Real PERS Reform Requires Disinterested Decision Makers

Right From the Start

“Even a blind pig finds an acorn once in a while.” – Russian Proverb

 A February 8, 2011, column by The Statesman Journal’s Dennis Thompson highlights a series of lawsuits initiated by The Statesman Journal and the Oregonian to force Oregon’s Public Employees Retirement System (PERS) to disclose information relating to taxpayer payments to individual retirees. The Oregonians suit is apparently limited to those retirees being paid in excess of $100,000 per year, while The Statesman Journal’s request is broader.

After years of ignoring the cancer that is Oregon PERS, it appears that at least some of Oregon’s major daily newspapers want to lead the charge to reform. Welcome aboard – there’s room for everybody. However, displaying the most egregious amounts that certain retirees receive will not solve or even address the underlying problems. At best it will only illustrate just how corrupt and abusive PERS has become under two plus decades of Democrat rule that has been bought and paid for by the political contributions from the public employee unions.

What it may demonstrate is the number of retired public employees that are receiving more in retirement benefits than they were earning when last employed. What it may demonstrate is the number of retired public employees receiving significant retirement benefits who have contracted back with state and local governments, using an intermediary employment agency, to perform substantially the same tasks for which they were previously employed – thus effectively double dipping.

What it won’t show is the underlying root causes of the fiscal crises that PERS has caused state and local governments. So let me help Oregon’s newspapers in hopes that they will do more than just capture some short-term headlines.

First, the PERS system is a defined benefit plan and, as such, was designed to be neither mathematically nor fiscally sustainable. Let me illustrate:

Assume that a public employee began employment thirty years ago and received a starting salary of $25,000 per years. For the entirety of the public employee’s term, (s)he received an annual 3.5% salary increase. At the end of thirty years, that employee would be making $67,800. That means over the entirety of the employment (s)he would have averaged $43,000 per year. It also means that the amount utilized for funding PERS would have been based on a percentage (approximately twelve- percent) of that $43,000 per annum. However, the benefit payments are based on the last three years of employment, which averaged not $43,000, but $65,530. And that imbalance is exacerbated by an annual cost of living adjustment.

This imbalance is made even worse by a special deal for legislators. Despite the fact that legislators – until the recent spasm of annual sessions – basically served between six and eight months every two years, the members are allowed to count each year of the their terms as a full year of employment for purposes of PERS. Add to that the habit of legislators seeking and receiving high paying administrative positions in the latter part of their careers so as to have a high (compared to their legislative salaries) incomes for the final three years in order to enhance their benefits – thus skewing the imbalance even more.

Second, a deferred compensation plan is basically a Ponzi scheme. It assumes that there will be an ever increasing number of employees paying into the plan so that it can fund the deficit created by the mathematical mismatch described above. There are two basic problems here. One is that such growth never occurs as evidenced by the financial crises in the Social Security. And two is that there have not been any employees paying into the system for years – the state government makes the employees contributions for them. In essence PERS is a Ponzi scheme in which taxpayers alone must foot the bill.

Third, the decisions makers for PERS are all beneficiaries of their decisions. In the Executive branch, the governor and all of the employees of PERS are beneficiaries of PERS. In the Legislature, the members and their staffs are all beneficiaries of PERS. And in the Judiciary, all of the judges and their staffs are beneficiaries. Not a single person involved in the creation, modification, or administration of PERS could be described as a disinterested party.

Even when the legislature sought to enact reforms to the PERS system in 2003, the Supreme Court – all beneficiaries of PERS – gutted the reforms and placed PERS back on track to financial ruin with the expectation that the taxpayers must pay and pay and pay regardless of how expensive the plan becomes. And they did it by making up the law under the guise of “divining” what the original framers of the state constitution intended. (I’m pretty sure that the founding fathers devoted months of debate on how to enhance the salaries and benefits of public employees – not.)

There is a ray of hope – Dan Re that is – who is suing the state regarding the impropriety of government officials creating and administering a program from which they directly benefit. In the context of that suit, Mr. Re is asking the members of the court who are beneficiaries of PERS to disqualify themselves. The theory of the case is correct but don’t hold your breath that these folks, including the judiciary, are going to play fair.

Fourth, the administration of the PERS program by a succession of Democrat administration beholden to their financial arm in the public employee unions has permitted an already brazenly overly generous system to be abused further. For instance, one of the factors in determining the level of payments is the life expectancy of the beneficiaries. The shorter the life expectancy, the greater the monthly benefit; and the longer the life expectancy, the smaller the monthly benefit. However, despite the fact that life expectancy has been increasing virtually every year, the PERS administration during the latter part of Gov. Kitzhaber’s term and the early part of Gov. Kulongoski’s terms steadfastly refused to “update” the life expectancy figures which resulted in lifetime overpayments to recipients.

Before Oregon (even Oregon’s newspapers) can seriously tackle the fiscal mess created by PERS, they must first appreciate the nature and causes of the problem. The key to actual reform is to remove those who benefit from PERS from the decision making. That means the governor, the legislature and the judiciary should be removed from PERS. Frankly, elected officials should view public office as an opportunity to serve – not a lifetime job with exaggerated retirement and benefits.