PERS – The Costs That Are Crushing Local Government

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On September 25, the Oregon Public Employees Retirement System (PERS) released its report on the financial status of Oregon’s generous public employee pension plans. You can read the report yourself online at http://oregon.gov/PERS/docs/financial_reports/dec08_mercer_actuarial_valuation_report.pdf

Unless you are actuarially acclimated it is difficult to understand all of the nuances. There are some startling, but expected, facts. But let’s step back to provide some perspective on PERS and the power of its chief beneficiaries — the public employee unions.

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 $6.5 Billion in bonded liability and, in an effort to mute criticism, reported that by 2007 the unfunded future liability of PERS had disappeared.

Six years ago, the $13.5 Billion unfunded future liability was considered to be a crises. Fast forward to September 25 and we see that the unfunded future liability has grown to $16.9 Billion. But that isn’t the whole of it. There is an additional unfunded future liability for healthcare contributions of about $325 Million — small in comparison to the unfunded pension benefits but it all counts. To give credit where credit is due, while the system’s assets lost nearly 26% of their value, the Standard & Poor’s 500 index lost nearly 41% during the same period of time. In other words, an extraordinary problem could have been even worse.

While those figures may demonstrate the enormity of the problem, it is the current impact of the problem on school and local governments that is the real story. The September 25 Mercer report indicates that the contribution rates for state and local governments and school administrations are going up — and not just a little but a lot. For many units of government rates will go from 4.7% of payroll to 13.1 % of payroll — nearly tripling the amount of mandatory contributions. And that does not include the amount the many school districts and local governments are paying for the bonds they issued to reduce the amount of unfunded liability.

The Oregonian’s Ted Sickinger reported:

“Just reviewing the valuation report, I started quaking in my boots,” said Michelle Morrison, business manager for the Yamhill Carlton School District.

The district already pays about 12.5 percent of its payroll to cover debt payments on bonds it issued to cover its pension obligation, Morrison said. And she figures — though she’s only guessing — that the district’s costs could go up by another 10 percent of payroll in 2011.

“We might as well reduce our staff by that much at this point, but we’ve already done that” in response to previous budget cuts, she said. “I don’t know whether there’s any legislative action to shield us, but it’s horrifying to think this is what we’re going to pay.”

And therein lies the rub. Under the federal Employees Retirement Income Securities Act (ERISA) employers cannot reduce accrued benefits but can reduce future benefits, including moving from a defined benefits plan (like PERS) to a defined contribution plan (like most private businesses) for current and future employees. In doing so, employers can mitigate future unfunded liabilities. But, uniquely in Oregon, and uniquely applicable only to public employees, employers (state, local and school districts) CANNOT reduce future benefits for existing employees. Oregon’s Supreme Court has ruled that public employees have a constitutional right to any benefit provided for the entirety of their future employment. While benefits can be increased they can never be decreased. Of course the Oregon Constitution contains no such provision but that does not deter the Oregon Supreme Court (beneficiaries themselves of a PERS like pension).

Add to that Gov. Kulongoski and his Democrat colleagues in the House and Senate have declared further reforms to PERS off limits and you have a seemingly unstoppable train wreck in progress. The Oregon legislature has already increased taxes by $1.8 Billion and none of it was to mitigate the increased expenses to local and school district governments for the additional burdens that will be imposed by the new increases in payroll surcharges to fund PERS.

So what can be done? If the state courts won’t let you reform PERS to mitigate against future liabilities and the state legislature has already increased taxes on business to make it second only to Denmark in the world, what avenues are left.
Well, in the world of the public employee unions, Gov. Kulongoski and the Democrat legislature there is only one solution — raise the tax on business even more.

But there is an alternative and that is bankruptcy. The federal bankruptcy laws don’t give a fig about the Oregon Supreme Court’s view of the inviolability of PERS. They can and will toss it aside in a New York minute. Somewhere out there is an Oregon city or school district which, because of the PERS unfunded future liability, is technically bankrupt. It only takes a little courage to actually file for bankruptcy protection and reorganize future debt to an affordable level by extinguishing future “rights” to current levels of pension rights. This appears to be the only means by which school districts and local governments can re-acquire the same rights as other businesses to mitigate their future liabilities by restructuring future pension rights.

