The citizen's panel tasked with overseeing Oregon's public pension fund investments began a much-anticipated debate Wednesday on how much it can expect to earn from those investments over the next decade.

Sounds wonky. And it was. But bureaucrats and politicians throughout the state are keeping tabs on the outcome, as it could have a major impact on their budgets, on top of the painful increase in pension costs they are already facing.

As the system's actuary is fond of saying, the assumed earnings rate is the Swiss Army knife of the Public Employees Retirement System. It's the lynchpin assumption used to calculate the present value of its liabilities, older members' benefits and, by association, the contributions that government employers must make to the system. If you assume pension investments will earn less, employers need to sock away more money now to pay for future benefits.

PERS' $71 billion investment portfolio is set up to deliver that rate of return – currently 7.5 percent – while limiting risk to the extent possible. And investment earnings have traditionally covered about 70 percent of the system's costs.

And therein lies the problem.

Of late, the portfolio has not been delivering that number. And some members of the Oregon Investment Council and the PERS Board think it's unrealistically high. Interest rates on bonds are persistently low. Returns from private equity funds, historically the portfolio's turbocharger, have been trending lower. And the stock market is already at record levels.

Over the past decade, PERS returns have averaged only 5.5 percent. Meanwhile, public pension systems around the country have been lowering their return expectations.

The PERS Board will vote on a new assumed earnings rate in July, and that decision will be based, in large part, on the guidance they receive from the Oregon Investment Council.

The potential implications are substantial. If Oregon follows in the footsteps of California's behemoth pension fund, which recently announced plans to lower its assumed interest rate from 7.5 percent to 7 percent, the system's funding deficit would grow from $22 billion today to about $26.5 billion.

The required increase in employers' contributions to dig out of the deficit is limited in any one biennium. But that increase in liabilities would push many employers' individual pension funded status below an important trigger point – 70 cents in assets for every dollar in liabilities – where bigger rate increases are allowed to protect the system's financial stability.

Rukaiyah Adams, the chair of the council whose day job is chief investment officer of the Meyer Memorial Trust, says she doesn't want to get into the business of prescribing the number that the PERS Board should use, other than to say it should come down.

"The question is how much," she said.

Wednesday's meeting turned quite technical, with extended discussions of things like alpha, beta, selection risk, persistence of returns, geometric versus arithmetic means, observed volatility, efficient frontiers, and the covariance of asset classes. But for all the sophisticated vocabulary, predicting market returns is not a science.

Indeed, each one of the council's outside consultants develops a forecast of future returns in various asset classes – stocks, bonds, real estate private equity – based on their assumptions about economic growth, corporate earnings, inflation, current market conditions, etc. Then they apply those returns to Oregon's unique mix of assets, massage the results a bit to "customize" them, and out pops an expected return.

The results vary widely, and the consultants admit they have no crystal ball.

"There is no magic out there," Allan Emkin, managing director at Pension Consulting Alliance, told members of the council. "There is no evidence – none – that any of these numbers are accurate."

In fact, he said, the only thing that is certain is that almost all the numbers will turn out to be wrong.

Still, the consultants offered a consistent theme: expected returns are coming down. Emkin's firm estimates that Oregon's portfolio will earn 7.4 percent annually during the next decade. Another consultant, Callan Associates, put the number at 7.1 percent.

The system's actuary, Milliman Inc., last offered its earnings estimate in November – 6.84 percent – and will update it in May. And Treasury staff applied the forecast of a third, Blackrock Inc., the world's largest asset manager, to Oregon's portfolio. That resulted in projected return of 5.7 percent.

In the end, Treasury staff recommended the council use Callan's number, then goose it a bit to reflect Oregon's record of outperforming the market in certain asset classes. The combination yielded an expected return of 7.5 percent – exactly what politicians are praying for, as it provides the cover to maintain the current earnings assumption, with no financial impact.

Council members were unconvinced, however. They poked and prodded at the consultants, looking for holes in their logic. Some, including Adams, expressed skepticism about adding any premium on top of the projected returns, no matter the fund's historical performance. Treasurer Tobias Read said he wasn't prepared to settle on a specific number and wanted more time to study the situation.

In the end, the council held off on any specific policy guidance and decided to take up the discussion again, perhaps in a joint meeting with the PERS Board before their July vote.

John Thomas, a Eugene benefits consultant who chairs the PERS Board, attended Wednesday's meeting and said afterward that he was not inclined to go with 7.5 percent, and felt the board would support a reduction.

"I think it would be a travesty to keep it at 7.5 percent," he said. "Hanging our hat on a number that high is a mistake."

- Ted Sickinger

503-221-8505; @tedsickinger