by Sen. Doug Whitsett
The Oregon Public Employee Retirement System (PERS) announced more bad news last month. Its unfunded liability has increased more than 20 percent, from $18 billion to $21.8 billion. The retirement system is now only 71 percent funded.
Even worse, we know that about 70 percent of PERS income is derived from returns on investment by the PERS Trust Fund. The PERS Board is assuming an annual 7.5 percent investment return. Returns for 2015 were barely 2 percent and 2016 returns are currently projected to be even less.
This distressing information was provided to the PERS Board during its July 29 meeting by its financial actuary firm. The actuaries told the Board that school districts, cities, counties and state agencies will have to pay an additional $885 million in PERS contributions during the upcoming 2017-19 biennium. That is a nearly 44 percent increase, on top of the $2 billion they are currently paying.
The PERS contribution rates for public employers in the state are expected to increase by an average of 4.51 percent of payroll for school districts in 2017. The additional cost to Oregon public schools will be around $335 million. To put that huge amount of money into perspective, it calculates to a 58 percent increase, which is the equivalent of more than 2,000 new teachers. According to the actuaries, Oregon schools now owe $13,879 per student in PERS unfunded debt.
PERS contributions by state government agencies will increase by $260 million for the next two years. The nearly 45 percent increase is equivalent to the total compensation for more than 1,400 average state employees.
Local governments and special districts are looking at a 33 percent increase in their PERS contributions for the next biennium starting July 1, 2017. Many believe that requirement to pay an additional $290 million is nothing less than an unfunded mandate.
The overall impacts are spelled out quite well in this article by Oregonian reporter Ted Sickinger. It states that public employer contributions are to rise about four percent during each of the next three budget cycles. Statewide pension costs are projected to increase by 125 percent, from $2 billion this biennium to $4.5 billion in the 2021-23 biennium.
A previous article written by Sickinger quotes a member of the Bend-La Pine School Board stating the last time their district saw those kinds of PERS rate hikes it was forced to respond by eliminating 100 teaching positions. That is the expected effect in just one of the nearly dozen school districts that I represent.
Legislative solutions must be crafted for this enormous and rapidly growing problem. Two sets of solutions are being presented to Oregonians. One aims to reduce and stabilize the cost of PERS, while the other intends to raise enough new tax revenue to pay for its near exponential cost increases. Oregon voters will ultimately decide which trajectory will best serve the people of this state.
Senate Republicans have offered several proposals to address the coming PERS funding crisis that threatens the viability of our public schools, as well as the quality and availability of public services offered by the state and local governments.
Up to $3.4 billion could be saved by redirecting Individual Account Program (IAP) contributions into an account to pay for future member benefits. This single amendment to the laws governing PERS could eliminate as much as half of the deficit over time.
It is estimated that up to another $1.2 billion in savings could be achieved through means testing retirement benefits by capping the final average salary subject to PERS benefits at $100,000 per year. Close to half of all the system’s benefits are currently paid to the top 21 percent of PERS pensions.
Approximately 22,352 PERS pensions pay more than the member’s final salary. Just under 2,000 pensions are currently in the system that pay over $100,000 per year. For example, a former OHSU professor receives $55,280 per month in PERS benefits and a former football coach receives $42,921 per month. That is more than many Oregon taxpayers make in an entire year. In other words, the highest earning PERS recipients are paid more every month not to work than most of the people who are taxed to pay for their benefits make working 40 hours per week for an entire year.
Up to $1.1 billion could be saved by using a market rate for money match annuities. The current rate being used is nearly twice as generous as most annuities available in the private sector.
An additional $350 million in savings could be achieved by eliminating the spiking of pensions by preventing future unused vacation and sick leave from artificially increasing final average salary calculations. Over half of the states in the nation have limited pension spiking by changing the final average salary calculations from three to five consecutive years.
Several other possible solution could save a great deal of taxpayer money, although the amount of the potential savings for many of these proposals is still in the process of being calculated.
The state could also start using the Social Security phased-in retirement age for all PERS general services starting in the year 2020.
PERS liability could be frozen by ending pension credit for salary or years of service earned on or after January 1, 2018. Instead, PERS members could receive a matching six percent contribution from their employer into the IAP.
All employees hired after July 1, 2017 could be moved to a new defined contribution plan in which employers match six percent of an employee’s salary into the IAP.
The state could also allow full bargaining regarding government payout of employee PERS contributions and limit those agreements to five-year periods.
I’ve written in the past about the abuse of emergency clauses in legislation. However, an E-clause could be attached to any PERS reform bills in order to allow the PERS Board to recalculate its rates to reflect any savings from changes to the system as soon as the bill passes.
In order to better stand up to any court challenges, as part of the process, legislation should specify that nothing in the bill creates contract rights, should including a legal severability clause and should allow expedited review to the Oregon Supreme Court.
In late July, Senate Republican Leader Ted Ferrioli sent this letter to the Democratic leaders in both the House and the Senate asking them to consider these changes. To date, they have not agreed to any bipartisan effort to reduce PERS costs.
The Democrat alternative appears to rely on provisions for higher taxes.
Governor Kate Brown had declined to express her support or opposition to Measure 97 for several weeks, even though she apparently was making plans to spend the money. She has now endorsed the Measure that was formerly known as IP 28. That measure will raise an estimated $6 billion per biennium by raising taxes on certain businesses organized as C-corporations.
Measure 97 was initiated and introduced by Our Oregon.
In one of the aforementioned articles by Ted Sickinger, that organization’s executive director is quoted as claiming that the multi-billion dollar measure is in no way connected to the pending PERS funding crisis. This allegation by the former State Representative appears at best out of touch with reality, given the impending projected $2.5 billion biennial increase in PERS employer contribution costs.
Proponent of Ballot Measure 97 further claim that if the measure is approved by voters in November’s general election, the $3 billion per year in new revenue will be spent funding Oregon’s schools, health care and senior services. This statement is essentially a false promise.
Legislative Counsel (LC), the team of attorneys that advises the members of the Legislative Assembly and performs the drafting of all legislative bills, has weighed in on the matter. Despite the claims being put forth by the Measure’s proponents, LC emphatically stated that the Legislature can spend its general fund revenues “in any way it chooses,” and its members are “not bound by the spending requirements” set forth in the Measure and can “simply ignore” them.
Nevertheless, state Democrat political leaders are ignoring the clear and concise opinion by LC. They are refusing to change the voter pamphlet statement in support of the measure, even though that statement appears to be obviously misleading.
According to this recent article, Our Oregon has raised $1.5 million in support of the Measure, consisting of two equal $750,000 donations from the Oregon Education Association and Service Employee International Local 503. Opponents of the measure have thus far raised over $5 million.
Oregonians may expect to be bombarded with advertisements both in support and opposition of Measure 97 over the next several months. Voters should keep in mind that within the next four years, nearly 40 percent of the new tax revenue will be required to pay the projected increases in PERS costs for schools and state government agencies. Much of the remaining portion of the new tax revenue will be required to fund already negotiated increases in state public employee salaries.
I believe the more favorable alternative is for legislators to solve the growing PERS deficit by enacting common sense reforms. We are encouraged by well-respected legal opinions suggesting that several of the Republican proposal may very well withstand the scrutiny of our court system.
Senator Doug Whitsett is the Republican state senator representing Senate District 28 – Klamath Falls