The Real Peril in Pensions – PERS


On Sunday, the state’s major newspaper, on the front page, above the fold, and in print size usually reserved for the second coming of Christ, announced PENSIONS IN PERIL — the latter word being in boldface RED to emphasize the danger. The management failures of the state’s major businesses were thereafter chronicled in a chart showing the employer, the deficit in millions of dollars and the percentage by which the pensions are underfunded.

Left out of the story, however is any mention of the four employers with the biggest unfunded future liability — the state of Oregon, the counties of Oregon, the school districts of Oregon and the municipalities of Oregon — under Oregon’s Public Employee Retirement System.

The most current estimate of the unfunded future liability for PERS is about $22 Billion. And that figure does not include the pension plans for the local fire and police departments all of which run substantial unfunded future liabilities of their own.

Six years ago, the legislature calculated that the unfunded future liability for PERS was over $13.5 billion. Reforms enacted by the legislature that year reduced that amount by $7.5 Billion but the Oregon Supreme Court annulled more than $4.5 Billion of that reform package leaving an unfunded future liability of $10 Billion — an amount almost equal to the entire 2003-05 general fund budget.

That figure was further reduced by about $6.5 Billion by using the bonding capacity of the state and local governments. The net effect of that was to replace unfunded future liability with bonded future liability. State government, however, chose to ignore that fact and, in an effort to mute criticism of the overly generous government pension program, reported that by 2007 the unfunded future liability of PERS had disappeared based on the superior investment skills of the Board of Investments on behalf of PERS.

But as the unfunded future liability of PERS ebbed with the surge in the stock market, it has roared back with a vengeance with a combination of the economic downturn and the unrelenting increase in the number of public employees.

The PERS Board is rather coy about putting an exact number on the unfunded liability. For instance, the Mercer report at the end of 2008 which was used by the legislature acknowledged that PERS was only funded at 71% of its future obligations. However, even that figure did not include revaluation of the real property held by PERS which has diminished like all other real estate in Oregon. It also did not take into account further declines in the market value of stocks held by PERS. The PERS Board also deferred calculating the unfunded future liability until September (perhaps hoping that a late summer stock market rally will improve their numbers). But we can make a relatively educated guess at that figure. In 2007, when the PERS Board was bragging that there was no longer an unfunded future liability, they calculated the total future liability at $52.8 Billion. Assuming 71% funding, the unfunded portion is $15.3 Billion. Add to that the $6.5 Billion that is still owing from attempts to bond a portion of the liability and you have a figure of $21.8 Billion.

At $22 Billion, the unfunded future liability of Oregon’s PERS exceeds the total biennial fund budget for 2009-2011 by $5 Billion.

But here is the kicker. While employees of the private businesses may be at risk with regard to their pensions during an economic downturn, the government employees are not. In the private sector employees have only a contractual right to the benefits earned up to the date that the benefit package is amended. Not so for Oregon’s public employees.

The Oregon Supreme Court has twice ruled that the Oregon constitution guarantees a benefit once conferred upon a public employee can never be modified or withdrawn — including prospectively as in the private sector. It can be increased but it cannot be reduced. Of course the Oregon Constitution does not actually say that but the Oregon Supreme Court, which benefits identically with their own form of PERS, found that it was in the framers’ intent.

So for those of you worried about whether you will have a pension when you reach the age of retirement, or are worried that your current pension cannot be paid, please do not add to your worries that your favorite public employee will suffer a comparable indignity. In fact, rest assured that if worse comes to worse your taxes will be increased to make sure that the public employees will be just fine.

In other words, no matter what the amount of future unfunded liability the state will be obligated to pay. And when I say the state, I mean you.

What else would you expect in a one-party state whose elections are funded in large part by the public employee unions?

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Posted by at 06:00 | Posted in Measure 37 | 12 Comments |Email This Post Email This Post |Print This Post Print This Post
  • Taxpayer

    Well, soon the Oregon taxes will go to the PERS retirees and nothing else……………..you can hear the moving vans warming up.

    • Rupert in Springfield

      >you can hear the moving vans warming up.

      Ok – That’s a great line. I love it.

      However, one has to remember that a large segment of Oregon’s economy operates in the grey market. Down here in Eugene there are a huge number of crafts people and I am sure more than a few pot growers who quietly ply their trade on a largely cash basis.

