The Hidden $6.2 BILLION Oregon PERS Liability

A recent study of public sector retirement funds by The Pew Charitable Trust’s Center on the States found that “Oregon currently has the best-funded pension system in the country.” This assessment of Oregon’s Public Employees Retirement System (PERS) deserves a closer look.

First, it is important to emphasize how fast seemingly well-funded plans can become poorly funded. For example, in 1999 “Pensions and Investments” magazine was reporting jubilance in the state PERS world over widespread fund surpluses. A few short years into the next recession many funds were deeply in the red — including Oregon’s plan, which bottomed out nearly $18 billion underfunded.

Second, the claim that Oregon’s $50-plus billion system is the best-funded retirement plan in the nation is only technically true if we leave out $6.2 billion in liabilities generated by so-called pension obligation bonds that the state, local governments and school districts issued to help reduce their PERS rates. Issuing these bonds did two things: It raised cash which was added to PERS assets, effectively prepaying the expected pension fund obligations of the participating public employers. And, these public employers traded rate charges levied by PERS for bond payment obligations.

Oregon state and local governments have, in effect, moved liabilities off the PERS books and onto their own. The state itself issued about $2 billion in pension obligation bonds, while school districts, cities and other local governments borrowed an additional $4.2 billion for the same purpose. Of course, these are principal amounts; interest payments will add to the cash burden over time.

The Pew report appears simply to accept PERS’s own calculations which show that with the pension obligation bond proceeds, the system was 110% funded at the end of 2006. But Pew did not disclose that PERS also calculated its fund would only be 96% funded without those proceeds. It is hard to see how Pew can do an accurate analysis of the consolidated condition of the PERS fund without considering the “off balance sheet” liabilities generated by those bonds. Taxpayers still owe this money; and the debts were incurred because the PERS system had a growing unfunded liability that, at its peak, soared to nearly $18 billion.

The Pew study does mention that Oregon’s strong position is due in part to its pension obligation bonds, but it fails to reveal the high dollar amount of those bonds. It also fails to mention that the financial health of public employee pension funding in Oregon depends on the extent to which associated future beneficiary liabilities are likely to evolve. Of course, the “off balance sheet” element of Oregon PERS may be solidly funded. But, like the funded status of the “on balance sheet” portion of PERS, just how well funded any program is depends upon an appropriate evaluation of assets and liabilities. The Pew study failed to do such an evaluation, simply assuming that neither the market value of PERS assets today, nor the future stream of liabilities, will change tomorrow.

Historically, the measures used by fund actuaries and organizations like Pew use fairly simple modeling techniques to determine funded status. These models fail miserably when market conditions or the behavior of employees and employers change. More sophisticated modeling techniques do exist, but apparently Pew failed to use them when it came up with its state PERS rankings.

PEW also credits Oregon’s strong position in part to reforms enacted in 2003. These reforms did indeed claw back excessive crediting of asset returns to Oregon public employees. They largely put an end to the outrageous “heads-the-employees-win, tails-the-taxpayers-lose” PERS benefit structure.

Pew does not mention, however, that those 2003 reforms occurred in large part due to pressure placed on the political establishment by outsiders; the insiders were content to continue the uncontinuable. Particular credit goes to Dr. Randall Pozdena. A Portland consultant and finance expert, Pozdena served on the Oregon Investment Council (the PERS investment board) for nine years and was its chair for three years. He is on record as having questioned the viability of the unique PERS benefit-crediting scheme in the early 1990s, but his concerns were dismissed by the Plan’s actuary. By the late ’90s the over-crediting of asset returns to PERS members threatened to bankrupt either the fund or Oregon taxpayers.

Pozdena and the OIC board urged an independent evaluation of PERS funding
status, against protests from the vested interests. Some cities and other public employers by then had joined the debate, and the rapidly deteriorating state of the fund was revealed in the press. Governor Ted Kulongoski, risking the ire of his labor constituents, pushed through some reforms aimed at saving the system from insolvency. Public employee labor unions challenged the legislation in the Oregon Supreme Court, and only about half the reforms survived.

