Pension decision to cost Oregon $750 million

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Preliminary analysis of Moro decision shows PERS costs will rise nearly 5% in 2017-19, costing nearly $750 million. The Oregon Supreme Court delivered its decision  in the case of Moro v State of Oregon. The Court overturned the vast majority of the PERS reform cost saving provisions in SB 822 and SB 861 from the 2013 Legislature.

Analysis of decision.

Of the $800 million in biennial cost savings achieved by the 2013 PERS reforms, nearly $750 million was achieved by reducing the annual COLA adjustments for current retirees. These COLA reductions for current PERS retirees were rejected by the Oregon Supreme Court.

However, the Supreme Court validated the constitutionality of reducing retiree COLA payments prospectively from the effective date of the 2013 PERS reforms. This, however, will result in only minimal, if any, PERS cost savings in the immediate future.

The remaining cost savings of the 2013 PERS reforms (approximately $55 million) were achieved by eliminating the extra retirement benefits payments intended to cover added tax costs for Oregon retirees. The 2013 Legislature ended the practice of giving these added payments to out-of-state PERS retirees. The Oregon Supreme Court upheld this reform.

What comes next?

The first consequence of the Moro decision will be that the PERS retirees who did not receive the full COLA during the 2013-15 biennium will need to be paid the amounts they have not received due to the now-overturned law. It is estimated that the fiscal impact of these payments will be somewhere near $130 million. PERS currently maintains a Reserve Account with a current balance of $600 million from which these payments could be made. Such an action would eliminate any financial impact on the current General Fund and would have no impact on PERS employer rates.

Increases in PERS unfunded liabilities.

Currently, in the wake of the 2013 PERS reforms, the PERS unfunded liability is down to $2.6 billion, which means that the PERS system is 96% funded. Now that the Oregon Supreme Court has invalidated the vast majority of the cost savings contained in the 2013 reforms, the unfunded liability is expected to increase to over $8 billion and system funding would fall to around 90%. PERS employer rates will increase by at least 5% of payroll starting in 2017 to pay for the increase in unfunded liabilities.

Increases in PERS costs due to Moro decision.

Because PERS employer rates are already set through the 2015-17 biennium, it’s unlikely that the Moro decision will have a dramatic impact on state, local and school budgets for the next two-year budget cycle. However, the Legislature may take steps in the current biennium to mitigate roll-up costs for future biennia. But what steps the Legislature will take this Session to soften the budget impacts for 2017 and beyond are uncertain.

Here’s what we do know.

Increased PERS costs for state agencies starting in 2017 will be somewhere in the neighborhood of $300 million per biennium. Increased PERS costs for school districts starting in 2017 will be around $350 million per biennium.

To read the Oregon Supreme Court’s full decision in the Moro case, click here

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