All We Want for Christmas is PERS Reform!

The best Christmas present all Oregonians could receive is a long-term solution to the PERS crisis that continues to threaten the health and future of our state. While politicians in Salem continue to debate how best to address the latest biennium fiscal crisis, they ignore the most pressing fiscal problem facing the state, namely, the exploding unfunded costs of the state’s Public Employees Retirements System (PERS). Originally designed as a “competitive” pension system to allow state and local government to attract and retain talented people, PERS quickly morphed into a taxpayer-financed orgy for public employees with total unfunded liability currently estimated to range between $11.5 and $15.7 billion. If the legislature does not take immediate steps to rectify the problem, funding for schools, fire and police departments, and basic government services will be in jeopardy.

In 1990, PERS was fully funded and it added $27 billion in investments during the decade. Yet beginning in 2003, local governments will have to divert at least $260 million a year to make up for the gap between what PERS “owes” beneficiaries and what its fund can afford to pay. This staggering shortfall has been caused by numerous changes to the system that have turned PERS from a typical government pension system into the most lavish retirement program known to man.

PERS began as a defined-benefit plan where employees are guaranteed to receive a specified annual payment upon retirement. When 401(K) plans and other defined-contribution plans came into vogue in the public and private sectors, the legislature and PERS board decided that Oregon public employees should also be able to earn greater returns through investment in the stock market. But instead of transforming the program along the lines of a true 401(k), PERS became a two-headed monster: employees could receive the annual 8 percent gains guaranteed by the program for the past 30 years, or the portfolio gains of the program’s stock investments, whichever is greater at the time of retirement.

This system allowed PERS beneficiaries to reap all of the gains of 401(k) plans without any of the risk. As a result, PERS is forced to pay out supernormal returns (sometimes in excess of 20 percent) when the market booms and the standard 8 percent when the market experiences a downturn, as it has the past 2 years. Thus the system has no ability to offset bad years by accumulating wealth when times are good. As a result, good times do nothing to lighten taxpayers’ burden, leaving them unable to fund the system when the market tanks.

As a countless number of Oregonians shifted their investments from risky stocks to more conservative funds and bonds, PERS beneficiaries chose risky all-equity investments that provide greater opportunities for gain since they knew they would still earn the handsome 8 percent appreciation if these investments fail. But, at the same time, employers are required to be conservatively invested in a balanced fund including bonds, leaving employer investment earnings well below employees during the boom, which also added to the unfunded liability and increased costs to taxpayers.

Worse still, PERS beneficiaries do not even contribute to their own retirement funds. During collective bargaining, PERS beneficiaries rid themselves of the original 6 percent contribution requirement. Yet employers received no similar concessions: The vesting period remains the same and to cover market gains, the average employer contribution has increased to an average of 11.2 percent of salaries. When coupled with the 6.2 percent contribution for Social Security, total retirement costs can equal a staggering 31.38 percent of payroll.

Two-bit reforms or resolutions to require future legislatures to address this issue are not going to cut it. PERS needs to be completely overhauled now, during this session. Without reform, PERS will require draconian budget cuts, enormous tax increases, or both. According to current projections, the average family of four would have to pay over $2000 a year in additional taxes for the next 40 years to make up for the PERS shortfall. Each day the legislature waits to reform the system this figure will increase.

This has placed an enormous burden on education, police and fire protection, jail staffing, juvenile- offender programs, mental health care, after-school activities, public health nursing, nutrition programs, and street maintenance all over Oregon. In many school districts, the PERS cost increases are equal to two cycles of new textbooks and teacher training. In others, PERS costs leave police patrols and fireman jobs unfilled.

Unfortunately, reforming PERS is no easy task. According to 2001 figures, there are 293,606 PERS beneficiaries scheduled to receive benefits or already receiving them, including elected officials, judges, and state policymakers. When their immediate families are added to the equation, the total PERS constituency is enormous, uniquely powerful, and resistant to change.

Oregonians must become personally involved in this fight if this system is ever to be reformed along the lines of a sane, defined-contribution, 401(k)-style system like the ones those Oregonians not lucky enough to serve in Oregon government currently live with.