      One thing that constantly amazes me about these people is their unswerving support for liberal Democrats. These are business owners who nevertheless support politicians who are antithetical to a constructive business environment. Why is that?

      Well, I think the answer lies in the old maxim, everyone is conservative in their own field of endeavor. People want to hang on to their assets rather than let others choose how to disburse them.

      Take the guy selling crafts at Saturday market. Some of these people actually make a fairly good living, others not so much. However what they have in common is a large part of their income is in cash. Aside from that, these people barter like crazy. Do they declare it all? Do they declare their barter transactions? No, of course not. But they insist that’s not hypocrisy, they are just getting by, or so they claim.

      Another example would be the pot growers and possibly the larger crafts people. Do these people list all the chemicals used in their business? They actually use enough fertilizer etc. that they would be required to list them according to Eugene’s law regarding businesses use of chemicals. No, of course they don’t . But they still think its a good law.

      Now, illegally evading taxes and not following local laws is not something a conservative would advocate, I certainly don’t. However it does show one reason why we have so many who support policies harmful to business. They feel they are for the other guy. Somehow they have rationalized in their mind that it is better to advocate for these laws, even if they don’t follow those laws themselves. It’s really kind of weird. They won’t deny that they are being inconsistent in not acting on what they advocate, however they feel that their advocacy alone gives enough karma to accommodate their own failure to follow its dictates.

      Weird I know, but I think that’s at the crux of why we have so many who endorse the ludicrous.

  • Kevin P. (Salem)

    As usual, Larry Huss’ post is written as if he extrapolated all of his information from an anecdote he heard in passing.

    First off, anyone who actually follows this issue knows that the “Board of Investments” as Mr. Huss calls it is actually called the “Oregon Investment Council.” Also, pension obligation bonds are not issued from the bonding capacity of state and local governments, but from PERS itself.

    But the largest issue that Mr. Huss glosses over is the fact that, despite the market downturn, Oregon’s PERS is the best-funded public retirement system in the country. Mr. Huss’ call for alarm reveals a fundamental misunderstanding of how pension obligations work, in that no pension fund of comparable size is likely to be over 100% actuarially funded all the time.

    I won’t sit here and explain it (nor argue it), but this issue deserves more than an on-the-spot analysis of an out of context factoid.

  • John Fairplay

    I don’t blame you, “Kevin P.” for not wanting to explain or argue since you’re completely wrong. General Motors was also the “best funded car company in the country” right up until the moment it collapsed.

    PERS bonds designed to cover unfunded liabilities are issued by local entities – interest and principle payments are made with property taxes and show up on my property tax statement each year.

    Larry’s right that this is not really an issue for the retirees who will receive their pension payments no matter what – just as current Oregon government employees are not being asked to make sacrifices in the current economic downturn. I don’t know why we bother to discuss it, frankly, as nothing can be done about it aside from relocate to another state to avoid the huge tax obligation that is on its way.

    • Rupert in Springfield

      Ok – I will admit that I do not follow this issue as closely as you seem to. However you say there is nothing that can be done about PERS.

      Can you tell me why that is? It is my understanding that a lot of the PERS trouble stems from an inane promise made to retirees during the Clinton years when Clinton and Bob Reuben claimed to have largely beaten the business cycle. What happened then was to promise a return of 8% minimum, in exchange public employees did not get a raise as I recall.

      If that is the case, is there a reason a law could not be passed to simply erase this ludicrous promise?

      I’m not talking about the practicalities. I understand that passing such a law would be very difficult.

      I just wonder why that kind of thing is not a consideration? Pension promises are broken all the time. All of us now working had our retirement age raised on us under Reagan, in order to “save SS”. We therefore had our benefits reduced. Therefore is there a reason why in order to “save PERS” breaking a previous commitment is legally, I’m not talking about practicality, impossible?

      • David from Eugene

        Rupert

        The Courts have ruled that the “promise” you refer to is a binding contract between the State of Oregon and the individual employees. Like all contracts it cannot be changed without the agreement of all parties. This levels only one way to change PERS, which is with new hires. This is what the Legislature did several years ago. If you were to go to work for a public agency tomorrow you would get a much different retirement plan then the PERS you are speaking of.

        The good news, as such, is that in about 15 years most of the employees with the original PERS will retire finishing the PERS fix the Legislature passed years ago.

        • Rupert in Springfield

          > If you were to go to work for a public agency tomorrow you would get a much different retirement plan then the PERS you are speaking of.

          That much I do know.

