A7
THE DAILY ASTORIAN • TUESDAY, JANUARY 22, 2019
Park: People care PERS: Better funded than many state systems
about it and value it
Continued from Page A1
the park. She has a condo
in Long Beach, Washing-
ton , and likes to walk the
mellow Lewis and Clark
River T rail that leads from
the far end of the park at
the Netul River Landing
to the visitor center and
the Fort Clatsop replica.
She took advantage of
sunny weather on Monday
to walk the trail. Though
she has not noticed any-
thing negative in the park
due to the shutdown, she
feels terrible for federal
employees who haven’t
been paid .
“What are they sup-
posed to do now?” she
asked.
Still, Cain and others
are impressed with the
state of the park. To them,
it is reassuring. It proves
people using the park care
about it and value it.
Continued from Page A1
replica. They had hoped
to sit in on a demonstra-
tion or two and learn more
about Lewis and Clark
from interpretive rangers.
Instead, they only ran into
other visitors like them-
selves who walked the
trails, stood in front of the
empty fort or paused to
look at the dark windows
of the visitor center.
Graham is studying
Lewis and Clark in school
and they had planned the
trip to Clatsop County —
their fi rst vacation in two
years — specifi cally to
visit historic sites in the
park.
“This is the reason why
we came down,” Pickard
said.
Pam Cain, of Seat-
tle, is a frequent visitor to
Quakes: ‘Slow slip directly
triggers seismic slip’
in earthquakes, can be pre-
cursors for quakes in the
lay ers above, said co-au-
thor John Nabelek.
“We see slow, aseismic
slips that occur at depth in
the fault beneath the Moho
and load the shallower part
of fault,” he said in a state-
ment. “We can see a rela-
tionship between mantle
slip and crust slip. The slip
at depth most likely trig-
gers the big earthquakes.
The big ones are preceded
by foreshocks associated
with creep.”
The Blanco fault is
close enough to the Cas-
cadia Subduction Zone,
Nabelek said, that action
on one could portend
action on the other.
“A slip on Blanco could
actually trigger a Cascadia
Subduction slip,” Nabelek
said. “It would have to be
a big one, but a big Blanco
quake could trigger a sub-
duction zone slip.”
Continued from Page A1
fault, where one plate is
sliding beneath another.
Still, Kuna’s fi ndings were
remarkable.
“Slow slip directly trig-
gers seismic slip — we can
see that,” Kuna said in a
statement. “The fi ndings
are very interesting and
may have some broader
implications for under-
standing how these kinds
of faults and maybe other
kinds of faults work.”
To see how those faults
work, Kuna and other
researchers had to look
beneath the Earth’s crust,
which can vary from 40
miles thick on land to just
2 miles thick on undersea
ridges. The boundary area
between the crust and the
next layer beneath it, the
upper mantle, is called the
Moho.
Slips in the Moho,
which don’t always result
fund employees’ pension ben-
efi ts. Over the same period, it
paid out $4.7 billion in pen-
sion benefi ts. That $3.3 billion
mismatch is called negative
operating cash fl ow.
That’s not an inherently
bad thing. Many mature pen-
sion systems are cash fl ow
negative. But when PERS
writes its monthly checks to
retirees, the money needs to
come from somewhere.
That somewhere is the
pension trust fund, and the
investment earnings it throws
off. In recent years, those
earnings have covered nearly
three-quarters of the cost of
PERS benefi ts. Across the
public pension landscape,
that makes Oregon’s system
more dependent on invest-
ment earnings than all but a
handful of systems.
But PERS’ benefi t pay-
ments aren’t static. They are
stair-stepping higher every
year as more public employ-
ees head for retirement. As it
stands, about a third of active
public employees and inac-
tive members entitled to a
future PERS benefi t are eli-
gible to retire. Consequently,
annual benefi t payments are
projected to grow to more
than $6 billion by 2024, more
than $7 billion by 2029 and
$8 billion by 2035.
The immediate question
facing state investment man-
agers is whether and how to
restructure the portfolio to
meet those increasing cash
needs. But longer term, the
question is the same one fac-
ing most retirees: How much
cash can it afford to spend
every year without dipping
into the seed corn, and poten-
tially exhausting the fund.
Here’s another conun-
drum: accomplishing the fi rst
objective may undermine the
second.
But fi rst things fi rst. To
date, the PERS portfolio has
been structured to maximize
returns for the pension fund.
Over time, state investment
managers have delivered,
piling money into leveraged
buyouts, real estate partner-
ships and distressed debt
funds that have generated the
excess returns needed to fund
PERS’ growing benefi t bill
while keeping contributions
from employers relatively
reasonable. Right now, more
than 40 percent of the PERS
portfolio is spread across a
variety of those “alternative
investments.”
