Public Employees Retirement System

What Are Side Accounts?

When an employer makes a lump-sum payment to prepay part or all of its pension unfunded actuarial liability (UAL), the money is placed in a special account called a "side account." This account is attributed solely to the employer making the payment and is held separate from other employer reserves.

As of December 31, 2014, 144 employers have established side accounts.

Employer Type Number with Side Accounts
Independent locals (not a member of a pool) 5
State agencies (all, including OUS) 1
Pooled counties 8
Pooled cities 9
Pooled special districts 8
Community colleges 17
School districts 96

 

As of December 31, 2014, 34 employers have multiple side accounts: one city, one special district, two community colleges, and 30 school districts.

As of December 31, 2014, side account assets totaled $5,924 million.

Side Accounts by Employer Type as of December 31, 2013
Employer Type Balance (millions)
Independent $96.4
State agencies $2,057.9
Pooled counties $66.7
Pooled cities $52.7
Pooled special districts $88.9
Community colleges $430.7
School districts $3,083.2

 

How Do Side Accounts Work?

Side accounts are generally amortized over the same time period as the employer's associated UAL, providing the employer with a reduction of its employer rate. The goal is for the side account to provide rate relief to the employer until the associated UAL is paid off. Side accounts are re-amortized every two years, taking into consideration how much of the side account has been used and what earnings have been credited. The rate offset from the side accounts is then adjusted based on the re-amortization.

Average Side Account Rate Offset 2005 - 2015
Rate Period Average Rate Offset
(Percentage of Payroll)
2005 - 2007 -4.54%
2007 - 2009 -6.71%
2009 - 2011 -7.20%
2011 - 2013 -5.11%
2013 - 2015 -5.26%
2015 - 2017 -6.38%

 

How Are Side Accounts Funded?

Most employers with side accounts issued pension obligation bonds (POBs) and provided the bond proceeds to PERS as a UAL lump-sum payment. A few employers funded their UAL lump-sum payments from other sources, such as savings from internal operations.

The State of Oregon issued $2.1 billion in POBs in 2003 to fund a side account. As of December 31, 2014, the state's side account balance was $2.1 billion, and the principal balance on the state's POBs was $1,835 million.

Historical Side Account and POB Balances 2004 - 2014
Calendar Year Side Accounts
(millions)
Outstanding POBs (millions)
2004 $5,556 $5,516
2005 $6,667 $6,202
2006 $7,248 $6,164
2007 $7,658 $6,249
2008 $5,135 $6,187
2009 $5,490 $6,109
2010 $5,579 $5,999
2011 $5,225 $5,896
2012 $5,518 $5,814
2013 $5,924 $5,520
2014 $5,876 $5,519

 

What Earnings Do Side Accounts Receive?

Side accounts are invested in the PERS Fund and receive the Fund's actual earnings or losses. These earnings or losses are posted to side accounts at the end of each year.

Average Side Account Earnings 2004 - 2014
Calendar Year Average Earnings/Loss
2004 13.68%
2005 12.80%
2006 14.98%
2007 9.46%
2008 -26.75%
2009 18.47%
2010 12.13%
2011 2.15%
2012 14.09%
2013 15.59%
2014 7.39%

 

Why Pre-Pay UAL Contributions?

Pre-payment of UAL contributions is an alternative to the traditional funding option of paying off UAL obligations over time as a part of the employer's contribution rate. There are potential advantages to this, but there are also potential risks. The primary advantage is that the employer can borrow at a low interest rate and offset a UAL obligation that is accruing at a higher rate. This strategy can benefit the employer when the rate relief from the employer's side account exceeds the POB debt-service cost. However, if side account earnings are less than the interest rate being paid on the POBs, the employer may end up paying more in POB service costs than it receives in rate relief from its side account.