Oregon lawmakers shouldn’t ‘punt and pray” when it comes to public pensions

The legislature has a unique opportunity to invest now in the long-term health of the retirement system that supports state and local public employees

By Jeff Gudman

What’s happening with Oregon’s public pension system? On the one hand is the belief that actions taken in previous years coupled with investment returns over the last few years will permit the Oregon’s Public Employees Retirement System (PERS) to heal over the next 20 years. In effect, “punt and pray.” On the other hand, is the belief that despite actions taken, probable future returns will not permit the system to heal and will require government bodies, from city councils and school boards to county and state agencies, to kick in more money to meets the system’s obligations. I would be happier with the former. So would taxpayers. But we can’t rely on wishful thinking.

I believe at this moment Federal Reserve actions, the apparent peaking of corporate earnings, relative decreases in fiscal actions will lead to less robust investment returns. So, best to prepare now to prepare for the worst, because there is minimal downside to that strategy if we end up with a happier trajectory.

PERS contributions by government bodies as a per cent of pay (contribution rates) prior to the 2007 – 2009 financial crash were in the 10% to 15% range. Even with actions taken to minimize increases and decrease in contributions by government bodies to spread the pain (known as rate collaring), contribution rates have doubled and will stay at the elevated rates for the next 20 years. And all of this is related to assumptions made about what kind of investment return will the system earn in the future.

In the current context that means when the legislature meets in February 2022 it needs to inject additional funds into PERS and to consider some policy tweaks. If I am wrong and the system is in the process of a long-term healing, then injection of funds by the state and other government bodies now will reduce future contributions. That, in turn, will free up more money for other government services.

Here are five specific actions our state government can consider to promote the healing of our public retirement system.

Increase the Employer Incentive Fund match program to $100 million each year for 10 years. This could trigger sizeable employer contributions into accounts that would buffer and mitigate contribution rate increases should the investment returns fall below the assumed investment rate of return. There were substantive employer dollars the pension system matched in the first go-around in 2019. Another $100 million in the Employer Incentive Fund by the state could bring in another $400 million in employer funds.

Initiate a $100 million annual additional contribution from the State of Oregon to the Oregon Public Employees Retirement Fund for 10 years

Increase amortization of the liability. Basically, spread the fiscal pain over time.

Delink the assumed rate of return from everything legally possible.

Consider additional contributions from public employees. It will be a difficult sell, and more likely than not the government bodies will pick up the cost, which then takes money away from other programs. However, the mechanism of more employee cost sharing is now in place and sanctioned by the Supreme Court. It’s all about the politics now, not about the method or its legality.

Pension reform isn’t a black-and-white issue. Our public employees deserve a retirement system they can count on, and contributions into that system are part of what we as taxpayers need to pay if we want quality services. However, that needs to be done prudently, and we have a responsibility — taxpayers and beneficiaries — to work towards systemic sustainability.

Can PERS and the governments that are on the hook for its health count on continued healing without further painful benefit surgeries? If not, the time for action is now since the state is in the rare position of being relatively flush with cash to begin prepaying some of the unfunded actuarial liability on a fixed schedule.

Whatever the case, we should think of the state retirement system in terms of holistic health. It is dependent on the larger state economy and can only be healthy if all components of public finance are healthy.

As has been noted many times, the “PERS problem” was generations in the making and will, unfortunately, be as long in solving. Ultimately, we will get there. It requires action now.

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Jeff Gudman is a former member of the Lake Oswego City Council and the Republican candidate for State Treasurer in 2016 and 2020. He can be reached at JGudman7150@msn.com