The city of Sweet Home and School District 55 both face increasing retirement costs as the Oregon Public Employees Retirement System’s assets lag behind its liabilities.
Both will face higher rates based on 2008 investment losses, but those high rates won’t be imposed until the 2011-13 biennium.
An actuarial valuation report provided to the state by Mercer, a consulting firm, showed that PERS lost 27 percent of its value in 2008. By the end of 2008, liabilities were only 80 percent funded.
That means the city’s rates will increase. Rates actually decreased earlier this year, starting on July 1, from 9.26 percent of an employee’s pay to 5.92 percent for tier one. For newer employees the rate decreased from 11.51 percent to 3.22 percent. The city also picks up its employees 6-percent contribution.
The only city employees using PERS are police officers. Other city employees are in a defined-contributions plan through the International City Managers Association.
The ICMA plan functions like a 401(k), said Finance Director Pat Gray. That means what it pays retired employees is based on how the investments perform.
“When the 401s tank, we tank,” Gray said. “We have no pension obligation. There’s no guarantee.”
PERS is a defined-benefits program, which guarantees a level of return for retiring employees. When its investments don’t perform well, its assets can be less than its liabilities.
The city has anticipated an increase in PERS rates, Gray said. “We put it in the ending fund balance because we knew it was going to go up.”
That money will be carried over in the budget from year to year to help the higher rates when they’re finally imposed July 1, 2011. Rates are projected to go to the high teens.
As it stands now, the city is over-funded with PERS, Gray said.
Projected rates will change before 2011 as intervening years are accounted.
“The recent news from PERS is not surprising,” said District 55 Business Manager Kevin Strong. “We’ve expected higher future PERS rates ever since the stock market tumbled last year.
“What it means for the district is that we will be required to spend a higher percentage of our operating budget on PERS in years ahead, which will reduce the amount available to spend in other areas.”
This year, the district is setting aside money in all funds to help defray the increase, Strong said.
The district borrowed money in 2002-03 to pay down its unfunded liabilities at that time, Strong said. The district borrowed more than $17 million and gave the cash to PERS to pay off its calculated unfunded liabilities.
The district needs the value of that money to grow at a rate higher than the interest rate on the loan, Strong said. “Long-term, the district’s financial health is tied to our investment performance.”
Those costs are all increasing at a higher rate than the district’s salaries, Strong said, therefore, the district must set aside some funds to offset the rapid increase.
Counting loan payments, the district is spending 19 percent of wages on PERS, down from 20 percent last year.
In 2009-10, the district is spending $2,097,000 on PERS and the loan. Wages from all funds are $11,037,000.
The district also picks up its employees’ 6-percent contribution to retirement.