By some reckonings, Oregon taxpayers dodged a $5-10 billion bullet. Although the growing problem ultimately would have revealed itself, in large part the timing and thus the size of taxpayer savings were due to the prescience and persistence of a citizen member of a public board.

Clearly, we should take claims of PERS’s good financial health with a grain of salt. The vested interests are not necessarily looking out for the best interests of those who ultimately pay the bills — Oregon taxpayers. Left to their own devices, without strong citizen oversight, we can expect these vested interests to try enriching their coffers again at our expense.

Steve Buckstein is Senior Policy Analyst and founder of Cascade Policy Institute, a Portland-based think tank.

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Posted by at 06:00 | Posted in Measure 37 | 44 Comments |Email This Post Email This Post |Print This Post Print This Post
  • eagle eye

    Back in the 90’s Oregon proved itself too dumb and lazy to run its pension program. Who is watching things now? Steve Buckstein doesn’t say. “Citizen oversight” is too vague to mean much. It’s impossible to tell whether the system is now being run responsibly or not from the information that is accessible to the public.

  • Frank

    Sounds like the oversight is similar to the Board’s overseeing the PDC, TriMet and Port of Portland.

    Oversight? Ha.


    Yeah, gov. K’s PERS light fix has almost entirely been thrown out by the Oregon Supreme Court. The liberals in this government are controlled by the unions, this retirement sysyeem is unsustainable………luckily I’ll be out of this state before the complete implosion occurs……I hope.

  • HeyStupid

    I took the PERS data and did a 20 year projection based on the life expectancy of PERS members, the average payout per employee, and the fact that this is an unfunded liability. Conclusion: Oregonians need to raise 9.3 Trillion dollars over the course of the next 20 years.

    • Anonymous

      Trouble is, they aren’t bright enough to figure it out, nor care.

    • Steve Buckstein

      Of course, for those who don’t do the math, this estimate is orders of magnitude too high. If PERS was totally unfunded (totally pay as you go) then the current benefit projections tell us that taxpayers would have to come up with something on the order of $50 billion, not $9.3 trillion.

      • CRAWDUDE

        Thanks I was just about to as that question. Last I heard they had about 30 billion is assests which will leave the citizens holding about 20 billion. Unfortunately, if the economy does fall into recession that amount is going to grow dramatically. 🙁

      • rural resident

        According to PERS’ audited financial statements (their CAFR dated June 30, 2007, on the PERS web site), there is (or was as of that date) about $63 billion in NET assets available for the payment of future benefits under the fixed benefit plan. This doesn’t include amounts due under OPSRP that have accumulated in the years since the legislature overreacted a few years ago.

        You mention that PERS would only be 96% funded if we don’t include the districts’ bond sales to cover future liabilities. Most districts’ overall payments for future retirement liabilities are roughly the same regardless of how this was handled. They aren’t paying more this way. I’m not sure that being “only 96% funded” should cause people to become hysterical about a retirement system that very few people really understand and start advocating again that public employees be figuratively hanged on the nearest street corner as we saw a couple of years ago. Given the track record of the Oregon Investment Council, things actually seem pretty good.

        • Steve Buckstein

          RR, I agree that only being 96% funded is not cause for hysteria. My point is that being declared “overfunded” and “the best funded” public retirement system in the country is qualitatively different than being 96% funded (which I failed to mention would place Oregon around 6th or 7th best funded according to the Pew rankings).

          And, yes, the OIC, has done a pretty good job generating investment returns, but it fell down when it paid out those high returns in the good times while having to pay the contractual 8% return in the bad times. That was a formula for disaster, which would have occurred if changed hadn’t been made. If we think PERS is now overfunded, I fear we’ll let our guard down again, and maybe next time the disaster won’t be averted in time.

  • Marvin McConoughey

    The excellent PERS investment returns of recent years has had two aspects: One is a bouyant growth economy. The second is a decision by investment managers to accept higher risk.

    Investment management performance is best assessed over the full economic cycle. We are now entering the down side of an economic cycle and will find out how well the investment managers prepared for hard times.

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