$22 Billion Debt Soaks Taxpayers, Reduces Services

Oregon’s Public Emplyee Retirement System is in the red. It’s $22 billion short of funds needed to pay for pensions owed to government employees and retirees. This unfunded liability is borne by state and local governments – and ultimately all taxpayers.

In addition to the total debt, payments for PERS are rising each budget cycle, taking an ever bigger bite out of tax-funded budgets for schools, police, health care, housing, and virtually every service that state and local governments provide. This PERS’ burden will double in four years, from $2 billion in the 2015-2017 cycle to more than $4 billion in 2019-2021. It will reach $10 billion by 2029.

Oregonians foot this bill. In 2010, the cost of covering PERS pensions through taxes amounted to $500 per year for the average Oregon household. Now PERS pensions cost each household about $1,500 per year. By 2022, the cost will pass $2,000 per year – and keep climbing.

This shortchanges public services. Every dollar spent on rising PERS costs is a dollar that cannot be spent to employ more teachers, firefighters, or other public servants.  It’s a dollar that can’t be used to reduce class sizes, lengthen the school year, or add more career and technical education programs. Without action, PERS will consume all of the increased tax revenue that comes from a growing economy.

There Are Legal Reforms That Can Be Made

Solving the PERS problem is a major objective of the Fiscal Initiative, and there are measures that can be taken to do that. The most recent Oregon Supreme Court PERS decision, Moro  v. Oregon (2016) provides a framework for pursuing PERS reforms that are legal.  The court said that benefits can be modified for work that has not yet been performed (all future service of current employees). Moreover, the court has long allowed for changes to the share of the benefits paid for by employees and the share paid for by employers (i.e., taxpayers).

These Are the Leading Reform Options

  • Reinstate Employee Contributions. Employee conributions to the pension fund were eliminated in 2003. Since then, no employees (with the exception of some judges) contribute anything to their PERS  pensions. Some employees contribute to a separate 401-K style account, but that does not pay for the PERS pension system or lower its long-term debt. Employees could be asked to contribute up to 6% of their salary to pay for their defined-benefit pension, as they do in most other states and as they did in Oregon prior to 2003. Employee contributions could come in the form of a new statutorily required contribution to the pension, or by redirecting future contributions to the 401-K style account to help pay for future pension benefits.
  • Extend benefit reforms to pre-2003 employees. Employees hired before 2003 (known as Tier 1 and 2 PERS members) continue to earn benefits that are much more generous and almost twice as expensive as those earned by employees hired after 2003,. As a result, younger employees are bearing higher payroll costs to pay for the benefits of those who preceded them. The courts have ruled that benefits for all current employees can be adjusted on a going-forward basis, provided all benefits earned to date are protected. Adjusting benefits for Tier 1 and 2 employees, to align them with benefits in effect for younger employees, would be more equitable for public employees and more affordable for Oregon taxpayers.
  • Refinance the liability. With these legal benefit and cost-sharing reforms in place, Oregon can then look at refinancing the remaining liability associated with public employees already retired. This could included using more of the state’s bonding capacity, extending the period over which the PERS debt must be paid off, or looking for creative ways to incent employers to make additional contributions as the Governor has proposed. However, without exhausting the legal and equitable reforms that are available, simply refinancing the liability would be unaffordable for Oregon taxpyers and detrimental to generations of Oregonians to come.

PERS: A PROBLEM LONG FESTERING

For many years Oregon offered an expensive and overly generous PERS pension plan for all government employees. The benefit goal for the original pension plan was an income worth 50 percent of final salary to employees with 30 years of service. Added to their Social Security benefits, employees woud be assured of a secure retirement. But poor management decisions greatly increased pension benefits for many employees. As a result, thousands of government employees have retired with annual PERS benefits higher than their final salary. While significant changes made in 2003 created a different system for employees after that date, a majority of all PERS retirees still enjoy benefits greater than the original goal. Taxpayers are on the hook for funding public employee pension benefits, including those that exceed the original target.

Only a part of the problem has been solved. In 2003 the Legislature reformed the system for new hires but left in place many of the generous pension benefits for employees hired prior to 2003. This effectively created two different benefit plans, but only a partial solution. Forty percent of employees hired before 2003 are still accruing unsustainable benefits.

So, the Oregon pension system limps along unfixed. When the stock market crashed in 2008, public and private retirement plans throughout the U.S. were forced to adjust to a more challenging investment environment to sustain their benefits. Most plans adjusted by slowing the accrual of new benefits and/or by requiring higher contributions from both employers and employees to replenish their assets. Oregon has yet to respond to this challenge, except by shifting the problem entirely to taxpayers. Since the market crash PERS’ investment returns have been exemplary, but the system’s unfunded liability has still climbed to $22 billion – a stunning $13,000 for every Oregon household.