Kitzhaber’s Well Intended PERS Reforms Are Insufficient

Right From the Start

Right From the Start

Oregon’s gold plated Public Employees Retirement System is seemingly in the news virtually every day. It should be. The PERS executive director – a beneficiary of PERS – announced that PERS had an unfunded future liability of $14Billion dollars. That approximates the entire biennial general fund budget. But good news is here (I’m being facetious) PERS investments earned approximately 10.14 percent through November (despite a headline in the Statesman Journal that it earned 14 percent for that same period). The PERS performance was below the return on the S&P 500 Composite Index for the same period – that means that the “whiz kids” at PERS would have been better off buying an Exchange Traded Fund that tracks the S&P 500 and avoiding the millions of dollars in fees for their staff and investment advisors. It also means that taxpayers would have been relieved of paying that much more to fund the unfunded future liability.

Left on the table, however, by the state’s inquiring journalists is an explanation as to why the last time the stock market was at current levels the administration of former Gov. Ted Kulongoski proudly announced that the unfunded future liability has been eliminated and yet it is back to where it was at the beginning of his terms as governor. Of course, in addition to a robust stock market that boosted the value of investments by the PERS board, a number of governmental agencies undertook a program to shift the unfunded future liability from PERS to bonds they issued so as to hide the ball on the growing and unsustainable retirement system. Mr. Kulongoski and Gov. Kitzhaber have been quick to blame the downturn in the stock market as the major source of the PERS deficit but have failed to explain how a virtually complete recovery of the stock market has left PERS in as bad a shape as ever. (The robust recovery of the stock market in 2012 reduced the unfunded future liability by $2 Billion. And while that is a good start the stock market would have to quadruple in value for it to eliminate the unfunded future liability as previously claimed by Mr. Kulongoski.)

Let me offer a couple of suggestions. When PERS calculates the future unfunded liability it accounts for cost of living increases (COLA) for benefits paid to current employees. It does not account for the growth in the number of public employees or the growth in their wages which is the foundation for the base benefit upon which COLA is calculated for future years. Since the beginning of Mr. Kulongoski’s terms until the end of 2012 the number of state and local government employees increased 7700 from 255,900 to 263,600 and that does not include all of the teachers, college educators or health care workers paid by state and local governments. While Mr. Kitzhaber and the legislature have access to the information on the increase in payrolls for state and local government, I do not. Suffice it to say that the total number of public employees and their salaries continued to increase during the darkest days of the Bush/Obama recession while the over 150,000 private sectors jobs were lost and the average household income for Oregonians declined by about $3000 per annum. As government grows in number and in wage increases, the future liability for PERS (funded and unfunded) will continue to grow. (In an editorial in the Oregonian the PERS’ director indicated that wages subject to PERS will approximate $18.4 Billion during the next biennium.)

I don’t want to be over critical of any attempt to rein in the huge amount of state and local budgets that are going to fund PERS and the government provided healthcare, but let’s be honest. The proposals by Mr. Kitzhaber are insufficient and even at that, given the domination of the Democrat Party – which controls the both the House and the Senate – are unlikely to pass. Oregon simply cannot continue on this path. Let me make a couple of suggestions that should be added to Mr. Kitzhaber recommendations but have no better chance of success because of the unions’ political domination:

  1. Reinstate the requirement that public employees pay their six- percent contribution annually. While that requirement remains a part of Oregon law, public employers – that means taxpayers to those of you who have suffered under a teacher’s union education in Portland’s Public Schools – have been picking it up for decades.
  2. Impose an annual cap on compensation increases for public employees that includes wages, PERS and healthcare benefits. The cap should reflect cost of living increases. If the increase in funding PERS or healthcare insurance exceeds the cap, there will be no underlying salary increase. There could be a supplemental increase for up to ten percent of each agency’s employees based solely of merit.
  3. Bar any judicial officer (judge or justice) who is a beneficiary of PERS – almost all are – from hearing any challenges to the constitutionality of PERS or changes to PERS. This is important because Oregon’s Supreme Court – all beneficiaries of PERS – ruled that the legislature cannot change future benefits for PERS recipients because PERS is deemed a constitutional right of public employees. No such right exists in the state or federal constitution and there was an extraordinary conflict of interests for the court to render such a decision – not once but twice. Authority already exists for the justices to call in a panel of judges who are not PERS’ beneficiaries to hear such challenges. A more robust discussion of this principle can be found in the several articles and pleadings filed by Dan Re and posted at http://inrethepeople.com/.
  4. Encourage local governments facing insolvency from increases in PERS costs to seek protection through the bankruptcy court to eliminate or modify their current and future liability. While the Oregon Supreme Court may rule that PERS is a constitutional right of public employees, the bankruptcy courts are not bound by that decision and will rightly ignore it given that it is based neither in fact or law.

