In the 1990s, Oregon let public pension benefits get out of hand, and now this decades-old mistake is returning to haunt the state’s taxpayers, schoolchildren and younger government workers.
Like the slow spread of dry rot that leads to an expensive home repair, a scary bill is coming due.
Oregon is $22 billion in debt on its pension obligations. Starting in July, public agencies are on track to pay nearly $900 million more in pension rates over the next two years.
Two years later, rates are expected to rise by another billion or so. And then two years after that, by yet another billion.
A Financial Tsunami
“It will pervade any kind of city, county or state service you can think of," said John Tapogna, a Portland economist who has long warned of the coming financial tsunami.
“You’re going to have students paying for it in classrooms that are larger. You’re going to have the citizens paying for it because the ambulances don’t show up quite as quickly. Or the police services aren’t quite as responsive as they have been in the past,” he added.
In the Beaverton School District, the state’s third largest, the tab is an extra $14 million next year. That’s equal to the cost of about 140 teachers, said school board chair Ann Bryan.
“We're looking at budgets like this is in a time of a growing economy in Oregon," she said. "So at the same time things are booming, and we would expect investments in our education system, as a school district we are looking at cuts.”
Ironically, Oregon’s pension problem deepened following the state’s wild success at investing money on behalf of public employees. During the 1990s, the state’s PERS fund earned an average of nearly 15 percent a year.
'We Created A Monster'
But here’s the hitch. The system was originally designed to give career workers about half of what they were earning in their final years on the job. But PERS also offered workers another option. They could get a retirement based on investment returns credited to their accounts, and the board running PERS credited almost all of the gains to members.
Between 1990 and 2000, the fund earned an average of 14.75 percent a year, according to a special master's report for the Oregon Supreme Court. The PERS board credited 13.63 percent to members.
Those accounts zoomed to the point that in 2000 the average career employee was leaving the government with 106 percent of salary.
“The actuary finally realized, we created a monster," said Steve Rodeman, who is now the executive director of the pension system. "This monster grew all the way until 2003.”
That’s when legislators clamped down on PERS. They put the brakes on using investment returns to spike pensions. New hires got a different, less generous plan, but the Oregon Supreme Court struck down attempts to cut existing benefits.
The 2008 market crash deepened Oregon’s pension hole. Five years later, the court struck down legislation to reduce cost of living raises for retirees. Now lawmakers can only consider cutting benefits that workers earn in the future. That means cuts would tend to fall on workers who already have slimmer pensions.
Public employee unions urge lawmakers to just accept the high rates and focus on the state’s overall need to get more revenue.
“They didn’t create this problem, and the facts remain that they shouldn’t be blamed for this problem,” said Bob Livingston, president of the Oregon State Firefighters Council and a spokesman for public employee and retiree groups that have fought benefit changes in the courts.
Because the PERS increases are spread so widely throughout Oregon government, no single leader is forced to worry about the full bill. Instead, it competes for attention with all sorts of other problems. For example, Gov. Kate Brown said PERS is not nearly as much to blame as health care for the state’s budget deficit.
But the governor and legislative leaders are under pressure not to shake off PERS.
Just How High Is It?
Katie Durant just left the chairmanship of the Oregon Investment Council with a blunt warning.
"I don't think the unfunded liability is $22 billion," she said. "I think it is a lot higher."
Durant said the state should be making even bigger payments right now to pay down this debt. Instead, it’s stretching them out, which she likens to paying the minimum on your credit card.
"I just worry that if we don’t fix our roof, we’re going to create damage to the structure of our state," Durant said. "Maybe it’s through bond ratings and maybe it’s through children that aren’t properly educated.”
Meanwhile, business lobbyists and Republican leaders say they’ll consider tax hikes to shore up the state’s finances if lawmakers agree to once again find a way to cut PERS benefits.
Trimming benefits could ease the hike in pension costs. But it won’t stop them. Officials say the pension debt is just too large to avoid major increases.