PERS decision will cost Oregon more than $1 billion

by Sen. Doug Whitsett

Cost of Oregon Supreme Court reversal of 2013 PERS reforms will be well more than $1 billion – “Not a single one of those dollars will go towards hiring teachers, police officers, librarians, paving roads or paying for any other public service. None of the money will make its way into the classrooms or towards the improvement of needed services at the local level.”

Much of my decade of service in the Oregon Senate has been as a member of the budget-writing Ways and Means Committee. In that time, I’ve developed a good understanding of the state’s budgeting processes and the ways in which the delivery of public services are funded and carried out.

Over the last decade, it has become increasingly obvious that one of the biggest factors that prohibits adequate services at the local level is the ongoing cost of the state’s Public Employees Retirement System (PERS). A decision made last week by the Oregon Supreme Court will only serve to complicate the efforts of local officials to provide quality levels of services to their constituents.

PERS has already created enormous future liabilities for state and local governments, as well as for all Oregon school districts. Those liabilities are to be paid by a combination of the investment returns on the PERS Trust Fund and by Oregon taxpayers.

The obligation for taxpayers to make greater PERS funding contributions is inversely proportional to any decreases in the PERS Trust Fund investment earnings. Any reductions in the Trust Fund earnings must be made up by employer contributions, which are funded by taxpayer dollars.

According to Oregon law, the PERS contracts, and the Oregon Supreme Court, it is the Oregon taxpayer that is ultimately responsible for paying those immense liabilities.

In 2013, the Legislative Assembly, in regular and special session, passed PERS reform legislation that significantly reduced that future tax liability. The enactment of those reform bills served to reduce PERS cost to taxpayers by more than $1 billion per budget cycle.

However, the Oregon Supreme Court determined last week that most of the Legislative Assembly’s PERS restructuring was unconstitutional.

The Court ruled that retroactive changes in bargained-for cost of living adjustments violated the provisions of the Oregon Constitution that prohibit legislative changes in existing contracts. That cost of living provision made up more than 90 percent of the PERS savings that would have resulted from the 2013 legislation.

Not all of the Court’s decision was bad news for Oregon taxpayers. It did uphold the constitutionality of parts of the 2013 legislation. The Court allowed the elimination of income tax refunds to PERS recipients that live outside of Oregon and that do not pay Oregon Income taxes. It also allowed the Legislature to make future reductions in cost of living adjustments

However, the unanimous High Court decision wiped out more than $1 billion in biennial PERS cost savings. It also requires the public employers to repay PERS recipients for their reduction in pension payments during the past two years.

The total costs of the Supreme Court decision are still being calculated.

The Court-mandated repayments to PERS retirees will not affect PERS rates during the next two years, because the reimbursements will be paid from a PERS reserve account. The more than $600 million that is currently in that reserve account will more than cover the expense of the cost of living reimbursements.

However, both the increased cost of PERS obligations, and the cost of replenishing the PERS reserve account, will come due during the 2017-19 budget period.

The non-partisan Legislative Fiscal Office estimates that the cost increase for that budget period will be well more than $1 billion dollars. About $360 million will be charged to school districts, about $420 million to local governments, and the rest will be paid by state employers.

Unfortunately, most of that enormous cost will continue in each future budget period.

Not a single one of those dollars will go towards hiring teachers, police officers, librarians, paving roads or paying for any other public service. None of the money will make its way into the classrooms or towards the improvement of needed services at the local level. What this ultimately means is that Oregon taxpayers will be required to pay more taxes without the corresponding tradeoff in increased services.

Our system of government is structured around three co-equal branches. The Legislature writes the laws, the Executive Branch is charged with implementing them, and the Judicial Branch is tasked with making sure that they pass constitutional muster. But in this case, the good-faith effort to reduce the growing costs of PERS pensions by the Legislative and Executive branches has been overruled by the Judicial Branch.

The consequences of that decision won’t be felt immediately at the local level. PERS employer contribution rates for cities, counties and school districts are likely to remain unchanged for the 2015-17 biennium. However, the 2017-19 biennium will present myriad challenges for local officials, as well as Legislators hoping to balance budgets based on existing obligations and the growing demand for more services both locally and statewide.

Make no mistake–almost all of the cost will be borne by Oregon taxpayers. It will come either in the form of higher taxes, reduced services, or some combination of the two. The High Court has spoken, and no amount of Legislative tinkering will be sufficient to undo the $1 billion cost of last week’s Court decision on PERS.

Senator Doug Whitsett is the Republican state senator representing Senate District 28 – Klamath Falls