PERS – And Then She Cried

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.

Ms. Adams was appointed to the Council on April 30, 2013, by then Gov. John Kitzhaber – one of the people principally responsible for the financial mess we know as PERS.  Three plus years have passed since her appointment.  The problems at PERS have been known to a succession of Oregon governors – Neil Goldschmidt (D), Barbara Roberts (D), John Kitzhaber (D), Ted Kulongoski (D), John Kitzhaber again (D) and Kate Brown (D) who have done nothing to fix the problem and everything to compound it – particularly appointing a series of Oregon Supreme Court judges (all of whom are beneficiaries of PERS) to torpedo each and every attempt at reforms.

Ms. Adams could have blown the whistle on this mess three years ago.  She could have spent the time compiling data on all of the financial transgressions that continue to understate the real unfunded future liability.  She could have demanded that the Oregon Investment Council quit participating in the charade, restate a more reliable deficit and implement changes that could have led to greater transparency.  But she didn’t.  She went along.  And then she cried.

Ms. Adams could have talked about the use of outdated mortality tables by the PERS Board to artificially inflate payments to PERS recipients.  She could have discussed the undue influence of Oregon’s public employee unions on the appointment of Board members by a succession of Democrat governors all of whom were beholden to the public employee unions for campaign contributions and political support.  But she didn’t.  She went along.  And then she cried.

Ms. Adams could have talked about the Oregon legislature adopting a provision that requires state agencies to make payments to PERS before any other budgeted items thus putting at risk welfare funds, education funds, law enforcement funds, and prison funds – in fact, every legitimate service of state government is subservient to the funding of Oregon’s gold plated PERS.  But she didn’t.  She went along.  And then she cried.

She could have pointed out the conflict of interest that the members of the Oregon Supreme Court have in hearing challenges to the attempted PERS reforms – they are beneficiaries of PERS.  Or that the members could have recused themselves and appointed special designees to hear the cases who were not beneficiaries of PERS as per arguments presented by attorney Dan Re.  But she didn’t.  She went along.  And then she cried.

I don’t mean to pick on Ms. Adams singularly.  Her tears would indicate recognition that she failed the people of Oregon and that she has some remorse.  The fact of the matter is that each and every member (past and present) of the Oregon Investment Council over the last three decades is equally guilty.  Each and every member (past and present) of the PERS Board over the past three decades is equally guilty.  Add to that, the succession of Democrat governors and the members of the state legislature – the Democrats for resisting reform at the behest of the public employees unions and the Republicans for failing to shine a sufficient spotlight on this abusive program to raise public awareness and a demand for change.

And yet it goes on.  PERS is just another, albeit the most expensive, government mistake, boondoggle, or waste perpetrated on Oregon taxpayers.  The list includes such notables as Portland’s water billing system, Portland Metro’s light rail system, the Columbia River Crossing, CoverOregon, the Wapato jail, and the multitude of “green projects” which have failed.  But what the hell, it’s not their money – no it’s your money and they are more than happy to spend your money on their “great” but failed ideas.

It’s not that a pension plan for public employees is a bad idea.  In fact, given the penchant of most Americans for not saving for retirement, a plan for providing an investment for retirement is a laudatory idea.  But like most things governments do, the Oregon PERS plan is excessive, riddled with preferences, and lacking in any accountability.  Here are just a couple of notables:

But getting back to what can be done about the financial crisis created by decades of political mismanagement of the pension system, let me suggest the following ten things to begin to fix the problem.

1. Allow changes in the Oregon pension plans on a prospective basis assuring that benefits earned to the date of change are quantified and guaranteed.  That is basically what the Employees Retirement and Savings Act (ERISA) guarantees private sector employees.  That would also require a repeal of the Oregon constitutional provision upon which the Oregon Supreme Court has “invented” a unique right in public employees to a “lifetime” recurrence of any benefit granted.

2. Repeal the provision of law that requires “first preference” for PERS contributions from any government budget.  PERS already exists as a current and future obligation of the government and does not need the “first preference.”

3. Eliminate the practice that has government assuming the responsibility for the “employee contributions.”  Employees should bear a portion of the weight for their retirement benefits.

4. Eliminate the statutory and/or contractual provisions on a going-forward basis that allow employees to accumulate sick leave, overtime and vacation pay to increase the three-year average salary upon which benefits are based.

5. Cap wages at current levels for a five-year period and dedicate assumed (budgeted) increases to reduce the unfunded future liability for PERS.  Current bargaining agreements may delay implementation of such a provision but they should begin at commencement of the next round of bargaining.  (First responders should be exempted.)

6. Cap employee headcount at current levels for five years and dedicate assumed (budgeted) increases to reduce the future unfunded liability of PERS.  (Because of the current staffing shortfalls for first responders, they should be exempted.)

7. Elminate current “defined benefit” pension plans on a going forward basis while preserving the benefits earned to the date when a new “defined contribution” plan replaces the old plans.  Under the “defined contribution” plan, employee contributions should be allowed to the maximum allowed under IRS guidelines for private sector employees.  There should be a full employer match and a variety of investment alternatives from which employees can choose.

8. Eliminate Cost of Living (COLA) increase for retirees who current payments exceed the three year average of their final wages.
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.

10.  Eliminate state income taxes on all government and private sector pension plans (including 401K and IRA plans).  The reason for doing this is that elimination of taxes on government pension plans will mitigate the financial impact on public employees, and elimination of taxes on private sector pension plans will ensure equal treatment under the law.  The elimination of taxes on pension plans will also have the ancillary benefit of stimulating migration of retirees to Oregon – anecdotal evidences suggests that this will also increase the amount of philanthropic participation in local communities.

Those are all things that can be done to mitigate the crushing effect of the unfunded PERS liability.

Following, however, are the number of things that will actually be done by this governor, this legislature and this Oregon Supreme Court: