Oregon lawmakers learned this week they can budget for $80 million more than expected. But state budget costs are rising. At a meeting earlier this week, the Public Employee Retirement System announced hundreds of millions of dollars in higher pension costs for the budget cycle, starting next July.
It was a reality check for PERS board chair, James Dalton.
It is painful, but it is reality. We do have an obligation to protect the funded status,” Dalton said.
OPB’s “Learning With Less” series has tracked the effects of budget cuts on schools, over the last year. Today, Rob Manning takes a closer look at a key cause of rising costs: teacher pensions.
More than 100,000 Oregonians get pension payments from PERS. Many are retired teachers, like John and Cindy Hayden.
The Haydens live on a quiet cul-de-sac in Milwaukie with their two dogs, after decades teaching in the Scappoose schools. John Hayden says the pensions helped them travel to Europe and around the U.S.
Hayden said, “So I look at our own situation here and all I can say is I don’t dare complain about anything. I didn’t plan it. I was just very fortunate.”
Retirement benefits for folks like the Haydens are based primarily on two things: how long you worked, and what you earned when you left.
Cindy Hayden says she didn’t consider retirement, when she was working.
“I mean, how many people at 30 or 35 think about retirement? You don’t,” she said.
Cindy Hayden says teachers accepted retirement money to make up for pay raises that often failed to keep up with the rising cost of living.
She explained, “And then they come back and they yell at us ‘We shouldn’t have done that.’ Well, we had a contract. At that time, we would’ve preferred to have had a raise in our salary. But we accepted the other, as a trade-off, knowing that it was 20 years down the line, perhaps.”
Greg McPherson, an employment attorney and a former Democratic state representative, said, “Public pensions are appealing to public officials because they offer the opportunity to borrow.”
McPherson said, “They can promise something that will have to be paid out over time, and they don’t have to raise the tax revenue to pay for those today. That is an opportunity that is just too tempting to too many of our elected officials. And as a result of what they’ve done in the past, we have a lot of liability we’re going to have to pay off, because we’ve made commitments to our public workers.”
That unfunded liability has grown from $13 billion to $16 billion, according to this week’s numbers.
Like many public retirement systems, Oregon’s PERS system depends on two funding sources: investment earnings and contributions from government budgets. JimGreen, with the Oregon School Boards Association, says decades back, PERS was not that expensive.
Green said, “But when you start adding on things like ‘money match,’ and you allow the board to credit way more than what the earnings of the system should’ve been – and not put it into reserves — then you created a mountain.”
“Money match” was a system that had school districts and governments matching what employees invested and the market earnings they were getting. And pension accounts guaranteed at least 8-percent returns. In the boom years in the 1990’s, return rates hit 20 percent.
Cindy Hayden said, “We’ve been very fortunate, we recognize that.”
Cindy Hayden retired from teaching in 1999, when employees could retire on average at 93-percent of their final salary.
She explained, “The year that I retired, was one of the years, where you had a higher percentage.”
Legislators have taken a couple of stabs at reforming PERS. The biggest changes affected new employees. Workers hired starting in 1996 lost the 8-percent guarantee. Workers starting in 2003 moved into a system much more like a 401(k) plan. But, courts have ruled against attempts to change rules for people who were already in the system.
Greg McPherson led the reform in 2003. By 2007, PERS was virtually fully funded.
McPherson said, “The 2003 reforms would’ve been sufficient to stabilize the PERS system over the long pull, if the investment markets had remained strong.”
But investment earnings dropped 27 percent in 2008. At the same time, tax income was down. Since then, markets and government budgets have been slow to recover, workers have continued to retire, and the system’s unfunded liability has grown to $16 billion.
There are three main hurdles to changing the system. One is legal.
Beth Ann Darby with the Oregon Education Association — the teachers’ union — notes the state Supreme Court has rejected attempts to change rules for current workers and retirees.
Darby told OPB, “You know, after 2003, the court spent a lot of time reaffirming that a promise is a promise and a contract is a contract. And to just run new ideas that run afoul of that concept is just creating costly litigation for the state.”
Another problem is political. Greg McPherson’s leadership on PERS cost him support from a powerful Democratic lobby — public employee unions. When McPherson ran for Attorney General a few years ago, unions backed his opponent, John Kroger. McPherson is now running for mayor of Lake Oswego.
He said, “Several hundred thousand Oregonians have benefits coming to them under the PERS system, and to make any changes to those — even prospectively — is a very heavy lift, politically.”
If the legal and political hurdles weren’t enough, PERS is also extremely complex – and changes that seem straightforward, simply aren’t.
The OEA says the 2003 changes created a “radical” new plan, and before trying anything more, the union says the state should watch how the last changes play out.
But Jim Green with the school boards’ association worries that without changes to the system — or more money — retirement costs will cut into the classroom.
Green explained, “Classroom sizes will grow because we’ve had to lay off teachers. Other offerings that school districts have for students and for their parents aregoing to be reduced - and we’ll do less.”
Some advocates worry that rising PERS costs could have another effect. Lawmakers may be reluctant to shell out more for public schools, if they suspect the money will go to pensions, rather than classrooms.
Retired teachers, Cindy and John Hayden hope legislators won’t think that way.
Hayden said, “Only people who are going to be hurt are the kids.”
Cindy added, “No, not just the kids. It’s the kids, the teachers, it’s all the support staff — firefighters and their families, police and their families. It’’s everybody involved.”
Nearly half of the $900 million in higher PERS cost comes from the K-12 system. The bottom line for individual school districts will be clearer in late September, when the PERS board receives more detailed information.
Sources for this story came by way of OPB’s Public Insight Network. Learn more at opb.org/publicinsight.