          Well, it seems like what is happening is that those public employees who did not get in on the 8% scam ( I think that was the rate guaranteed ) are subsidizing the PERS retirees.

          Frankly I would simply argue government just break the contract.

          Government is in a unique position in this state in that it is above the law. Dorothy English didn’t get paid her judgment and apparently the Oregon University System feels it can make up its own regulations regarding concealed carry even if the clearly violate the plain wording of the law.

          Of course that is tongue and cheek, but it does seem odd that on this issue all of a sudden the government is concerned about following the law.

          Frankly I think those who offered the now retired PERS members this 8% guarantee should just be dope slapped.

          “You mean to tell me you were the idiots who actually believed Reuben and Clinton when they said they had beaten the business cycle?”

      • mrfearless47

        >Frankly I think those who offered the now retired PERS members this 8% guarantee should just be dope slapped.

        Well the guarantee began in 1975 under the leadership of Tom McCall and followed by Bob Straub and then elaborated on by Vic Atiyeh. Two out of three were Republicans.

        The issue of the “guarantee” is so complicated that it can never be untangled. The guarantee is tied to the actuarially assumed interest rate, which is also used to determine employer contribution rates. Reducing the rate would harm employers and taxpayers who fund the agencies public employees work for. Of course, the rate guarantee started out at 5% and rose over time until it settled at 8% in 1989. This rate is the same assumed rate that can be found in the public employee retirement system of 75% of the states and municipalities. It isn’t a number drawn from a hat. Even now, few states are dropping below 8% as it accurately desicribes the long-term earning of most retirement accounts in the public sector.

        As for unilaterally “breaking” the contract, you assert that the Government is in a unique position to be above the law. Were that the case, the PERS system wouldn’t be in the predicament it is in. The Oregon Supreme Court ruled that parts of the PERS statutes in Chapter 238 of the ORS have the effect of being unchangeable EXCEPT for the better. Nevertheless, the 2003 reforms did make a number of changes that, combined with the City of Eugene case, had the effect of retroactively reducing ongoing retirement benefits. The “overpayment” allegedly paid to me has already been taken from my benefit and wil continue to be reduced for the rest of my retirement

  • Harry

    Kevin P. :
    First off, anyone who actually follows this issue knows that the “Board of Investments” as Mr. Huss calls it is actually called the “Oregon Investment Council.”

    ===

    Wow! What a complete and total repudiation of the above article. Larry Huss just got smoked by Kevin P.’s total annihilation of all of his arguments. NOT!

    How about this:

    Anyone who actually follows this issue knows that the “Oregon Investment Council” is really just a group of appointed idiots, as well as a couple of members by virtue of position (the Bull Semen Seller and the ex-OWRD, and now-PERS manager), who collectively mismanage the state of Oregon’s OPERF, SAIF, and other funds.

  • Maximillion

    I think these peoples who are in PERS have earned every penny of their pensions because, as noted above, they often gave up pay increases that were due them in order to get this payout later. Well, they gave up some then to get more now. So, we must honor this commitment for these dedicated, hard-working ex-state employees.
    Nothing else will do.

    • DavidR

      “When the people give way, their deceivers, betrayers, and destroyers press upon them so fast, that there is no resisting afterwards. The nature of the encroachment upon the American constitution is such, as to grow every day more and more encroaching. Like a cancer, it eats faster and faster every hour. The revenue creates pensioners, and the pensioners urge for more revenue. The people grow less steady, spirited, and virtuous, the seekers more numerous and more corrupt, and every day increases the circles of their dependents and expectants, until virtue, integrity, public spirit, simplicity, and frugality, become the objects of ridicule and scorn, and vanity, luxury, foppery, selfishness, meanness, and downright venality swallow up the whole society.”
      –John Adams

  • Joanna Smith

    Wow! This is incredible! Thanks for sharing this work of fantasy fiction. It’s great to know that the scams the GOP pulled in Wisconsin are now being foisted on Oregon.

    I wonder how police officers who put their lives on the line will react once they realize that the GOP is out to kill their pensions? Do you think they and their families will vote Republican?

    See, no one really likes 401Ks. We all know that we can lose our shirts in a market crash like many of us saw happen to our parents 401ks in the 2001 and 2009. We know that people like you are trying to play us against people who are fortunate enough to have pensions. We also saw how you folks tried to destroy Medicare, which would have hurt our parents.

    Shame on you!

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