Absent some action by these local units of government (you won’t get anything from the governor or the legislature) Oregonians will continue to watch the decline of services for lack of resources while the public employee unions continue to fatten their larders at the expense of Oregon’s taxpayers.

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Posted by at 06:00 | Posted in Measure 37 | 20 Comments |Email This Post Email This Post |Print This Post Print This Post
  • Ed Van Horn

    This is an example of why Oregon will never have a Republican majority or elected Governor in our lifetime. Please take your ideas and move to Idaho.

    • Voter

      You’re an idiot!

  • provo

    PERS goes down and up. It was behind a few years ago and recovered when the economy did. Are things any different.

  • Anonymous

    Nice logic Ed.

    Isn’t it insane for public employee unions to demand totaL fiscal collapse for governement in order to maintain their nonsustainable compensation?

    Your reaction is nothing but a threat and battle cry in your e war against the taxpayers by public employee unions.

    Not only has your unions elected politicians who hand over all you demand but they are also the same fools deliverng horrible liberal policies further destroying government and the taxpayer’s ability to fund it.

  • Rupert in Springfield

    I would suggest a third alternative.

    The sticking point here is the Oregon Supreme court ruling that future, like accrued benefits, cannot be cut. This is a very serious matter because what it means is any time the legislature screws up it is etched in stone forever. When they sell the citizenry down the river with idiotic deals like guaranteeing an 8% return nothing can ever be done about it.

    So what to do?

    Well, I am not an expert on the Oregon constitution, but I do know something about the US constitution. If Oregon’s had a similar provision, the ability to regulate the courts, then what could be done is simply legislate that the courts had no purview in these matters. The Supreme Court of the US is regulated in this fashion, congress is given specific power to regulate the courts and obviously this includes the scope of the courts power. I would say a similar solution needs to be found in Oregons case.

    Its time for public employees to join with what the rest us call the real world. That means yes you might get laid off, no you don’t automatically get a cost of living increase in your pay, and yes, you might actually make less when you retire than you did when you worked.

  • Duck fan

    I’d be careful with the talk about bankruptcy, Big Boy. That is a big step and can lead to very unpleasant consequences. Asset disposal to pay for the PERS obligations? The State of Oregon is nowhere near bankruptcy, but if it ever reaches that point, there are a lot of assets to put on the block — the public school and other State and local government buildings? The state highways? The parks? The prisons? Oh, I forgot Autzen stadium and the new UO basketball arena!

    Is that maybe what you guys are after?

    Or is this just another example of the great thinking that made U.S. West/Quest such a great operation?

    In any case, Oregon is nowhere near bankruptcy, as a I said.

    Just sounds like another fantasy of the increasingly loony Oregon far-right.

    • anon

      DF, Larry is talking about local governments and/or school districts filing bankruptcy, not the state of Oregon. The city of Vallejo, California recently filed bankruptcy over the cost of employee salaries and benefits. In the next few years, Larry is suggesting, we may start seeing that in Oregon.

    • Steve Plunk

      The true fantasy was expecting PERS to not bankrupt us all. There have been warnings about this retirement system for more than twenty years yet our government has not fixed the problem. I suspect it will never be fixed unless the citizens do it through initiative.

    • Rob DeHarpport

      Really? My thoughts are that we are not too far behind California. Whenever an “Unfunded Actuarial Liability” nearly equals the General Fund balance you have serious problems!! Add to that fact; tax revenues are down drastically,
      there is no sign of a significant up-swing in the economy,
      unemployment remains at record highs
      foreclosures are still increasing
      the stock market is very likely “over-valued” currently
      Government continues to grow, despite all of the above

      Reality sucks! But this is very serious and real. Municipalities, schools, fire districts etc. etc. are already cut to the bone. The only place left to cut is jobs and/or benefits.

      The sad thing is many of us have seen this coming “again” for years, yet nothing has been done in Salem. The real problems are left to the cities and School districts etc.

      This will only add to our serious unemployment problem. Bottom line is that Government has drastically outgrown the population and the economy, thus the revenues to cover these “grand” plans are non-existent. Folks are TAXED OUT!

      We need to get back to producing products in this state and nation or we are royaly screwed!
      The “Green” movement is a scam, it began with the spotted owl and continues to potentialy ruin us.
      WAKE UP!

