Illinois Valley News, Cave Junction, Ore. Wednesday, October 5, 2016
Page A-9
Oregon’s public pension deficit comes under attack
By Ted Sickinger
The Oregonian/
OregonLive
PORTLAND, Ore. — Just how bad is
Oregon’s public pension funding crisis?
Bad enough that Rukaiyah Adams, the
normally polished investment professional
who is vice chair of the Oregon Investment
Council, made an impassioned appeal for
Oregon leaders to address the fund’s $22
billion deficit, not pass it to future taxpayers.
“My call to the Legislature and to
the governor is for leadership on this, and
I mean right now,” Adams said during last
Wednesday’s joint meeting of the Oregon
Public Employees Retirement System
board and the citizen panel that oversees its
investments. “This is becoming a moral issue.
We can’t just talk about numbers anymore.”
The numbers are bleak. Oregon’s pension
system owes billions of dollars more to retirees
than it has, and the last major attempt to fix the
problem was shot down in courts.
This month, cities, school districts and
others will find out how much more they’ll
pay to help prop up the system. Higher pension
costs could come at the expense of funding
for other needs, including social services,
infrastructure investments and education
programs.
Last week’s meeting was extraordinarily
candid. And it provided a brief, reality-based
peek behind the financial charade taking place
not only in Oregon’s pension system, but also
in systems across the country.
Experts openly acknowledged they’re
understating the magnitude of Oregon’s
problem. They’re relying on optimistic
assumptions about investment returns. And
they’re holding down required pension
payments below what’s needed to keep pace
with the debt, to avoid eviscerating school and
government budgets across Oregon.
“We’re beyond crisis,” Katy Durant,
chair of the Oregon Investment Council, said
in an interview after last week’s meeting. “We
should have been addressing this 20 years ago
and it’s just been building. It’s a little bit like
a Ponzi scheme. Sooner or later it’s going to
catch up with you.”
A handful of lawmakers are set to
meet Wednesday in hopes of jumpstarting a
conversation on pension reforms in the 2017
legislative session. They have a list of ideas
already vetted by state lawyers. They say the
ideas could help plug an $885 million budget
hit looming over the next two years, fallout
after the Oregon Supreme Court rejected most
of a package of pension reforms negotiated in
2013.
But Democratic leaders, including Gov.
Kate Brown, so far say they’re not interested.
In an interview this week, Brown said she saw
pension costs as a very important issue, but
“from my perspective, that list is not legally
viable and not likely to result in significant
financial savings.”
It’s a similar story from Senate President
Peter Courtney, D-Salem, and House Speaker
Tina Kotek, D-Portland. They insist there
are no more money-saving moves that could
be both legally viable and economically
significant.
Remaining pension reforms would also
mean cutting pay and retirement benefits for
current state workers — which would alienate
Democratic benefactors in Oregon’s public
employee unions.
Kotek and Brown are both backing a
controversial, union-backed proposed tax
increase on large corporations on the fall
ballot. Measure 97 would raise $3 billion
a year by taxing 2.5 percent of certain
corporations’ sales over $25 million. But
Brown also said that revenue should be spent
as supporters have promised: to beef up
spending on schools and social services.
So why is the pension debt becoming a
bigger issue now?
There’s the sheer size of the deficit
- $22 billion - at record heights even after a
seven-year economic recovery. It’s no longer a
cyclical problem that a string of big investment
returns could erase, board members agreed last
week. The imbalance of assets and liabilities is
now structural.
With interest rates at historical lows,
financial markets aren’t delivering the high
returns needed to sustain the system. Public
employers - financed by taxpayers - aren’t
contributing enough to make up the difference.
And public employees are no longer required
to contribute to their pensions.
“This problem is not going away,” said
John Thomas, a Eugene benefits consultant
who chairs the pension system’s board. “It is
what it is. The math is the math...It’s getting
to a point now that it’s difficult for people to
accept what these numbers are.”
As it stands, pension payments cost
government agencies and school districts
across the state about $2 billion every two
years, and they’re panicking about the $885
million, or 44 percent jump, in required
payments over the next two years.