The PERS problem must be addressed but don’t count on the political processes of Oregon to do so. So long as the public employee unions remain the primary funding source for Oregon’s Democrat Party which now controls all statewide offices and both houses of the legislature nothing significant will be achieved.

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Posted by at 05:00 | Posted in Gov. Kitzhaber, Gov. Kulongoski, PERS, Public Employee Unions, Public Employees Retirement System | 45 Comments |Email This Post Email This Post |Print This Post Print This Post
  • Jack Lord God

    >So long as the public employee unions remain the primary funding source
    for Oregon’s Democrat Party which now controls all statewide offices and
    both houses of the legislature nothing significant will be achieved.

    Au contraire, much will be achieved. With the shift to an all Democrat government, I predict PERS recipients will be greatly enriched. In the next two years I predict the following:

    1 – The employee pick up will not only continue, but payments will be made to current employees as a form of restitution for the insult of even hinting that they should fund their retirement.

    2 – Unemployment in the art sector will decline slightly as statues for judges who rule the right way on PERS are commissioned. The word will get out, rule for the taxpayers, no statue for you!

    Few things in life are eternal. However PERS is one of those. We got sold down the river by spineless politicians who caved to every union abuse. Move on, call it good and pay. Thousands of 52 year old retirees are depending on you for their cruise every year!

    • DavidAppell

      “Jack Lord God” = Rupert

      • jest

        OMG! david_appell_140x140.jpg(JPEG Image 14…

  • Bob Clark

    I would go to a more broad based solution. I would go for Right-to-Work law and the immediate right of all public school districts to elect charter school status, giving them the right to hire and fire. Furthermore, give state government agencies the ability to elect government enterprise status, also giving them the right to hire and fire. These actions would bring an effective counterforce, I believe to the labor monopoly and political monopoly erected by the brotherhood of government employee unions.

    This also is related to the issue of tax certainty. I think Oregon’s existing tax structure and rates are a bit quirky but I also think the total level of taxation is about right. But what’s very scary, for folks who worked and saved over decades, is the insatiable demand of the urban, state and federal governments to borrow and tax ever more heavily to meet promises made by politicians long ago, and who have since moved on. It’s like the corporate executives with large multi-million dollar severance packages who bet the corporation’s whole net worth and more during the period leading up to the 2008 financial meltdown. Short term glory is traded for huge medium-to-long term risk by those with power but with little if any actual skin in the game.

    Nike has been given long term tax certainty by Governor Kitzhaber (most recently) but why should not all Oregonians be given such certainty?

    Finally, it is reported most recently the state Treasurer did move to have state employees and the Investment Council manage PERS investments rather than paying fat fees to financial management companies. Also, it is probably unfair to compare the PERS return to only the stock market performance since this implies assets should be invested 100% in stocks rather than a mix favoring stocks over bonds with some proportion in other assets like real estate and precious metals.

  • guest

    Why is it public employee pensions are given COLA’s and the private sector not? COLA, in and of itself, an inflationary catalyst.
    Too, arbitrary minimum wage increases seemingly dilatory for increasing job opportunities in a down or sluggish economy.

    Dear John…Kitzhaber, Oregon’s silk PERS must be pared back to private standards and all other over the rainbow spending evaporated until productive private employment, NOT progressive public indulgence, retakes the high ground.

    • 3H

      Depends upon the private sector business. While most do not have a COLA adjustment, some do (somewhere around 9%). Perhaps one of the reasons that some don’t is because they have management who raid the funds (think Hostess).

      You might want to check out the following book: Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers, by Ellen E Schulz. You can find it at Amazon. If you don’t want to buy it, it is available at all 3 local library systems.

      Is that the private standard you have in mind?

      • guest

        Define inflationary catalyst in your mindset of Econ 101.

        • 3H

          Are you arguing that no retiree should get a COLA adjustment and that they should just keep falling further behind every year?

          • guest

            Know Ye: public employee COLA’s merit no more than private sector – and when privates get none, so should the progressive genericals. Kapeesh?

            Others, like Crabman34, et al, have take me to rasp but what’s unsustainable remains unsustainable until commoner sense prevails in our society…that’s on a slippery slope ‘failingy’ down into a Greece pit beyond your sees, Sir!

          • 3H

            Perhaps you have it backwards, perhaps the private sector should give COLA adjustments to their pensioners. That would be just as fair, yes?

          • guest

            Depends on what’s sustainable – government gone wildly over the top with promises it cannot afford or common sense in today’s competitive economic world?

          • 3H

            Actually I agree that COLAs cannot be unlimited in how much they can be adjusted. But that is a far cry from claiming that because most of private industry doesn’t grant COLAs for their pensions, then government shouldn’t. That is faulty logic.

