Kitzhaber’s Well Intended PERS Reforms Are Insufficient

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.