PHOENIX - Oregon state and local government contribution requirements will "escalate significantly" in the next six years due to recent increases in total liabilities and weaker investment earnings, Moody's Investors Service said this week.
Moody’s made those dour projections in a report Monday. Part of a series of reports analyzing state and local government pension risks across the U.S., the Oregon report casts a sobering light on the future of that state’s pension management in the wake of a failed 2013 reform effort and market factors challenging many state and local pension systems.
Oregon’s government pension exposure is heavily concentrated in the Oregon Public Employees Retirement System, with the exception of Portland which has its own sizable plan. The state implemented reforms in 2013 that aimed to keep OPERS’ unfunded liabilities under control, but the state’s Supreme Court overturned those changes the following year and the system’s unfunded actuarial accrued liability soared from less than 50% as a percent of payroll in 2013 to in excess of 150% in 2015.
“Pension contribution rates relative to payroll for Oregon's state and local governments are higher than historic levels and will continue to rise in coming years,” Moody’s said Monday. “Even if key assumptions pertaining to factors such as investment performance are met, recent increases in unfunded liabilities are pushing up government costs.”
OPERS sets contribution rates every two years. The average contribution rate for OPERS employers in the 2017-19 biennium was nearly 21% of payroll, compared to just over 10% in the 2003-05 biennium.
OPERS decided last month to drop the assumed rate of return to 7.2% from 7.5%, which remains higher than the 7.0% recommended by OPERS' actuaries. If the system had dropped its assumed rate of investment return to 7.0% for setting rates in the 2019-21 biennium, Moody’s said, the average contribution rate to OPERS would have grown to roughly 34% of payroll by the 2021-23 biennium under the plan's assumptions, before gradually declining.
Oregon’s investments are also volatile, Moody’s said, leading to further possibility of increased contributions.
“Oregon governments are exposed to budget risk from high expected pension asset volatility,” the rating agency said. “OPERS' cash outflows for defined-benefit payments exceed the contributions in, making it more difficult to build up assets if returns are volatile. At the same time, roughly 75% of OPERS' investments are allocated to volatile public and private equities and real estate.”
Future costs for Oregon's governments will be heavily influenced by pension fund investment performance, Moody’s said.
“OPERS' actuaries simulated the trajectory of average government contributions under a large number of different scenarios with a median 20-year return of 7.0% and a standard deviation of 13.3%,” the report notes. “While this simulation was conducted prior to the latest actuarial valuation snapshot, it nonetheless depicts how sensitive future pension costs will be to investment performance. The worst 25% of simulation trials project systemwide average contribution rates reaching 40% of payroll, or more, in the 2023-25 biennium, but the best 25% of trials resulted in contributions at or below 22% of payroll by the same biennium.”
Moody’s rates Oregon’s pension risk as “medium.”