Optimizing the portfolio
for cash needs, says Adams,
the Oregon Investment Coun-
cil chair, is an entirely differ-
ent objective. And by defi -
nition, it may mean dialing
down investments in the pri-
vate partnerships that have
traditionally delivered the
extra juice on returns. That’s
because those are illiquid
investments, often locking up
cash for 10 years or more.
During the last reces-
sion, many pension plans
were forced to sell their illiq-
uid alternative investments at
deep discounts on secondary
markets to raise cash. Ore-
gon’s pension managers want
to avoid that kind of “liquid-
ity crunch.”
— exactly the situation that
Brown and other lawmakers
are looking to avoid. In fact,
Brown has pledged to sta-
bilize schools’ contribution
rates, though she hasn’t said
how.
Oregon politicians take
comfort in the fact that PERS,
unlike many public pension
systems around the coun-
try, is not in severe distress.
It is better funded than many
state systems, and its actu-
arial assumptions are more
conservative.
But not all the compari-
sons are favorable.
Negative cash fl ow
Last year, the Pew Char-
itable Trusts issued an anal-
ysis comparing cash fl ows
in public pension systems
across the country. It found
that Oregon PERS’ negative
cash fl ow as a percentage of
its assets (before investment
earnings) was higher than
all but fi ve state pension sys-
‘THE LIQUIDITY AND SOLVENCY
RISKS ARE SIGNIFICANT.’
Randall Pozdena | an economist with EcoNorthwest who
previously served on the Oregon Investment Council
“It’s defi nitely an issue for
the council to consider,” said
Treasurer Tobias Read. “I feel
good about the fact that we’re
taking this seriously. We have
the capacity to be thought-
ful about it. We don’t have to
make drastic changes.”
If the investment council
does shift more of its invest-
ments into liquid assets —
and it will be looking hard
at that question this year —
it could put new pressure on
the PERS Board this July to
reduce its assumption about
what those investments will
earn. That’s currently 7.2 per-
cent annually, an estimate
many experts think is infl ated
in today’s low interest rate
environment.
That’s not just an aca-
demic exercise. Lowering the
assumption would increase
the present value of the sys-
tem’s future benefi t pay-
ments as well as its funding
defi cit, requiring higher con-
tributions from employers
tems, at negative 5 percent
in 2016. So, before invest-
ment earnings, cash outlays
consumed 5 percent of its
assets. That number bounces
around, but the cash fl ow has
been on an increasingly nega-
tive trend line.
That makes Oregon’s
plan more vulnerable to mar-
ket volatility, magnifying
the impact of poor invest-
ment returns. In years of poor
investment performance, like
last year, the fund eats itself.
And if the balance gets low
enough, from a big market
correction or a series of years
with low returns, it might
not throw off enough cash
to backfi ll the annual cash
fl ow defi cit and, potentially,
could undermine the plan’s
solvency.
That’s not an issue yet. But
as the Pew study noted, the
gap between returns on safe
investments and state pension
plans’ assumed returns are the
highest in decades.
“Independent
analy-
ses suggest that states can
assume returns of about 6.5
percent a year for at least the
next 10 years; 5 percent or
lower returns are a real possi-
bility over the next 20 years,”
the study said.
Oregon’s Legislative Fis-
cal Offi ce took its own look
at the issue in December. Its
analysis noted that Pew had
actually underestimated the
ratio of PERS negative cash
fl ow to its assets in 2016. But
it concluded that the system
had little liquidity or solvency
risk, because PERS is still
assuming its investments will
earn more money each year
— 7.2 percent — than the
drain on its assets: 5.2 percent
of assets. Assets increased in
2017, for example, when the
fund earned 15.3 percent and
contributions went up.
Randall Pozdena, an econ-
omist with EcoNorthwest,
previously served on the Ore-
gon Investment Council. He
was sounding the alarm about
the structural defi cit created
in the pension system in the
run up to the 2000 dot.com
bust. He’s unconvinced by
the state analysis.
“The assumption is that
you’ll earn the assumed rate
every year as new cash, and
that will paper over the neg-
ative cash fl ow,” he said.
“That’s simplistic logic.”
The reality, he says, is that
this is the longest bull mar-
ket in history. At this point,
he says, it’s hard to see where
the productivity growth will
come from to sustain market
returns.
“The liquidity and sol-
vency risks are signifi cant,”
he said.
Adams, the Oregon
Investment Council chair,
said the panel will begin that
analysis with a review of its
private equity portfolio later
this month, then expand to
consider liquidity needs,
expected returns and the vol-
atility of returns.
“If benefi ts remain the
same, and employer contri-
butions plus earnings can-
not cover the cash needs of
the plan, (we) as responsi-
ble investors have to face that
reality and manage the assets
accordingly,” she said.
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Contact Fred 503-440-9481
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