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Newsletter by Klamath District 28 Senator Doug Whitsett 12/13/12.
Oregon Governor John Kitzhaber is to be commended for taking the initiative in proposing reforms to the Public Employment Retirement System.
His first proposal is to eliminate the income tax reimbursement payments for out of state PERS retirees who do not pay Oregon income tax. This concept was enacted into law during the 2012 legislative session. Unfortunately, it was amended at the last minute to only include new retirees; thereby, reducing the potential savings from more than $50 million to about $80 thousand per budget cycle. The Governor proposes to extend the cost savings by including existing retirees who live out of state.
Kitzhaber also proposes to limit PERS cost of living adjustments to the first $24,000 of benefit. This concept would limit retirees’ cost of living increases to about $500 per year and reduce PERS costs by as much as $800 million per budget period.
His third proposal is to reduce or eliminate the current practice where the state public employers pay the employees’ required PERS contribution equal to six percent of their salary. This cost reduction is more difficult to calculate, but appears to be about $170 million for each one percent reduction in the “six percent pick-up” for all public employers statewide.
These change proposed by Governor Kitzhaber are similar to three of the PERS bills that I have drafted. I believe just those three bills alone would save Oregon taxpayers about one billion dollars per budget cycle into the foreseeable future.
While the Governor’s proposals represent an admirable start, in my opinion, they are not nearly enough to stabilize and secure PERS benefits into the future. PERS has established a steep financial deficit due to a long series of questionable actions based on inappropriate assumptions.
The first questionable assumption was that those who negotiate,
legislate, adjudicate, administer and argue cases before the courts, who are themselves PERS members and beneficiaries, will work in the best interests of the taxpayer regarding PERS issues. A long series of changes have been made over several decades that belie that assumption.
Virtually every decision aimed at improving or expanding PERS
benefits has required public employers to foot the bill. Those public employers are financed by the people of Oregon who pay the taxes, fees and charges that in turn pay for most of the PERS benefits.
The first action required to correct the situation is to be certain that those who make the decisions regarding PERS budgets, benefits and lawsuits are no longer members and beneficiaries of PERS.
The second assumption has been made and perpetuated that
investment returns for the PERS trust fund will average an annual compounded eight percent. Private sector retirement plans assume and calculate about a four percent average return on investment because that is the maximum rate that can actually be guaranteed by secure, long term investments such as United States Treasuries.
The assets required to meet future PERS benefit payments is determined largely through reverse compounding. For instance, two hundred thousand dollars invested at an average annual eight percent return will grow to about one million dollars in twenty years. The same two hundred thousand dollars invested at an average four percent return will only grow to about four hundred forty thousand dollars in twenty years. The secured lower interest rate will return less than half the unsecured PERS assumed rate of return.
Remember, the PERS eight percent assumed rate of return is not
guaranteed. Therefore, Oregon taxpayers implicitly guarantee the approximate fifty percent difference in asset appreciation between the guaranteed four percent and the PERS assumed eight percent rate of return.
Oregon taxpayers are now required to make good on that guarantee. The PERS trust fund lost about $18 billion during the 2008 investment debacle. Contributions to PERS will be required to exceed twenty five percent of payroll during the next budget period and into the foreseeable future as the direct result of the unsecured investments that lead to those losses.
The third questionable assumption is that the PERS rates paid by public employers can be leveled, or smoothed out over time, by delaying the immediate effects of market returns. PERS calls this “rate collaring”.
The PERS Board set their public employer contribution rates largely based on the value of their assets and liabilities eighteen to twenty four months before the date the rates are established. The rates are not allowed to either increase or decrease more than a set amount for the next two year budget period as long as PERS future liabilities are considered to be at least eighty percent funded.
The PERS trust fund had endured losses of about $18 billion the year before the new PERS contribution rates were established in 2009. Using the eight percent assumed return on investment calculation, the Board considered the future liabilities to be more than eighty percent funded. PERS assets actually exceeded liabilities when the Board looked back to 2007 before the disastrous losses occurred.
Using the rate collar computation, the PERS Board followed their own inexplicable rules and lowered the PERS employer contribution rates for the next two years. The financial hole created by that absurd decision will haunt Oregon taxpayers for decades.
Public employee benefits, earned to date, are a legal, contractual obligation that must, and should be paid.
Having stated that, I believe the entire set of conflicting PERS statutes and administrative rules needs to be rewritten and modified.
Assumptions proven to be false must be abandoned. Statutes and rules for future contributions and benefits should be developed to insure that public employees are able to earn a fair and equitable retirement benefit that is affordable for Oregon taxpayers.
Oregon’s current combined debt and pension liabilities are among the worst in the nation according to the Moody’s rating service. In my opinion, future generations are likely to balk at paying for the combined accumulated debt and unfunded pension liabilities that represent our current legacy. We need to address these problems now, because to do less will likely result in future default on already earned PERS benefits.
Please remember, if we do not stand up for rural Oregon no one will.
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