“That’s just next biennium,” PERS
Director Steve Rodeman, said at the meeting.
“There’s going to be one just like that in the
next biennium and very similar to that, under
almost any scenario, in the one after that.”
In other words, to pay down the debt over
20 years, the increase in pension payments
over the next two years should be more than
three times higher, or nearly $2.7 billion.
But, Rodeman said, “You bump up
against reality in terms of how quickly
employers can adjust to the higher rates they’re
going to need to be charged.”
So the pension board artificially “collars”
required contributions. In essence, by not
making the needed minimum payments, the
board is borrowing from the pension fund,
adding interest costs and making the overall
liability even larger.
The investment council, meanwhile,
is bumping up against a different reality. Its
members believe the system’s assumptions
for how much its investments will earn are
unrealistic. The assumed rate of return is 7.5
percent a year. Over the last 10 years, pension
fund investments have earned just 6.2 percent
annually. Last year it was 2.1 percent. So far,
this year, it’s 4.6 percent.
“Can’t we rip the band-aid off and deal
with reality?” Durant, the outgoing chair of
the council asked at the meeting. “We keep
stacking more and more on because we’re
unwilling to deal with reality.”
It’s a math problem facing pension
systems around the country. Pension payments
are determined, in large part, by the income the
system assumes from its investments.
If a pension system lowers its assumed
returns, it has to make up the difference to
keep its promise to retirees. That, in turn,
requires higher payments — at the expense
of other priorities — from government
employers.
In Oregon, even a quarter-percentage-
point reduction in the assumed rate would
increase employers’ payments by about $400
million every two years. Oregon already made
that change last year, lowering what had been a
7.75 percent rate.
Getting the rate to 7 percent would be
painful, and 6.5 percent excruciating. But
Thomas, the pension system’s chair, said the
rate would likely be reduced again next year.
The discussion during last week’s
meeting turned to how else the state could
address the liability. Durant and Adams said
Brown and lawmakers could make extra
payments, worth billions of dollars, to pay
down the liability.
Lawrence Furnstahl, a pension system
board member and the chief financial officer of
Oregon Health & Science University, said the
state should consider refinancing its obligation.
Oregon State Treasurer Ted Wheeler
said the pension board and investment council
should both be more active in advising the
Legislature on debt-solving strategies —
though that would push them into the realm of
policy making.
“We cannot solve this problem alone,”
Wheeler, who takes office as Portland’s mayor
Jan. 1, hastened to add. “There is leadership
required outside of this room.”
Sen. Tim Knopp, R-Bend, and Sen.
Betsy Johnson, D-Scappoose, plan to get the
conversation rolling at a special meeting in
the Capitol. They’ll kick off the session with a
presentation from Rodeman, who’s expected to
share some of the same numbers he presented
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last week.
The lawmakers have already submitted
potential money-saving reforms to the
Legislative Counsel’s Office, which said many
of the ideas would withstand a legal challenge.
They include capping final salaries in pension
calculations at $100,000, changing the interest
rate used to calculate benefits under the
system’s money-match formula, and requiring
employees to help pay for their pensions.
Brown said the state could waste time
and money pursuing reforms that could be
thrown out in court. She said the best bet
to solve Oregon’s pension problems “is to
increase investment returns.”
She’s focused on one major proposal
in 2017, a plan to restructure the Oregon
Treasury’s investment management division
that could potentially save fees paid to Wall
Street firms.
Treasury estimates the overall savings
over 20 years at $1 billion. The idea has failed
three times already and was opposed in 2015
by Courtney.
“This is something on my radar screen
and I think it’s critical,” Brown said.
Johnson and Knopp, meanwhile are
waiting for the pension system’s actuary to
analyze how much each of their ideas might
save. They say their proposals could both cut
the system’s debt and save public employers
big money each budget cycle.
“I’m not wed to any concept,” Johnson
said. “These are some ideas. There may be
many other ideas. But the responsible thing to
do is begin the conversation.”
(Courtesy photo for The Illinois Valley News)
Rukaiyah Adams, vice chair of the
Oregon Investment Council.
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