      The Democratic party has been overtaken by both the Greenies and the non-thinkers who look to more Government to solve all problems. Well…. the chickens HAVE come home to roost!

      Hopefully we can survive until 2010!

    • Duck fan

      The comments here reflect the contradictory thinking in the piece. Is the suggestion for isolated local bankruptcies or a statewide bankruptcy? Well, the comments suggest the possibility or need for one or the other or both.

      In my opinion the logic leads to a state bankruptcy. But that would have unforeseen and as I tried to convey, potentially catastrophic consequences. Cheap talk about bankruptcy is not the answer.

      The state really made a mess of PERS, no doubt about it. To a large extent the Kulongoski reforms have fixed things to the extent they can be fixed. I don’t see any way out from the foolish obligations the state undertook with the 8% guarantee to Tier 1 employees. The state is just going to have to deal with its mistakes until the demise of the earlier employees solves the problem. That is going to transpire over many years, it will be decades until the problem is gradually solved.

      Instead of a bunch of cheap talk about bankruptcy, which is probably going absolutely nowhere, why not do the hard work of gradually bringing total compensation for public employees into line with what the state can afford?

      For starters, try adjusting the total compensation of the Tier 1 workers for the extra benefits they are getting through the PERS system?

  • Franklin Maxwell

    Remember everyone – these people worked hard at thankless jobs with very little time off to get these “bare bones” pensions. I say let them at least retire in peace.

  • Marvin McConoughey

    PERS is a complicated subject, made more so by the politics involved. Public agencies that have agreed to pick up employee’s share of worker contributions can renegotiate that commitment at contract time–and should do so as part of their fiduciary responsibility to the public. The legislature should convene an aggressive review panel to identify all PERS cost control options that are legal under the Oregon Supreme Court Ruling. The Court ruling itself applied to specific cases and might not apply equally to different challenges. This has been the history of the federal supreme court, which sometimes responds differently according to the nuances of the cases appearing before it. Where retirement costs cannot be made similar to the private sector, bargaining can make appropriate reductions in dollar wages, or in wage increases.

  • Bob Clark

    California also has bloated pension obligations. Their solution so far is to cut social services, and maybe sell some state assets. The union based obligations probably are still too great, and eventually California state will find some way to default on its pension obligations. Other states and municipalities are on the same track.

    What’s another irony is there are many Oregon state employees who are retiring as soon as possible to collect their government service pensions, and then, they move to states like Washington which have no state income tax.

    This is called the union shake down. Buy off the politicians during their campaigns. Negotiate with these same politicians for union wage and benefit hikes. Also, push these same politicians for expanded government programs, which helps in turn expand the ranks of the union and thereby union dues for buying more politicians. Eventually the union sucks its employer dry, and the employer goes into a coma like the Detroit automakers have gone.

    Bottom line: government employee unions shouldn’t be allowed to make political contributions, because there’s too much conflict of interest. There needs to be a counter balance to government employee unions. At least, this is the obvious case in the state of Oregon.

  • Marvin McConoughey

    I agree with Bob Clark’s comments. The present situation has created an inherent power imbalance between Oregonians as a whole and that extremely powerful segment consisting of unionized public employees. Legislators and public agency leaders do not like to think of themselves as having been corrupted but they have been.

  • Bill Sizemore

    There are several options still open. Here’s just one:

    If public employees want to continue receiving so much of their compensation in the form of first class health benefits and gold-plated pension benefits, then so what. Let them. However, if that means we cannot afford to also pay them the salaries they have been receiving, then we reduce those salaries to an amount we can afford to pay without laying off a bunch of teachers, firefighters, and prison guards.

    The Oregon Supreme Court’s decision in the 1994 Measure Right case, flawed as it was, may have precluded getting rid of the eight percent guaranteed rate of return for Tier One employees, but there is no legal reason why salaries cannot be reduced as needed to maintain that unrealistic benefit.

    The history of the guaranteed rate of return is a long one. If I remember correctly, the initial guarantee was something like 5.5 percent. Legislators, who were in the same retirement system they were regulating, kept increasing it. And the Court, with seven justices who were also participants in the same system, have protected that guarantee, even though they have to ignore their own precedents to do so.

