Oregon’s PERS problem: Only bad options

As the latest Public Employee Retirement System projections show, Oregon’s effort to slow the growth of PERS costs have failed and any future solution will be painful

Service Union Employees International Union 503 boss Melissa Unger speaks at the Oregon Capitol in support of a $4.3 billion tax increase passed by the legislature last month. Public employee unions like SEIU 503 fight against PERS reforms.

The timing of the latest financial projections from the Oregon Public Employees Retirement System, as reported by The Oregonian’s Ted Sickinger, could not have been more appropriate.

As the Oregon Legislature was inching toward the conclusion of a special session it claimed was necessary to ensure continuance of basic road maintenance, the actuary for the PERS system issued preliminary estimates of investment earnings and required contributions by public employers indicating that the state is going to need a lot more money unless it finds a way to reduce pension obligations or operate more efficiently.

Whether your political preferences lean left or right or reside in the middle, the report should scare you. Unless the Legislature is able to accomplish one of three difficult things, the state’s descent toward the bottom of national rankings is likely to pick up speed. Here’s a look at each one, all fraught with risk.

Raise taxes more, probably a lot more.

The PERS math is inescapable. Unless investment returns meet or exceed the returns that the state is obligated to pay retirees, public employers (school districts, state agencies, etc.) must increase their contributions to the pension system. Increased pension contributions mean less money is left for basic public services unless the state increases taxes.

Because of the way Oregon pensions are structured, particularly so-called Tier One accounts for employees in the system before 1996, it’s virtually impossible for investment returns to keep up with retirement obligations over the long haul.

While tax increases rarely, if ever, are pitched as a way to pay for PERS, a significant percentage of any tax increase that funnels money into the general budget ultimately goes to pay pensions. As recently as this year’s regular session, the Legislature designated $180 million of “emergency” money for school districts to help pay pensions.

So, the path Oregon is most likely to take is to continue increasing taxes. But if that’s all the Legislature does, services will continue to decline because voters are unlikely to allow the level of increases that would be necessary to pay current PERS obligations and fund services at existing levels.

Enact further PERS reforms

The Legislature has slightly dialed back PERS obligations twice, in 2003 and 2013.

The most significant change, elimination of the so-called Money Match, came in 2003. However, Oregon will be paying Tier One benefits to some retirees well past 2050, and the Tier Two benefits still are generous and costly.

Those calculations led to efforts in 2013 to take further steps to control soaring PERS costs. But the most significant of several changes, lowering cost-of-living adjustments, was struck down by the Oregon Supreme Court. For the most part, the Supreme Court has ruled you can change benefits for new workers but you can’t change the “contract” in place when existing workers started their jobs.

Is there room to further reduce benefits for new workers? Probably, though any Democrat who supported such changes likely would be defeated in a Democratic Primary the next time they sought re-election. Public employee unions are the single most important influence group in Democratic politics in Oregon and the electoral track record of Democratic candidates who rankle them is abysmal.

Changing benefits for future employees wouldn’t make a meaningful difference in budgets for decades anyway. So there’s very little incentive for Democrats to support more PERS reform.

Downsize state and local government

Political inertia eventually will leave only one option, since unlike the federal government Oregon cannot run a budget deficit: shrink government.

Philosophically, I like this option and there certainly are some government functions that could be eliminated with little harm. (The cost of DEQ emissions testing for license plate renewals would not pass any reasonable cost-benefit analysis, but that’s another column for another day.) The problem is cuts made under duress rarely turn out to be the right ones, especially if they are made - as likely would be the case - with the goal of preserving the jobs of public employee union members while sacrificing any other position necessary.

So, where does this leave Oregon if all the options are bad? To state the obvious, in bad shape.

This is a problem that has been building for a more than a half century. Aside from occasional efforts to make minor fixes that at best slowed the bleeding, the Legislature has chosen to ignore the problem and hope for a miracle cure in the form of outsized investment gains. But despite record stock-market gains over most of that period, the day of reckoning finally appears upon us. And, as usually happens when one delays necessary treatment, the patient already is in critical condition.

Oregon probably is going to have to make the transition to a low-service state. It’ll be painful because most low-service states also offer low taxes and cost of living. We are staring at the unenviable combination of low services and high taxes/cost of living.