PERS board chooses ‘pay now, save later’ plan for schools

Milliman, Oregon's actuary, created a greatly simplified illustration of the effects of different rates on paying down the Public Employees Retirement System's unfunded actuarial liability. The PERS board chose the blue line Friday, May 29.

The Public Employees Retirement System board took the long view Friday, May 29.

A unanimous board approved a PERS policy holding the recent line on PERS rates in 2027-29 for school districts, education service districts and charter schools. The move rejected a slight lowering but is aimed at saving schools money in the future.

Public employees' retirement benefits are paid by a combination of PERS investment income and system payments from their former employers, a district's PERS rate. PERS rates are high, approaching a third of payroll in some districts, in part because of generous retirement packages offered decades ago, often in lieu of pay increases during tough financial times.

Schools are paying the price now for the decisions of policy-makers long gone. The PERS board was determined to not repeat the practice of kicking the hard funding decisions down the road.

In 2025, the Legislature passed Senate Bill 849 to make what was expected to be a one-time payment of $168 million toward the K-12 system's total liability for 2025-27, lowering most school PERS rates by 1.68 percentage points.

The question Friday was whether the board should use that lowered rate for the "collar" while determining the 2027-29 rate. PERS rates have a collar so that they don't swing too wildly from cycle to cycle. As of 2023, the collar prevents PERS rates from increasing more than 3% of payroll and from decreasing until PERS is around 90% funded. As of the 2025 valuation, PERS is about 76% funded.

The collar has held the rate steady the past three cycles, although district costs still climbed because employees' pay went up.

The collared debt payment on PERS unfunded liability works out to 13.95% of payroll. With the SB 849 credit, the rate was 12.27%.

When applying the rate collar this year, the board had to decide whether to use the 13.95% rate or the 12.27% rate. According to Milliman, the state's actuary, using either number would be sound accounting practice.

Using the higher rate would cost school districts more in the next biennium but would save them money over the long run by paying down the unfunded liability faster and getting them to a point where the collar would allow the rate to fall.

The lower percentage would translate into a slightly lower rate in 2027-29 but would cost districts more later, an estimated additional $1 billion over the next decade.

The PERS Board chose the 13.95% rate.

Board Chair Jardon Jaramillo said he must serve fiduciary principles of stability and intergenerational fairness by not passing on greater costs to future generations.

Leaders from OSBA, the Coalition of Oregon School Administrators, the Oregon Association of School Business Officials and the Oregon School Personnel Association submitted a joint letter urging the board to take the 13.95% rate.

The education advocates stated that the 1.68% credit in 2025-27 was paid for by the Legislature as a one-time action. To roll it forward without paying for it would cost school districts more in the long run, hurting budgets and impacting staff and classrooms.

But that's not the end of it.

"All things in PERS are necessarily very complex," Matt Larrabee of Milliman told the board.

The one-time payment has turned out not to be one time.

The $168 million came from the winding down of the School Districts Unfunded Liability Fund. The Legislature created the fund in 2018 with most of its funding sources expiring in 2023. The $168 million was advertised as the last gasp, but around $150 million is now available. It could still grow a bit before the last funding source ends in 2027.

SB 849 can again apply that money toward districts' unfunded liability, potentially lowering rates about 1.25% of payroll in 2027-29. With Friday's decision, that would be subtracted from the 13.95% collar rate.

The Legislature will have final say on how all this actually works out for school districts. When the Legislature sets the State School Fund, it calculates what it would cost with inflation to continue districts' staff and programs, known as the "current service level."

PERS is part of that cost roll-up, so wherever the rate lands, in theory the Legislature will provide enough to account for the increase in 2027-29.

The Legislature, though, is working at a state level, providing an average increase. At the district level, rates and increases vary widely. School district rates ranging from next to nothing to nearly a third of payroll depend on factors such as staff age, experience and pay; the retirement benefit levels of current and former employees (Tier 1, Tier 2 and OPSRP); and the availability of side account investments.

More than half of those side accounts finish their terms in 2027, and that is driving a whole separate spike in rates for many districts.

PERS is now putting the finishing touches on rates for 2027-29. Districts will learn the average statewide system rate in July and individual rates in September.

About this time next year, district leaders will learn if the State School Fund will actually cover their individual changes.

- Jake Arnold, [email protected]