The number crunchers for Oregon’s public pension system are set to deliver a status check to the system’s board Friday, and the prognosis is not good.

The Public Employees Retirement System, like investors everywhere, had a tough 2018. U.S. stocks’ worst year in a decade was capped by a fourth-quarter plunge that wiped out trillions in wealth and most gains for the year. The pension fund’s full-year return was 0.48 percent, preliminary results show, falling well short of its assumed earnings rate of 7.2 percent.

As a result, system actuary Milliman Inc. estimated, PERS’ unfunded liability grew to $26.6 billion – a $4.3 billion increase – and its funded status declined from 73 cents to 69 cents in assets for every dollar in liabilities.

That’s obviously not good news, but Milliman suggested the situation may actually be worse than it appears. That’s because the system’s 0.48 percent return does not reflect fourth-quarter results for its investments in private equity partnerships, which comprise about 20 percent of the portfolio. Those results always lag by a quarter and therefore won’t be reflected until the end of the first quarter of 2019. The supposition is that private equity valuations will adjust downward, reflecting the 15 percent decline in the overall stock market that took place in the fourth quarter of 2018.

If that’s the case, then the fund’s actual returns were likely negative in 2018 and the deficit is larger than $26.6 billion. The actuary provided an illustrative example: If overall returns were actually a negative 4 percent including the private equity adjustment, then the system’s unfunded liability is closer to $29.2 billion, and the fund has only 66 cents in assets for every dollar in liabilities.

The projections could inform state lawmakers’ discussions about potential fixes to the pension system during the legislative session. And it illustrates how difficult it will be for Gov. Kate Brown to deliver on her pledge to hold pension costs constant for schools or preserve any new revenues from a corporate tax increase for schools.

PERS officials also note that last year’s poor investment returns will force them to transfer $255 million in reserves to fund the guaranteed earnings crediting for Tier One members’ pension accounts. That’s the equivalent of $7,500 for every Tier One member (those hired before 1996) who has yet to retire and illustrates that the system’s problem with its “money match” retirement formula has yet to go away.

For public employers, what’s really important is the impact all this will have on their required contributions to PERS in coming years. The inescapable answer is that they will continue to rise, but how much remains to be seen.

Employers’ pension contribution rates are reset every other year, based on PERS investment results from the previous biennium. They are scheduled to increase in July, for example, based on the system’s funded status at the end of 2017. And the contribution rates for the 2021-23 biennium will be based on the system’s valuation at the end of 2019, meaning that employers, employees, lawmakers and taxpayers have a lot riding on PERS financial results this year.

Once again, Milliman provided some illustrative projections by making a few assumptions.

Assuming that the preliminary return of 0.48 percent in 2018 holds, and that PERS investments earn 7.2 percent in 2019, then Milliman estimates that employers’ net pension costs would jump, on average, by nearly 7 percentage points of payroll in 2021. That works out to approximately $1.6 billion in additional pension costs systemwide in the 2021-23 biennium, a 45 percent jump from the $1.1 billion increase employers are struggling to absorb come July.

Supposing, however, there is a downward adjustment in private equity returns at the end of the first quarter, and that the returns for 2018 were actually a negative 4 percent. In that case, if the system generates a 7.2 percent return on its investments in 2019, the actuary calculated that employers’ pension costs would rise by more than 9 percent of payroll. That’s the equivalent of $2.1 billion in new PERS costs for the 2021-23 biennium.

Those were the only two scenarios examined, and investment results could obviously beat or fall short of the assumed rate in 2019. Strong results would temper 2021 costs increases, but be highly unlikely to eliminate them.

There are other moving parts that could impact employers’ costs, including a July vote by the PERS Board on whether to lower its assumption about investment earnings. If it does reduce the rate, it will put additional upward pressure on costs. Likewise, if wage growth exceeds the system’s assumption of 3.5 percent annually – with a healthy economy and increasing tax revenues, unions think they’re in a strong bargaining position – that will put more pressure on pension costs.

So, there’s a lot happening, much of which is outside policymakers’ control and won’t be apparent until after the current legislative session ends. And that complicates any effort by Brown to hold pension rates steady for schools or preserve any new tax revenue to reduce class sizes, lengthen the school year or improve the state’s high school graduation rates.

The governor has clearly articulated that goal, but her office has been vague about how to accomplish it.

“The governor is working to address it and will be considering several options this session,” said Kate Kondayen, a spokeswoman for Brown. Her team is “meeting regularly with PERS management and the state CFO to develop options for accomplishing this goal for discussion with the Legislature during the 2019 legislative session.”

The legislature, at the suggestion of a task force created by Brown, did create two funds last year to help schools and other public employers offset some of the pension cost increases. The school district fund is expecting a $11.5 million transfer this year from interest on unclaimed property from the Department of State Lands. So far that’s its only funding, though Brown’s recommended budget did include a $100 million appropriation.

That’s still a drop in the bucket. On average, schools will be making PERS contributions during the next two years equal to 28.93 percent of their payroll costs, excluding any rate credits from side accounts some districts have established with PERS. Offsetting 1 percentage point of those rates would require a balance of $435 million in the school district fund, according to PERS.

And if the required rate increases in 2021 are anything like the ones Milliman modeled for the board – 7 to 9 percent of payroll – Brown would need to a multibillion-dollar funding source to hold schools’ rates in check.