    If Ted Kelongoski, who was AG at the time his office was charged with defending Measure 8, had appealed the Oregon Supreme Court decision to the U.S. Supreme Court, we would not be in this fix and stuck with somewhat limited options.

    There are still ways to overturn the Oregon Supreme Court’s decision, which was based on a flawed interpretation of the federal “contract clause.” That interpretation has turned out to be an aberration and can be reversed. Even this court could so so if it wished. Justice Michael Gillette dissented from the Measure 8 decision and now could lead the court back to sanity on this issue, if he chose to.

    If public employees think they are unappreciated now, when the effects stemming from the enormity of the PERS shortfall begin to really hit home, they may remember these as the good old days, the days before the public realized what the public employee unions had really done to them.

    • Duck fan

      Is this the Bill Sizemore who is renowned for his finesse and expertise in legal matters?

      With your great ideas, perhaps you should run for Governor!

      • Marvin McConoughey

        I always prefer to listen to people who have led faultless, error free, lives. But when I tried to do that, there was no one there, and I had no voice with which to speak.

    • anonymous

      “If I remember correctly, the initial guarantee was something like 5.5 percent. Legislators, who were in the same retirement system they were regulating, kept increasing it. ”

      The public employee unions accepted lower pay in return for higher guarentee on retirement as part of their negotiations. That was the deal. To say now that this just magically “kept increasing” is disingenuous when you know better.

  • Helk4

    Here is yet another muddy issue regarding PERS. The political leaders in Oregon were quite agreeable to the transition of both SAIF and OHSU to what are called “quasi-public” entities. Just these 2 organizations employ many thousands of workers. They are now able to function without the burdensome control of state government, and can supposedly compete more ably in their competitive environments. Each entity contains top brass executives making far above the norm of state bureaucrats, and their financial workings are kept much more private than state bureaus. Then why oh why does every single employee in SAIF and OHSU still qualify for full PERS benefits ? This is truly outrageous … be either a public OR private entity, but don’t pick and choose the best cherries from both sides and be a tax payer supported chameleon … take the big salaries of private industry, the flexibility of no government control, but then scoop up all the great bennies from a public retirement system that used Disneyland as a model … to then add a little more insult, all of the attorneys and staff of the Oregon Bar Association, defined as a private organization, are also on the PERS system … very cozy deal there … just give a call to PERS and ask if you or perhaps the Oregon Plumbers Assn can enroll for their great benefits … they will tell you abruptly that their’s is a program for public employees ONLY ….. then ask them about the deal with the bar assn, and they stammer like fools … seems it’s a good thing to have a bunch of attorneys on your team when it comes to protecting against deserved scorn … the only real way to get out from under the crushing weight of Oregon’s self serving public benefit system is to do what so many individuals and businesses have already done … get the hell across the river to a state that is at least not so far under water …. yet …

  • Helk4

    Here is yet another muddy issue regarding PERS. The political leaders in Oregon were quite agreeable to the transition of both SAIF and OHSU to what are called “quasi-public” entities. Just these 2 organizations employ many thousands of workers. They are now able to function without the burdensome control of state government, and can supposedly compete more ably in their competitive environments. Each entity contains top brass executives making far above the norm of state bureaucrats, and their financial workings are kept much more private than state bureaus. Then why oh why does every single employee in SAIF and OHSU still qualify for full PERS benefits ? This is truly outrageous … be either a public OR private entity, but don’t pick and choose the best cherries from both sides and be a tax payer supported chameleon … take the big salaries of private industry, the flexibility of no government control, but then scoop up all the great bennies from a public retirement system that used Disneyland as a model … to then add a little more insult, all of the attorneys and staff of the Oregon Bar Association, defined as a private organization, are also on the PERS system … very cozy deal there … just give a call to PERS and ask if you or perhaps the Oregon Plumbers Assn can enroll for their great benefits … they will tell you abruptly that their’s is a program for public employees ONLY ….. then ask them about the deal with the bar assn, and they stammer like fools … seems it’s a good thing to have a bunch of attorneys on your team when it comes to protecting against deserved scorn … the only real way to get out from under the crushing weight of Oregon’s self serving public benefit system is to do what so many individuals and businesses have already done … get the hell across the river to a state that is at least not so far under water …. yet …

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