In a recent report before a joint meeting of the Oregon Investment Council and the Oregon Public Employees Retirement System (PERS) Board it was revealed that the unfunded future liability of PERS is estimated at $22 Billion – an amount that exceeds the current biennial general funds budget. According to the Oregonian, Rukaiyah Adams, the vice chair of the Oregon Investment Council made the announcement and then she cried. It would have been better if she had resigned and took the remaining members of the Oregon Investment Council with her.
- A pension plan should be actuarially sound. Most private sector plans today are defined contribution plans rather than defined benefit plans like PERS. A defined contribution plan (usually based upon a percentage of a worker’s salary and often matched by the employer) determines the total liability of the employer. By definition it is actuarially sound. How the funds are invested over time defines the benefits that are actually received. (An investment in an S&P index fund has, over time, averaged an annual return of 8%.) A defined benefit plan is based on the average ending wage of the employee (usually a three-year average). Contributions by the employee and employer are based on the then current wages. Given that wages are relatively low when an employee begins and much higher for the three-year average period, contributions are insufficient to fund the pension and are, therefore, actuarially unsound.
- A pension plan should require contributions from both the employee and the employer. In Oregon, the statutory provisions establishing PERS envision just such contributions but state and local governments have made the arbitrary decision to ignore those provision and “assume” the employee contributions in addition to the employer contributions.
- A pension plan should not allow manipulation of benefits. The Oregon PERS plan allows employees to accumulate sick leave, overtime and vacation pay to artificially raise the three-year average pay upon which retirement pay is based.
- Benefits from a pension plan should not be based on an assumed or guaranteed rate of return. Some PERS recipients in Oregon have a plan that is based on their three year average pay with a “kicker” based on an assumed minimum rate of return for a portion of the employer contributions. This has resulted in the recurring phenomena of some employees retiring with guaranteed incomes in excess of their final salaries. (Which then leads to pictures of retirees in Mexican resorts raising Margaritas in mock toasts to Oregon’s beleaguered taxpayers.)
- Pension plans should utilize current mortality tables to determine benefits. Oregon PERS has had extended periods during which mortality tables have not been updated resulting in excessive payments to beneficiaries. (For those of you who were forced to endure a teachers union led education in the Portland public schools, that means if you use shorter life expectancies but pay them over longer current actuarially determined lives you will pay an excessive amount. Okay, if you are one of the one-in-three products of the Portland public schools that did not actually graduate try this – divide $100,000 (assumed benefit) by 10 years (antiquated mortality table) resulting in a $10,000 per year payment but actually pay that $10,000 per year over the current actuarially mortality table of thirteen years and you get a total payment of $130,000 – 30% excess payment.)
- Pension plan investments should be based on a “sound and prudent” principle basis and not on “politically correct” investments. CalPERS is notorious for using its pension plan to reward or punish “politically correct” nuances. I’m not sure what Oregon PERS’ total investment strategy is but given the uber liberal cant of its three decades succession of Democrat governors who appoint the PERS Board and Oregon Investment Council, I would not be surprised to see similar actions in Oregon. At the very least there have been repeated calls by the left to do so.
9. Bar members of the judiciary from hearing challenges to public employee pension plans on the basis that they have an inherent conflict of interest in the outcome. Make provisions for the appointment of temporary replacement members who are not currently eligible for public employee pension plan benefits.