            There are most likely a great number of reasons private sector companies don’t try to adjust pensions for the cost of living. Sometimes, frequently I would argue, greed takes precedence over common sense, what is right, and what is possible.

          • guest

            Numb question.

    • David from Mill City

      You have it completely backwards, if the goal is a strong economy, the correct course of action is to bring the private sector compensation packages up to public sector levels. Public employees are not over paid, private workers are under paid.

      The problem with the Minimum Wage is not the annual COLA, but that it is not a Living Wage. Since the early 1980s increases in worker productivity have not been matched by increases in workers wages. Adjusted for inflation wages have been stagnant since then. A consumer driven economy does not function when the consumers do not have money to spend.

  • bartles

    I appreciate your efforts, Mr. Huss, but have to disagree with your caption: that Kitzhaber’s PERS reforms are well-intended. He cannot get new taxes by the public without some marginal minimal accomplishment here. That I am afraid is the only “intent” — and likely to be the only accomplishment.

  • HBguy

    As a former Democrat and a traditional progressive who believes the Democrats have sold the needy and our kids down the river on a raft paid for by public employee unions, can I just say I’m very disappointed in the Republican party.

    As long as the GOP is run by the anti crowd (Anti immigration, anti abortion, anti gay rights) it will be unable to challenge Democratic dominance. I thought the libertarian wing could have some influence and moderate the anti crowd. But I listened to the new GOP chair on OPB yesterday, and it was clear that the anti crown still controlled the party.

    While the Republican Party faithful would LIKE to believe that it’s anti positions are really what the majority of Oregonians believe, they are wrong. And that’s been proved time and time again.

    And I’m not talking about “rebranding”. That’s stupid. The OR-GOP is what it is. This isn’t a branding issue. The issue is, centrists and persuadable progressives won’t vote for candidates from a party that requires adherence to the anti agenda.

    The OR GOP will still win elections in rural areas, and some metro areas where they run good candidates. But it’s looking at a perpetual minority. Because Oregon as a whole is past the anti agenda and not looking back.

    I have no suggestions for the OR-GOP. But standing in the middle of the road shaking your fist at the car that just passed you will only make you road kill for the next driver.

    • David from Mill City

      Targeting the Public Employee unions is the wrong approach. Public Employees are not over paid the private sector worker is under paid. If the Oregon GOP would start looking after Oregon’s Main Streets rather then Wall Street, and take actions that benefit workers rather then the 1% it could move out of minority status. There is a place in Oregon’s politics for a real populous party. All that is necessary is to return to the Republican party of Roosevelt and Eisenhower.

      • DavidAppell

        Except ordinary Republicans have been conned into accepting the priorities of their elites, even though it is not in their best interest. They are so turned and twisted they no longer understand what they are asking for.
        See “What’s the Matter With Kansas?”

      • HBguy

        The problem with your perspective, as I see it, is that by providing much higher pension to public employees, then defending them by saying the private employees should get the same generous pensions, you’re not helping the private sector employees at all. You’re hurting them by forcing larger tax levies to pay for the public retirements, and creating in them a hostile attitude towards public services and government in general.

        Your argument is in my opinion a red herring successfully sold by the public employee unions. It is a diversion. How do I know this to be true? Well, why did the public employee union leadership – all Tier 1 employees – agree that the “solution” to the last PERS crisis was to give new public employees a more standard retirement benefit? If they truly believed that everyone should get Pers 1 and 2 type retirement, they never would have agreed to that. Unions leadership’s goal is to preserve Tier 1 and 2 benefits.

        • 3H

          Except, if I remember correctly, they actually fought the provisions in court. They finally signed on, because they weren’t going to win.

          Tier 1 and 2 employees no longer pay in to the old accounts, they now make contributions to the same OSRP accounts as employees hired after 2004 (and have since that date)

          • HBguy

            I don’t believe the unions challenged that part of the 2003 rules. Not sure if they even could legally. Regardless, they never tried to negotiate improvements,or increase the base wages of tier 3 hires in order to make up for the huge drop off in total compensation from 2002 hires to 2003 hires.

            The point is, Public employees don’t care about private workers, not much at least. They have even fooled tier 3 workers into sacfricing their positions to the alter of tier 1 and 2 employees as they suck up all the revenue and governments are forced to lay off newer hires.

            Someone commented that the R’s have fooled people into supporting policies that harm them, and referenced the book Whats Wrong with Kansas.

            I guess I’d ask, Whats Wrong With Tier 3 Public Employees.

          • HBguy

            should be….Public Employee Unions don’t care about private workers.

  • zohaib anwer

    o allow me to reword this…. Thank YOU for the meal!!

    But yeah, thanks for spending time to discuss this matter here on your blog and i have a crack software

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