SALEM, Ore. - Oregon is in the process of retooling its $33 billion pension plan in hopes of fixing the plan's $16.43 billion funding shortfall.
Late last week, state public employers mounted a move to convince legislators to terminate the defined benefit plan and start a new hybrid or defined contribution plan. According to data presented to the House's Public Employees Retirement System Committee on April 10 by ECONorthwest, a Portland-based research firm, over the next 25 years, the current plan would cost employers 23.9%. By comparison, should Oregon officials replace the existing plan with a defined contribution plan with a 6% employer match, the cost would drop to 11.1% or 13.1%.
Despite the new push by municipalities and local government entities, House Majority Leader Tim Knopp, R-Bend, who is chairman of the committee, has said he would first like to try to save at least a modified version of the current plan for existing employees.
Legislators are expected to choose April 15 one of two competing proposals to replace the existing plan, in hopes that changing the plan design will bulk up the fund. One, dubbed the "Fair Retirement Plan," is a defined contribution plan; the other is a hybrid.
More likely to pass
Observers say the defined contribution plan is more likely to pass because the hybrid plan would not save the state enough money.
Under the defined contribution plan proposal, employees hired after July would automatically participate in the new plan, while current employees would have the option of switching or staying with a modified version of the current defined benefit system, Mr. Knopp said.
The defined contribution proposal incorporates a study of investment history provided by the Teachers Insurance and Annuity Association - College Retirement Equities Fund, New York, one of four bundled providers of the Oregon University System's $64 million 401(a) plan. Mr. Knopp said the state plan would be structured much like the university system's plan, with multiple bundled providers.
Republicans favor the defined contribution plan and Democrats would prefer a hybrid plan that had a defined benefit plan at its core, Mr. Knopp said, adding that the defined contribution plan is likely to sail through the Republican-controlled House but could be delayed or defeated in the Senate, which is evenly split along party lines.
Details of hybrid
The hybrid plan was proposed by Rep. Greg Macpherson, D-Lake Oswego, a benefits lawyer. That proposal would provide a slightly higher defined benefit formula of 1.8% for police and fire employees and 1.5% for general service employees, and the replacement rate - the percentage of final salary the hybrid plan would pay an employee at retirement - would be 45% of final average pay. Duplicating a feature of the existing defined benefit plan, the hybrid plan also would allow employees to contribute up to 6% of pay and allow employers to pay employees' contributions.
Employee contributions would be pooled and professionally managed by the Oregon Investment Council, but there would be no guaranteed interest rate, Mr. Macpherson said.
So far, Gov. Ted Kulongoski has not supported either proposal, said Marianne Hammond, information officer for the governor.
Officials back overhaul
Plan officials also have been careful to avoid taking sides, although they emphasize the need to completely overhaul the system.
According to projections by the pension plan's staff and actuary, Milliman USA, the fund's total unfunded actuarial liability is expected to increase at a modest pace of 0.7% to 2.7% a year over the next five years, reaching $18 billion by the end of 2007.
During the same five-year period, higher employer contribution rates should improve the plan's funded ratio to 72.9%, said James Voytko, executive director of the system, in his March 27 testimony before the PERS committee.
These projections do not take the potential legislative changes into account, however, and they assume the fund will earn 8% a year on its investments, Mr. Voytko reported.