Monday, February 08, 2010

Oregon leaders shrug as pension crisis looms

From John Curry, February 8, 2010
Oregon leaders shrug as pension crisis looms

By The Oregonian Editorial Board

February 06, 2010, 8:48AM
The elephant in the room, the Oregon public pension system, is about to swallow an additional $1 billion-plus from school districts and other public employers over the next two years.

Members of the board that governs the Public Employees Retirement System warn this is only the beginning, that without a strong runup in the stock market, PERS could pull billions more out of the operating budgets of schools, state agencies and municipalities over the next two decades.

Yet there is no sense of urgency in Salem. On the contrary, when senators raised a PERS issue last week it was only to discuss the Democrats' desire to override a governor's veto and repass a bill requiring the system to pay retirees extra benefits mistakenly promised as a result of miscalculations. That won't cut PERS' costs -- it will increase them.

There is an astonishing silence and political passivity around the pension system, given how deeply it is projected to erode budgets for schools and other essential public services for years, even decades, to come.

The PERS board, which saw the pension fund suffer nearly $14 billion in losses in 2008, has tried to get the attention of state policymakers. When the board voted Jan. 28 to reduce the immediate hit on public employers, board member Brenda Rocklin, who is the CEO of SAIF, a workers' compensation fund, said she was tempted to pass along the full increase and require public employers to confront the steep and abrupt rise in costs. "Let's do the cliff," she said, before relenting, "because then people can start to get that there's a problem here."

When you press for answers, what you hear is that Gov. Ted Kulongoski and legislators did all they could -- and then some -- in 2003, when they passed a series of significant PERS reforms, some of which were later overturned by the Oregon Supreme Court.

Yes, the governor and Democratic lawmakers took important steps seven years ago to restrain the costs of PERS. Yes, the Democratic leaders of those reforms, Reps. Greg Macpherson of Lake Oswego and Tony Corcoran of Cottage Grove, paid for their leadership with their political careers. And yes, public employee unions never have been stronger or better financed in Oregon, and better prepared to defend retirement benefits.

All that is behind the conventional wisdom in Salem that PERS is politically and legally untouchable, and all Oregon can do is hope for high stock market returns, and prepare to carve billions out of public services if they do not materialize.

In fact, there are additional ways to strengthen the PERS fund. One possibility is to reduce the assumed earnings rate of the PERS fund, which has been established at 8 percent. The accounts of PERS beneficiaries are guaranteed by law to grow each year by no less than the assumed earnings rate.

Over the past 40 years, the PERS investment fund has enjoyed average earnings of about 10 percent; however, over the the past decade the earnings have averaged less than 5 percent. No one knows whether the last decade is the new normal for the stock market, or whether it will get back to the mostly go-go returns of the 1980s and 1990s. But if PERS holds to the 8 percent assumed earnings rate, and Oregon's investment returns fall short over time, PERS will bite deeper and deeper into public budgets.

Another possible reform would be the elimination of the law requiring a 6 percent contribution to individual PERS accounts. For almost four decades, most public employers have picked up the costs of the 6 percent contribution. If the statute were lifted, the contribution becomes a matter for collective bargaining, and strapped public employers could at least discuss the problem with their employees.

There are other possible reforms, including a potential buyout of high-cost retirees and a "reset" of PERS. However improbable these reforms look today, they will look much different if Oregon's public pension system is allowed to fall off the cliff.

The governor and Legislature should appoint a special commission to examine PERS, study possible reforms and recommend changes. If nothing is done, then four years, six years, eight years from now, Oregonians will look back at 2010 as the time its leaders could have acted to protect PERS retirees and essential services, but chose instead to look the other way.
Larry KehresMount Union Collge
Division III
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