Borrowing money to pay off PERS debt doesn’t solve the problem

Sen Doug Whitsett

by Sen. Doug Whitsett

The compounding financial debacle within the Public Employee Retirement System (PERS) is one of the most persistent and vexing problems facing Oregon lawmakers. Oregon taxpayers now owe about $22 billion more money to Oregon public employees than PERS has saved to pay for their promised retirement benefits. That taxpayer debt computes to about $5,400 for each person currently residing in Oregon.

The PERS Board recently released information on the rate increases for the 2017-19 biennium. Most public employers are faced with paying between four and five percent higher payroll costs just to help fund the PERS shortfall. The additional annual contribution to PERS will increase by about $885 million. That is above and beyond what the public employers are already paying and will amount to about $2,500 for a public employee earning a salary of $4,000 per month.

The PERS board is expecting similar increases for the 2019-21 and 2021-23 budget periods. By 2021, the cumulative increase in annual PERS contribution for a public employee earning $4,000 per month will likely exceed $7,000.

These untenable PERS rate increases are not limited to public employees who work for the state. They will impact nearly every city, county, school district and special district in Oregon.

Those local government impacts were spelled out in this article that appeared in the East Oregonian newspaper. Public employers in the Senate district that I represent will feel a similar crunch from these higher rates.

The Bend-LaPine School District will see PERS contributions grow as a percentage of payroll from 12.37 to 17.99 for its Tier 1 employees, a 45 percent increase. The contribution rate for employees hired after 2003 will climb from 7.86 to 12.66 percent.

Community colleges will see hikes similar to school districts. Central Oregon Community College’s contribution rate will go from 15.08 percent of payroll to 19.09 percent for Tier 1 employees. Klamath Community College’s will go from 19.49 to 23.4 percent.

The City of Butte Falls faces an increase from 9.55 to 13.18 percent for Tier 1 employees and a mind-numbing increase from 0.45 to 6.09 percent for its employees hired after 2003. The City of Malin’s Tier 1 PERS contribution will rise from 13.61 to 17.37 percent of payroll.

All five counties located in Senate District 28 will be required to pay PERS contribution increases ranging from 4.7 percent to 6.25 percent. Crook County will see contributions for Tier 1 employees go from 11.8 to 16.83 percent of payroll, Deschutes County will rise from 13.26 to 17.96 percent, Lake County will go from 14.92 to 19.9 percent, and Jackson County from 16.1 to 21.1 percent. Most adversely impacted is Klamath County, increasing from 5.99 to 12.24, more than doubling its required PERS contribution.

Most of the local government entities in Oregon are special districts. Not surprisingly, they will also be hard-hit by the PERS rate increases.

Deschutes Valley Water District’s contribution for Tier 1 employees will rise from 19.37 to 24.38 percent of payroll. Jackson County Fire District #5 will see increases of 19.9 to 25.41 percent, and the Klamath County Fire District’s will go from 22.44 to 28.18.

Each of these examples of Oregon public employers are expected to experience near equal increases again in 2019 and again in 2021. Their financial situation will be even more dire when an overdue, and near certain, economic recession results in lower PERS investment earnings and sharply lower equity values.

Two distinctly different methods are being advanced for solving the PERS funding shortfall. One supports reducing the PERS funding shortfall by lowering the costs for PERS retirement benefits. The other advocates dealing with the shortfall by borrowing $20 billion.

This Statesman Journal article discusses how borrowing money could help pay off the unfunded liability in Oregon’s PERS program. Pension managers propose PERS refinance its debts by offering $20 billion in Pension Obligation Bonds. Incredibly, Governor Kate Brown later released a statement saying she applauds members of the PERS Board and the Oregon Investment Council for thinking creatively about the system’s financial problems.

The proposal to borrow $20 billion to address the PERS unfunded liability simply shifts the burden of paying the enormous debt from current taxpayers to future taxpayers. Worse, it adds long-term interest costs to the future taxpayers’ burden. Even at a low fixed interest rate of 3.5 percent, the principle and interest payments over the life of the proposed 25-year bonds would exceed $30 billion.

Moreover, borrowing money does absolutely nothing to solve the causes of the unfunded liability problem. It would allow even more future unfunded liability to accrue because the underlying problems that caused the PERS shortfall continue to be ignored.

The proposal will also serve to mask the ever-increasing costs of public employee compensation. It will encourage granting even greater unsustainable future wage and benefit increases.

Finally, refinancing $20 billion in uncollateralized debt with general obligation bonds will likely challenge the state’s credit ratings. Bonding the PERS debt may also raise havoc with the state’s bonding capacity for other capital construction projects.

During my three terms serving in the Oregon Senate, I’ve written at least a dozen newsletters detailing the financial problems with PERS and predicting the fiscal debacle that now faces the state, school districts and local governments.  The most recent PERS-related newsletter included several potential solutions to the enormous PERS shortfall that were developed by Senate Republicans. Rest assured, they do not involve paying off current debt with future debt.

Our Legislative Counsel attorneys have confirmed they believe at least seven of these cost-reducing solutions are likely to survive state Supreme Court scrutiny.

During the 2013 legislative session, I introduced 14 bills designed to reduce future PERS costs: Senate Bill 652, SB 653, SB 654, SB 655, SB 656, SB 657, SB 658, SB 659, SB 660, SB 661, SB 662, SB 663, SB 664 and SB 674. Although some of the bills actually included concepts currently being advanced, Democrat leadership refused to allow a single public hearing on any of them.

Instead, they enacted a couple of “feel good” concepts that did little to reduce the PERS unfunded liability. Subsequently, bills were enacted in the 2013 special session “grand bargain” that would have lowered PERS unfunded liabilities significantly. However, the features of those bills that reduced retirement benefits retroactively were later overturned by the Oregon Supreme Court.

Senator Betsy Johnson (D-Scappoose) and Sen. Tim Knopp (R-Bend) have now formed a bipartisan work group that is actively seeking to apply some of the Legislative Counsel approved cost-cutting solutions to the PERS problem. Although they have thus far been largely ignored by the Democratic leadership in the House and the Senate, as well as by Governor Kate Brown, I believe my colleagues are making a good faith effort to address the causes of the PERS cost overruns.

Failure to deal with the rapidly compounding PERS fiscal instability will severely jeopardize our ability to provide quality public services at the state and local levels. It is my hope that the growing recognition of this critical problem, and its enormous impacts, will prompt a sense of urgency to provide sustainable, long-lasting answers. Those solutions must ensure the solvency of the system without jeopardizing the promised benefits currently received by retirees.

Whether that happens in the highly partisan atmosphere of our Legislative Assembly remains to be seen.

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