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An uptick for PERS.

Byline: The Register-Guard

Seven years ago, Oregon's Public Employees Retirement System had a $6.1-billion surplus - it had enough money to meet all its pension obligations to current and future retirees, plus 12 percent. One year later, a Wall Street crash put PERS $11 billion in the hole, 20 percent short of fully funded status. Such wild swings suggest a need for restraint in celebrating an impressive improvement in the system's financial condition.

Paul Cleary, the executive director of PERS, told the Oregon Investment Council Wednesday that the pension system's unfunded liability had been cut by more than half since 2011. That year, PERS had a $16.3 billion gap between its resources and obligations. By the end of 2013, the shortfall had been reduced to $8.1 billion. PERS is now projected to have 87 cents of every dollar it will need to pay current and future retirees' pensions. It's doing even better if "side accounts" - money that many local governments borrowed at low rates and invested in the financial markets - are included in the calculations.

Nearly three-quarters of the money for PERS benefits comes from investment earnings, so bull markets make a big difference. Returns on investments of 14.3 percent in 2012 and 15.6 percent in 2013 cut $4.5 billion to $5 billion from the unfunded liability. The Legislature also reduced PERS benefits last year, mainly by limiting annual cost-of-living increases, which shrank the shortfall by an additional $5 billion.

That's an improvement of $9.5 billion to $10 billion. Last year, however, the pension system's governing board made a prudent decision to be more conservative in its projections of future investment returns. PERS had long assumed average annual earnings of 8 percent on its invested funds. Acting on expectations of a long-term slowdown in the financial markets, the board scaled its expected rate of return to 7.75 percent. That small change meant PERS is projected to need an additional $1.5 billion to $2 billion to cover its obligations. The move partially offset the gains from investment returns and benefit reductions, resulting in a net change of about $8 billion.

But the same variables that have brightened PERS's outlook could darken. The financial markets could slide - the Standard and Poor's 500 index is down 2.55 percent so far in 2014. The Oregon Supreme Court could strike down part or all of the PERS benefit reductions approved by the Legislature. The result of either or both would be an increase in the pension system's unfunded liability.

Even after two good years and a difficult series of legislative actions, PERS is still in the red. The unfunded liability is an obligation shared by all Oregonians, and a continued run of better-than-expected investment returns will be needed to eliminate it. Otherwise, the result will be higher taxes or reduced public services.

The latest news about PERS is good. But the possibility - even the likelihood - of continued volatility should instill a lasting attitude of caution among those who manage PERS's resources and lawmakers who write laws governing pensions.
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Title Annotation:Editorial
Publication:The Register-Guard (Eugene, OR)
Date:Jan 31, 2014
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