Local governments and school districts have vastly different approaches to dealing with public pension debts.
Timothy Iltz probably knows more about the financial health of local governments in Oregon than anyone else.
Iltz is a portfolio manager and municipal bond credit analyst for the Aquila Tax-Free Trust of Oregon, a fund that invests in bonds issued by local governments, counties and cities to fund public projects such as roads, bridges and schools.
These kinds of municipal bonds are usually a safe investment for investors. The risk of default is historically low and most muni bonds have high investment-grade ratings.
But Oregon’s liabilities from the state’s Public Employees Retirement System, PERS, is on the radar of investors like Iltz, who is also vice president of Kirkpatrick Pettis Capital Management, a division of D.A. Davidson.
Iltz analyzes PERS liabilities closely because they can affect local governments’ ability to pay down debt that his firm has holdings in.
The large hole in Oregon’s PERS unfunded liabilities, roughly $22 billion, is a well-documented drain on the state’s public finances.
The PERS program, which promises high rates of return for certain public employee retirees, has put local governments, districts and schools under financial pressure.
A recent front-page New York Times article documented how PERS payments are crowding out spending by local governments and leading to cut backs of essential services.
But some jurisdictions are in worse shape than others. PERS payments as a percentage of payroll are much larger in some municipalities, while others have managed to keep contributions low.
On the high end, some cities and districts are contributing more than 40% of payroll to PERS. In others, it is less than 1%.
Take Lincoln County School District as an example. It is projected to contribute 0.50% of payroll to PERS in 2017-2019, according to state data. Its contribution rate is low because it issued so-called pension bonds in 2002 and 2003, which it used to pay down the unfunded liability with PERS.
As a result of these bonds, the district’s 2016-2017 PERS contribution rate was reduced from 26.69% to 0.59%, according to a 2017 school district financial report.
The pension bonds are still a financial burden on the school district. It repays the bonds from the same money it would have paid to PERS by charging 21.25% to salary expenditures and transferring those funds to a side account.
But it estimates it will be able to save $12.3 million in pension payments over the life of the bonds.
“The Lincoln County School District had a lot of foresight,” said Iltz of its decision to offload the PERS liabilities.
Other jurisdictions have more worrying PERS obligations.
The small city of Huntington in eastern Oregon, population 440 based on 2010 census, is projected to contribute 50.59% of payroll to PERS in 2017-2019.
A contribution rate of more than 30% is a concern, says Iltz.
Although Huntington’s PERS contribution is very high, the city also has a low amount of debt, making it less a concern that it can make pension payments.
“The City of Huntington has little debt outstanding, but the high contribution rate is a red flag,” says Iltz.
A lot of jurisdictions’ ability to deal with PERS liabilities boils down to staffing. Local governments do not typically issue pension bonds like the Lincoln County School District to offset payments, because they do not have staff to organize this.
“When you think about PERS, people think everyone is in the same boat. They are not,” says Iltz.
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Another jurisdiction that had the foresight to plan for PERS liabilities is Grants Pass in southern Oregon. The city has built up a reserve fund over several years to pay for projected increases in its contribution rate.
City officials estimate a 3% increase in its PERS contribution rate is equal to $400,000 each year in additional costs.
It expects its PERS contribution rates to increase at least 3% every two years starting in July 2019 until rates approach close to 30% of payroll costs, according to a city budget report.
“Thanks to actions in the past in building up a PERS reserve, the City’s operating budget won’t be severely impacted by PERS rate changes for at least a few more years,” the report says.
This kind of planning “is good to see,” says Iltz.
Some local governments have opted out of PERS altogether by creating their own retirement plans or choosing not to have one.
The City of Seaside, for example, has its own pension plan. Its pension payments totaled $509,425 for the year ended June 30, 2017.
Local governments that have their own pension plans often have more flexibility in managing costs because fewer employees participate. But they can also present their own challenges to investors.
“Investors understand PERS, but are unfamiliar with local government plans,” says Iltz.
As concerns grow about the state’s pension debt, investors will be keeping a close eye on how local jurisdictions manage their liabilities.
In larger districts in the Portland metro area, pension liabilities tend to be managed more carefully, says Iltz.
But for smaller jurisdictions without staffing to manage contributions, PERS liabilities do not bode well.
Employers with PERS Tier 1 and 2 contribution rates of more than 30% of payroll 2017-2019:
|Douglas County Fire District #2||32.70%|
|Nyssa Road Assessment District #2||36.55%|
|South Lane County Fire and Rescue||34.03%|
|City of Cascade Locks||31.17%|
|City of Condon||31.24%|
|Goshen Fire District||44.00%|
|North Bend/Coos-Curry Housing Authority||57.35%|
|Tangent Rural Fire Protection District||41.76%|
|West Slope Water District||30.98%|
|Winston-Dillard Fire District||36.86%|
|Woodburn Fire District||31.93%|
Source: oregon.gov report