PERS – The Costs That Are Crushing Local Government

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

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.