If you think Oregon has pension affordability problems now, wait until 2021.

The Public Employee Retirement System’s chief number cruncher, actuary Milliman Inc., delivers projections to the PERS Board once a year detailing what the system’s funded status, unfunded liability and employers’ costs will look like under various investment return scenarios.

Milliman reviewed this year’s projections for the PERS Board on Friday. And not to be a nattering nabob of negativism, but here’s the thing: Even the good scenarios look grim.

Scott Preppernau, a Milliman actuary, said that, under the vast majority of scenarios modeled, pension costs would see another significant increase in 2021 and another smaller step up in 2023. Then rates would start to gradually drift down, he said – assuming PERS’ investments continue to deliver the system’s assumed rate of return of 7.2 percent.

Public employers’ contribution rates – which schools, state agencies and local governments are required to pay to PERS as a percentage of their overall payroll – are already fixed for the two-year budget cycle that begins in July. Systemwide, they’ll go up by 4.1 percentage points, which will cost public employers an additional $1.1 billion.

That’s painful enough, leaving some employers desperate for relief. Portland Community College, for example, just issued $172 million in pension obligation bonds. The move will help the college defray some of its pension costs in the short run. But it’s really a long-term bet on PERS’ investment returns, one that could go awry and that some experts believe was very poorly timed in PCC’s case.

Either way, Milliman’s projections show that employers are virtually guaranteed to face a larger PERS rate increase in 2021 than the one that will occur in 2019. The exact size of that increase will depend on the system’s investment returns this year and next, as well as the PERS Board’s expectations about future investment returns. But it’s clear that higher payments will be necessary to continue digging out of the system’s funding deficit, the actuaries say.

Here are the main factors that will determine how much employers owe:

So far this year, the pension fund’s overall investment returns – 1.5 percent – are well short of its assumed return. If that result holds until the end of the year, Milliman estimates PERS unfunded liability would grow by $3.5 billion to $4 billion, bringing it to $26 billion.

“Given the current volatility (in financial markets) I’m assuming we won’t hit the assumed rate rate of return of 7.2 percent,” Kevin Olineck, director of PERS, said at Friday’s meeting. “Volatility may be an understatement.”

The PERS Board will also vote in July whether to maintain its current assumption about investments earnings – 7.2 percent – or whether to lower it, perhaps to 7 percent, as some will urge. Though Milliman doesn’t provide PERS with investment advice, it currently estimates the system’s investment returns will only average 6.65 percent over the next couple decades, for example. Other consultants will be weighing in with their own estimates this spring. Lowering the rate to 7 percent would add roughly $2 billion to the unfunded liability.

A growing deficit would put further upward pressure on rates. And that means a lot is riding on what happens in financial markets next year, because 2021 rates will be based on a system valuation on Dec. 31, 2019. Many economists predict that economic growth will slow next year, with declining stimulus from tax cuts, slower corporate profit growth and continued uncertainty around trade.

One potential anchor on PERS’ 2019 returns: The value of its private equity investments. The reported value of those investments are essentially best guesstimates (some say inflated best guesstimates) provided by fund managers, and the reporting of those returns typically takes three to six months. The private equity returns this year – currently reported at 13.4 percent – are the main factor holding up the system’s overall returns, as its public stock and bond portfolios (down 4.5 and 1.2 percent, respectively) have taken a hit amid the current market volatility. But private equity returns do typically correlate with and depend on valuations in public markets, albeit with a lag. And that suggests that they could take a hit in mid-2019, when the reporting catches up with what’s happening in public equity markets.

So a lot can happen, but here’s how various scenarios play out in Milliman’s projections:

If PERS investment portfolio earns between 6.7 percent and 9 percent next year, the result will be a rate increase in 2021 of about 5.5 percentage points. That’s equivalent to about $1.3 billion in new pension costs for the biennium and somewhat higher than the cost hike that will kick in July 1 and is causing so much consternation now.

That’s the good news scenario. If the portfolio returns only 5 percent next year, the rate increase in 2021 would climb to 6.5 percent, or $1.5 billion. And if the performance is flat, like this year, employers could see a 9 percentage point rate increase, the equivalent of more than $2 billion in new PERS costs.

No one can predict how 2019 will play out with any certitude. But it’s easy to see that the budget pain will continue for public employers and increasing PERS costs could eat up any new taxes the Legislature settles on this year.

At one point, Sadhana Shenoy, the new chair of the PERS Board, jokingly asked whether Preppernau had any more optimistic slides in his presentation. He didn’t have much, and at the end of the meeting Shenoy gestured at the overhead screen and told the crowd, “We have to get rid of this first, and then I can say ‘Merry Christmas and happy holidays.’”