SL-1 1 Oregon PERS Road to Reform Paul R. Cleary Oregon PERS Executive Director New Retirement Realities: Pensions at a Crossroads Conference University of California, Washington Center May 19, 2010

SL-1 2 What you dont know can hurt you... PERS started as a money match system with member contributions and earnings matched from employer reserves at retirement Formula benefits eventually added; members get highestbenefit calculation method Assumed rate earnings guarantee began in 1975 to maintain member support for pension fund equity investments; assumed rate ratchets from 5 to 8 percent between 1974 and 1989 High earnings in 1980s and 1990s doubled member accounts several times over, 8 percent guarantee protected against down years

SL as can what you know for sure that just aint so System was funded with focus on formula benefits (50 percent of final average salary with 30 years) Member account balances soared in mid-90s; money match became predominate benefit calculation overnight Employers saw little relief from good earnings and sued PERS Board over 1999 earnings overcrediting (20 percent reduced to percent five years later) Market downturn in early 2000s impacted employers while members started retiring at 100 percent of final average salary with 30 years

SL-1 4 The quickest way out of a hole is to first quit digging... Liabilities growing at 12 percent annually; $17 billion unfunded liability emerged; system 65 percent funded; employer rates projected to triple Digging was slowed with elimination of earnings guarantee and higher retirement age for Tier Two members (began January 1, 1996) Digging stopped with 2003 reforms that froze money match benefits by diverting member contributions to new individual accounts (no guaranteed earnings) and capped earnings crediting on legacy accounts with members now self-funding guarantee PERS Board reconstituted to five members with independent majority

SL and then start filling Reformed system able to take advantage of good earnings, averaging over 15 percent from 2003 through earnings overcrediting recovered by adjusting 100,000 member accounts and reducing benefits for 44,000 retirees and beneficiaries; total liability reduction of $1.6 billion Unfunded liability disappeared; system was 112 percent funded at end of 2007 (including employer pension obligation bond side accounts) Liability growth rate has declined and stabilized at approximately three percent per year Retirement benefits measured by replacement ratios are declining towards full formula ratios (50 percent with 30 years)

SL-1 6 Big payoff today... Benefit calculation method trends Replacement ratio trends

SL bigger payoff in future years New tier for employees hired after August 28, 2003 (now the largest active member tier) Retirement age increased to 65 Formula benefit factor decreased to 1.5 percent Salary definition modified, limits on overtime crediting, and no credit for unused sick leave or vacation leave Two-percent COLA carryover bank eliminated No subsidy for retiree health insurance premiums Member contributions go to individual account with no earnings guarantee or money match

SL-1 8 Nothing comes easy... Pre-reform, Oregon PERS lost credibility by failing to identify problems and craft responsible solutions Post-reform, PERS had to implement two new retirement programs and develop comprehensive employer reporting system, all in four months, while retirements doubled Modifying current member benefits and recovering 1999 overcrediting from retirees triggered numerous lawsuits in both state and federal courts, some still unresolved.

SL so its important to stay the course Focus on long-term sustainability with adequate and affordable benefits Provide predictable and stable employer rates while funding ARC Protect funded status by critically evaluating assumptions Maintain intergenerational equity Be an accurate and credible information source Make decisions in an open, transparent manner

SL-1 10 Still a long road ahead PERS is an investment-based system with earnings providing 69 percent of revenue, employer contributions 23 percent, and member contributions 8 percent since 1970 PERS is a mature system with 64 percent of accrued liabilities baked-in for retirees and inactive members Employer contribution rates projected to increase by about 4 percent of payroll in the biennium; additional increases likely in biennium Full recovery from calendar year 2008 losses of negative 27 percent needed to stabilize employer rates 87 percent funded as of December 31, 2009 (including employer pension obligation bond side accounts)