PORTLAND — The citizens panel tasked with overseeing Oregon’s public pension fund investments began a much-anticipated debate Wednesday on how much it can expect to earn from those investments during the next decade.
Sounds wonky. And it was. But bureaucrats and politicians throughout the state are keeping tabs on the outcome, as it could have a major impact on their budgets, on top of the painful increase in pension costs they are already facing.
As the system’s actuary is fond of saying, the assumed earnings rate is the Swiss Army knife of the Public Employees Retirement System. It’s the lynchpin assumption used to calculate the present value of its liabilities, older members’ benefits and, by association, the contributions that government employers must make to the system. If you assume pension investments will earn less, employers need to sock away more money now to pay for future benefits.
PERS’ $71 billion investment portfolio is set up to deliver that rate of return — currently 7.5 percent — while limiting risk to the extent possible. And investment earnings traditionally have covered about 70 percent of the system’s costs.
And therein lies the problem.
Of late, the portfolio has not been delivering that number. And some members of the Oregon Investment Council and the PERS Board think it’s unrealistically high. Interest rates on bonds are persistently low. Returns from private equity funds, historically the portfolio’s turbocharger, have been trending lower. And the stock market is already at record levels.
During the past decade, PERS returns have averaged only 5.5 percent. Meanwhile, public pension systems around the country have been lowering their return expectations.
The PERS Board will vote on a new assumed earnings rate in July, and that decision will be based, in large part, on the guidance they receive from the Oregon Investment Council.
The potential implications are…