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The Medford School District plans to dip into its contingency fund for a third time as it braces for significantly higher Public Employees Retirement System rates in the next biennium. In April, Oregon Supreme Court overturned a 2013 PERS reform bill (Senate Bill 822) that had lowered the cost-of-living adjustment on benefits for retired members in an effort to make the pension system more sustainable. "Basically, the courts said you cannot change accrued benefits," said PERS spokesman David Crosley. Legislators now have no place left to go, said Rep. Peter Buckley. "It took many years to find a way to stabilize the system,” Buckley said, adding that it was almost fully funded before the recession hit in 2008 and PERS lost 28 percent of its assets. "It is the decisions made by (a former) PERS board ... that have caused costs to skyrocket, along with the stock market crash of 2008-09," he said in an email. "Retirees are not to blame." Nonetheless, the court’s ruling was a $5.1 billion hit to the pension system. Currently, PERS’ unfunded liability stands at $18 billion — or $12 billion when prepayments made by employers as investments to reduce their liability are factored in. Of that, the state’s approximately 925 public employers will have to come up with an additional $800 million in 2017, and projections show that employers' contribution rates will increase over the next three bienniums. The Medford School District, which was already running on a deficit budget, was notified in November that its PERS contribution rate would very likely go up 4 percentage points for qualifying employees hired before August 2003 and 0.3 percentage points for qualifying employees hired after August 2003 — a difference of about $2.3 million per year. “This PERS issue is probably the hottest topic in the state right now among legislators and superintendents,” said Superintendent Brian Shumate during a work session Monday. “Now, while this is a major punch to the gut for us, we can absorb it. We are just going to have to do some strategizing.” Unfortunately, due to poor timing on investments made in 2006 under a former administration, the school district has very high employer contribution rates compared with other school districts statewide, said Chief Operations Officer Brad Earl. This biennium, the district’s contribution rates are 17.7 percent for employees hired before August 2003 and 15.7 percent for qualifying employees hired after August 2003. Whereas Portland Public Schools is paying 3.3 percent and 1.3 percent, respectively. At Monday’s school board meeting, Earl recommended that the district move $2.25 million out of its reserve fund and into a special revenue fund to mitigate the impact of the rate increase in the first biennium. “Our current thinking is that if we use half of it in the first year of the biennium and half in the second, then it pushes the full weight of the change into the next (2019-21) biennium and buys us about five years in potential increases in funding from the state,” Earl explained. “If we continue to get an additional $3 million in revenue increases from the state each year, then that will help to offset it in the coming years,” he said later. However, this would mean that the district’s reserve fund would most likely drop to about $4.3 million by the end of the year — 3.5 percent of its general fund revenue. Because board policy mandates that the district keep at least 5 percent in its reserve fund at all times, the board will have to amend its policy before the fund dips below that threshold. During Monday’s work session, some board members were concerned about dipping below that 5 percent. “I’m OK with softening the blow, but I’m really nervous about our reserves going down to 3.5 percent,” said Karen Starchvick, the board’s vice chair, who suggested that the district set aside $1.125 million this year and $1.125 million next year. “I like Karen’s idea, but I’m wondering if that could backfire on us when we go into negotiations because we have a greater contingency fund,” said Tricia Prendergast. Shumate responded that whether the money is earmarked now or later, it will have an impact on contract negotiations this spring. Despite some board members' reservations, a motion to move $2.25 million out of the reserves and into a special revenue fund was passed unanimously during the board meeting. Board member Larry Nicholson was absent from the meeting. “I think we should go below the 5 percent and take care of it now and not kick the can down the road,” said Board Chairman Jeff Thomas. “We can bring it back up to the 5 percent in the budget process.” Although the district chose to deficit spend this year to pay for the implementation of full-day kindergarten, to reduce class sizes and implement several of Shumate’s initiatives, the district will have to have a balanced budget in 2016-17, Earl said. “Looking at STEP increases, medical costs and other contractual pay increases for employees, we won’t be able to balance our budget without making some cuts next year,” he said. Nonetheless, Shumate and Chief Academic Officer Michelle Zundel have made it clear they want to put kids first and hold on to the new programs, such as the Bulldogs to Raiders program, Project Lead the Way, Medford After School and Medford prep, Earl said. During the meeting Monday, board members also approved additional deficit spending to cover the cost of facility-related projects, information technology equipment, custodial and other expenses. “This is going to be an ongoing challenge for the Medford School District and all other public employers until PERS gets back to 100 percent funded,” Earl said. “By the court overturning this, it only leaves one solution for PERS, and that is to continue to get more and more money from public employees to make up for the shortfall in the PERS balance. And that means one thing, reducing services in all public realms.” Reach education reporter Teresa Thomas at 541-776-4497 or [email protected] . Follow her at www.twitter.com/teresathomas_mt .