Next year alone, the increased costs to Oregon school districts to fund the Public Employee Retirement System (PERS) will be $200 million. That’s the equivalent of 2,224 teachers. Unless we reform PERS now, increased PERS costs will continue for the next decade. This video provides a brief explanation of how we got here, narrated by economist John Tapogna, President of ECONorthwest.
Why Is This Important?
How Much Will PERS Cost Your School District, City and County Next Year? Find out here.
Next year alone, the increased costs to Oregon school districts to fund the Public Employee Retirement System (PERS) will be $200 million. That’s the equivalent of 2,224 teachers. That means larger class sizes, shorter school years, and the elimination of classes like art, music and PE for Oregon’s kids. That’s on top of the 7000 teachers we’ve already lost in the past few years, the nation’s 3rd largest class sizes, and some of the shortest school years in the U.S..
At the same time, 50% of career public employees retiring this year will retire under Oregon’s unique “money match” PERS program, where, combined with Social Security, they will earn more in retirement than they did while working.
Unless we reform PERS now, the cost increases for school districts, cities, and counties will continue for the next decade or more.
How Did We Get Here?
Most people find it odd that a state would be cutting school days and growing class sizes while paying out retirement benefits to former employees that are greater than what the employee earned while working. But because of Oregon’s bizarre “money match” retirement system, that’s exactly what the State of Oregon is doing.
Under “money match” employees earned a guaranteed 8% return on their retirement accounts while working. When the stock market roared in the 1980s and 1990s, these employees received all of the returns in excess of 8%-reaching well above 20% in the late 1990s. Then, when the stock market crashed and delivered negative returns when the “dot-com” bubble popped in 2001, these same employees still received the guaranteed 8% return, and again when the market crashed in 2008. This practice-giving all of the upside of the market and none of the downside–may prove to be the single biggest mistake ever made by a public pension system-anywhere.
At retirement, the “money match” retirees pension account is doubled by their employer (school district, city, county or state government), and then that pension is converted to an annuity (annual payment) that continues to grow at 8% annually. On top of this, money match retirees receive a cost-of-living increase of up to 2% annually.
The money match program-which is unique to Oregon-has made PERS the third most expensive pension system in the country. Oregon has the same size pension liability as Washington, but Oregon’s economy-our ability to pay for it-is half the size of Washington’s.
What Can Be Done?
PERS can be reformed fairly, legally and while still providing generous benefits for employees. Combined, the reforms below would save well over one billion dollars and significantly reduce employer PERS rates.
Cap Cost of Living Adjustments
All PERS recipients receive up to a 2% Cost of Living Adjustment (COLA) on their annual PERS benefit. By capping the COLA for those who receive the most generous PERS benefits, Oregon can save hundreds of millions of dollars that can be used to hire more teachers, reduce class sizes and bring back courses like art, music and PE. Governor Kitzhaber has included a COLA reform in his 2013-2015 balanced budget. The Governor’s plan would save approximately $810 million in the 2013-15 biennium.
Eliminate the PERS Tax Adjustment for Out-of-State Retirees
PERS recipients are reimbursed for the Oregon income taxes they pay, including-bizarrely-those who live out of state. This proposal would eliminate the reimbursement for out-of-state PERS retirees. This proposal would save approximately $55 million in the 2013-15 biennium.
Redirect the 6% “I.A.P.”
State law requires PERS and OPSRP members to contribute 6 percent of their salary to retirement. Before the 2003 legislative changes, the members’ contributions were deposited into regular accounts that were eligible for money match. Post 2003, member contributions build an Individual Account Program (I.A.P.), which functions like a 401k plan. However, 70% of public employers actually “pick up” the employees contribution. This proposal would redirect the 6% contribution to pay down the PERS deficit.
Reduce the Money Match Annuity Rate
The money match option, which is unique to Oregon’s pension plan, has generated excessively high benefits for some retirees and has been a key driver of PERS’s unfunded liabilities. Under the option, a member’s individual account balance is matched dollar for dollar, and the resulting balance is annuitized at an 8 percent rate. The Board’s use of the 8 percent rate is wholly inconsistent with the nature of the benefit. Rather, the PERS Board should use a rate that is available in the commercial annuity market – currently about 3.25 percent. The Board would apply the change prospectively. Pre-reform retirees would be unaffected. Portland’s City Club advanced a similar concept in its May 2011 report. The change would reduce the value of the money match option for future retirees. All affected retirees would be eligible for a benefit under the existing full formula or full formula plus annuity calculations. Those alternatives would effectively provide an adequate safety net.
According to the PERS actuaries, reducing the Money Match annuity rate to 4% would reduce employer rates would decrease by a net of 1.2% of payroll saving approximately $221 million in the 2013-15 biennium, although the biggest impact of this reform is the long-term savings, which will be realized for the next 20 years. This graphic shows the impact on a 5, 10, 15, 25 and 30 year employee.
Prevent Pension “Spiking” and “Padding”
Statutes allow employees to apply overtime, vacation pay, unused sick pay, and other adjustments to boost the level of final average salary (FAS) (used in pension formulas) of near-term retirees. Moreover, pre-retirement raises or promotions have generated some pensions that are inconsistent with an employee’s broader compensation profile. The recommended policy change would tighten the definition of FAS to mitigate so-called pension spiking. This could include limiting the final average salary to base pay and limiting the growth of base pay for late career employees (at least for the purposes of pension formulas). Because of the different availability of overtime and other adjustments, only certain types of public employees (e.g., police and fire) can take significant advantage of spiking and other public employees with more fixed compensation (e.g., teachers and general service) cannot inflate their final average salary as significantly. Eliminating the opportunity to spike FAS provides greater fairness as among public employees, as well as to taxpayers.
According to PERS, this reform would reduce the PERS unfunded liability by over $600 billion and reduce employer contribution rates by about 0.7% of payroll, saving approximately $129 million in the 2013-15 biennium.