no less than the earnings assumption. Lowering the earnings assumption means, therefore, that fewer dollars will be credited to Tier 1 member accounts, and members will ultimately have less in their accounts at retirement.

In addition, lowering the earnings assumption affects the calculation of the "Money Match" and annuity portion of the "Pension Plus" benefit, because once again lowering the assumption also lowers the amount by which the employee account which funds the benefit will grow during retirement. Hence, the amount of the benefit that will be paid goes down. However, these reductions only impact about 10-15 percent of the current active members of the system. For the vast majority of PERS members, the lowering of the earnings assumption has no impact on their benefits.

Accordingly, the long-term savings on benefits for Tier 1 members eligible for "Money Match" or "Pension Plus" annuity benefits is overwhelmed by the immediate financial impact of a new earnings assumption. A reduction in the earnings assumption means that the approximately $50 billion which has been contributed to fund PERS benefits (for both current and future retirees) is predicted to generate lower earnings in the future. This shortfall in assumed investment earnings will necessarily require increasing employer contribution rates.

In other words, the public outcry to lower the assumed earnings rate in light of the 2013 employer rate increase is contradictory — doing so would have the opposite effect and raise employer rates even higher.

Oregon AFSCME members can rest assured that you have a lobbying team that understands this situation, including Mary Botkin, who is the senior PERS lobbyist at the capitol.

(Editor's note: The PERS Coalition, of which AFSCME is a founding member, is a voluntary association of Oregon public employee unions with members in the Oregon Public Employee Retirement System. Greg Hartman is the longtime lead attorney for the coalition.)