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?