The city of Ontario, on Oregon’s eastern edge, pays some of the highest employee retirement costs in the state.

“We’re just struggling to provide basic services because of this burden,” Ontario City Manager Adam Brown said. “We’re cutting every year.”

Costs for Ontario and other governments have soared because the Oregon Public Employees Retirement System doesn’t have enough assets to cover its expected pension costs.

That gap is referred to as the unfunded actuarial liability (UAL), and its burden can fall particularly hard on rural municipalities and school districts. Compared with urban areas, those jurisdictions have smaller workforces but often have a higher percentage of long-term employees, which means they spend a proportionally larger share of their payroll for PERS.

There are several ways to measure that burden on Ontario.

One is context: What the city owes to PERS amounts to nearly six times as much money as the city spends on salaries every year.

Another is the annual cost: More than 900 school districts, community colleges, universities, special districts and local and state governments are part of PERS. Each one must pay a certain amount toward its current and future pension obligations, depending on the size of its UAL. The rate is expressed as a percentage of the government’s payroll. It’s like a payroll tax, except all the money goes to PERS.

Each government has three PERS rates, depending on such factors as when the affected employees joined PERS.

This year, the top-rate “PERS tax” for Ontario will be 28 percent of its payroll. On July 1, that will jump to 35 percent.

Ontario will be spending $1.1 million for PERS despite having only 42.4 staff positions.

To survive, the city has been cutting expenses wherever it can. At one time having 75 employees, the city has since privatized its finance and public work departments to save money. It’s turning recreation programs over to a recreation district approved by voters on Nov. 6, and it’s reducing park and cemetery maintenance.

Although Ontario endured one of the highest increases in PERS rates, other governments are paying even more.

Next year, Douglas County’s PERS rate will cost as much as 38 percent of payroll; Douglas County Fire District No. 2, nearly 45 percent; and Tangent Rural Fire Protection District, 47 percent. Those rates are for the most expensive PERS category.

Thirty miles and a time-zone change away from Ontario is Huntington, which has an unfunded PERS liability of $335,340. That is a paltry sum compared with Portland’s $605.2 million liability. Yet that amount is huge for Huntington, a city of fewer than 500 residents and a declining population.

As a result, Huntington’s top PERS rate this year equals 50 percent of the city’s payroll. Next year it will exceed 63 percent of payroll.

Much of rural Oregon is economically challenged, so governments have little opportunity to increase revenue through local taxes and fees. Like Ontario, other governments often must trim current staffing in order to pay for future retirements.

“Growth begets growth, and decline begets decline,” said Nick Green, city manager of John Day, whose PERS liability has gone from approximately a $173,000 surplus in 2015 to an $869,000 deficit today.

Gov. Kate Brown and the Oregon Legislature created an Employer Incentive Fund, so local governments could get a partial state match for paying off their PERS liability sooner. John Day, like many municipalities, has no money to do so. Grant County has lost around 1,000 residents since the 1990s, and the vast majority of households are low- or moderate-income.

Meanwhile, John Day – the county’s largest city at population 1,735 – continually faces other budget challenges. For example, every year it receives less 911 funding from the state.

“PERS adds to the portfolio of problems,” Green said, describing the growing PERS payments as “knee-capping” to the city budget.

Jefferson County created a side account to reduce costs and intends to participate in the Employer Incentive Fund to help pay down its nearly $6.2 million unfunded actuarial liability.

“For us, it’s a smart financial decision,” said Jeff Rasmussen, county administrative officer.

The county’s PERS rates are lower than those in much of rural Oregon, currently a top rate of 18.6 percent of payroll, rising to 21.97 percent on July 1, 2019.

Those costs still make it difficult to offer competitive wages, Rasmussen said. The county’s workforce, which was about 180 employees in 2007, fell to 142 three years ago and is now 135. The increased payroll costs for PERS mean the county often must obtain three grants to pay for a grant-funded job, compared with two grants in the past.

“PERS is eating up any opportunity to be innovative,” Rasmussen said.

On the west side of the Cascades, Linn County is a mix of urban and rural. But with only about a half-month’s payroll in the bank at any given time, the county lacks any reserves to pay down its unfunded actuarial liability.

“You can’t save enough money to get out from under PERS,” said Ralph Wyatt, county administrative officer. “The PERS thing has been coming a long time. And now it’s eating everybody’s lunch, especially schools’.”

In Northwest Oregon, the 450-square-mile Banks School District, like many rural districts, saved the additional money it received when the 2017 Legislature expanded the state education budget more than anticipated. As a result, the district can absorb its PERS increases through next year.

“We planned ahead for this, but it’s a short fix,” Superintendent Jeff Leo said.

Without more funding, the rate of PERS increases could mean cutting district jobs within a few years. The district already has difficulty maintaining its old facilities. Banks also has the challenge of keeping its academic programs comparable with the nearby Hillsboro School District, which is Oregon’s fourth-largest district, so students will stay in Banks instead of transferring to Hillsboro.

“The smaller the district, the less maneuverability they have” to deal with PERS, said Mark Mulvihill, superintendent of the InterMountain Education Service District in Pendleton. “It’s such a big issue for school districts because of the escalating costs.”

His proposed solution: Let longtime, higher-pensioned employees retire, collect their benefits but continue working for as long as five years. Require both them and their employer to pay 6 percent of their salary toward the employer’s PERS liability.

The proposal needs vetting, Mulvilhill said, but it would help retain good employees, give them more money while holding their pension level stable, but reduce the employer’s PERS liability.

Other ideas include switching to a straight 401(k) retirement plan for new employees, giving current employees a choice between PERS and a 401(k), and redirecting the “6 percent employee match” to pay down the liability.

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