TIGARD, Ore. — The governing board of the state's public pension system Friday lowered the rate of assumed earnings on the state's pension fund.
The board adopted to assume a 7.2 percent rate of return on the state's investments of the Public Employees Retirement Fund. The rate is currently 7.5 percent.
That decision doesn't affect how much the state actually earns on its investments, which are overseen by the state's investment council.
But the change is projected to increase the system's unfunded actuarial liability, the amount by which the system's obligations exceed its assets.
Using the new rate, the state's actuary will calculate a new unfunded actuarial liability, a figure that will be revealed later this year. The new rate is expected to increase the unfunded liability — at most recent valuation $21.8 billion — by about $2 billion.
The decision is also expected to increase the amount of money that individual public employers must dedicate to paying for employees' pension benefits as a share of payroll.
In a defined-benefit plan such as the one Oregon provides to its employees, employers have to make up the difference between what employees are guaranteed and what the state's investments are able to return.
Local budget managers are bracing for the effects of the change.
While the decision may appear abstract, for school districts, where personnel costs can make up roughly 80 percent of annual budgets, the effects are real.
Nearly every year since 2008, Eastern Oregon's Umatilla School District has had to make cuts, in part because of increased pension costs, according to Superintendent Heidi Sipe.
Sipe said the increases have been higher than additional funds from the state can cover.
"Over the past 10 years, we've modified our textbook adoption processes, limited our supply budgets, enacted energy saving procedures, limited staff increases, cut paid days and had pay freezes," Sipe wrote in an email last week. "If we cannot get funding to adequately address the PERS increases from the state, I see those same strategies again at play in our future which is concerning for our students."
The rate decision has been monitored with interest, especially by those advocating for reforms to the state's pension system.
A Brighter Oregon, a coalition of state businesses that angled for spending reforms during the recently concluded legislative session, is one such observer.
"A more realistic assumption is an important first step toward unmasking the severity of the problem these rising PERS costs create for our state, schools and local governments," said Pat McCormick, spokesman for the group, "and ultimately for Oregon taxpayers left holding the bill for the pension system's growing unfunded liability."
House Minority Leader Mike McLane, R-Powell Butte, said in a statement Friday that the vote "should serve as a sobering moment for our state's political leaders."
Earlier this week, a group appointed by Oregon Gov. Kate Brown, a Democrat, to find ways to leverage state assets to chip away at the unfunded liability, held their first meeting. It has been charged with finding a way to shave $5 billion from the unfunded liability and are reviewing the state's assets.
Lawmakers can't reduce benefits already earned, per a 2015 Oregon Supreme Court decision.
Some lawmakers, including many Republicans, propose modifying public employee benefits going forward as a way to cut down on the system's costs.