Oregon’s pension bill has come due.
Beginning in July, state and local governments started a series of elevated payments to buy-down a $24.5 billion unfunded liability.
If all goes as foreseen by the actuaries—investment returns are good and no additional missteps are made—public employers could expect relief in the late 2030s.
And only then, a mistake that drew its origins from botched legislation in the late 1960s would come to a close. Seventy years later.
But we don’t have to passively wait for time and demography to heal the system. Active management of the liability would accelerate the recovery, free up resources for critical public services, and rebuild a reputation for good governance.
READ MORE OPINION: OREGON’S FISCAL FLOW
As of late, we’ve shown little appetite for the active approach.
The 2017 Legislature acted without urgency despite the forecast for sizable, prolonged rate increases.
Pre-session PERS workgroups were initially unsanctioned and relegated to obscure meeting rooms. A February announcement of hearings appeared promising, but lawmakers met infrequently and made little meaningful progress on policy options.
Ultimately, the political calculus was this: a continued economic expansion would generate nearly enough tax revenue to paper over increased pension costs.
Oregonians would earn more, pay more taxes, but see diminished public services. Class sizes—already among the highest in the country—would edge up. And, everything from DMV wait times to building permit delays likely would get worse.
Use that strategy for a couple years, and Oregon possibly recovers.
Apply it for the next 20 years, and Oregon would establish itself as a high-cost, low-service state incapable of addressing clearly defined challenges. We’d erase whatever positive brand lingers from innovations like the bottle bill, vote by mail, and the Oregon Health Plan. And, we would push young learners through understaffed schools and leave them ill-prepared to compete with global talent and to interact with technology.
The 2017 Legislature’s passive drift may have been good politics for now. But it was lousy public policy and economic strategy. Oregon’s reputation and competitiveness require active management of the PERS liability.
So, where do we go from here?
Oregon has clarity around PERS reform options. To their credit, past legislatures have advanced reforms in 1996, 2003, and 2013. Absent their actions, our challenge would be far worse. Each round of reform triggered a judicial review that spelled out what is, and isn’t, possible.
The Oregon Supreme Court has made abundantly clear that pension benefits earned to date are off limits. Attempting to recoup outsized payments–however unfair or egregious—won’t be allowed. But, the Court has been equally clear that lawmakers have the right to alter benefits going forward.
Here’s some bad news. No combination of reform options available to lawmakers would come close to solving the problem. It’s just too big. But constitutionally-viable benefit reforms could be a critical component to a larger liability-reducing package .
The best place to look for reform proposals is in six-year-old report by the City Club of Portland.
A group of citizen volunteers devoted hundreds of hours to study the system and develop recommendations that are actionable today and meet standards of adequacy and fairness.
City Club recommended the PERS benefits should replace 50% of a career employee’s final salary. Then, Social Security payments, which add to the state pension, would bring the typical career retiree to 80% salary replacement. That’s a level that financial advisors consider adequate.
Existing PERS plans deliver replacement rates of up to 15 percentage points in excess of City Club’s 50% recommendation.
Older employees operate under more generous rules than newer ones, so City Club advanced different proposals for employees hired before and after the 2003 reforms. Enacting the package would require a major bipartisan lift and would address about one-quarter of the PERS unfunded liability. Far from a fix, but an essential piece of the solution.
Beyond benefit redesign, Governor Kate Brown has appointed a taskforce to study whether state assets (e.g., the Portland State Office Building or the State Data Center) could be sold or bonded against to buy down the liability.
The approach is worthy of investigation. The taskforce’s recommendations, for up to $5 billion in payments toward the liability, are due next month.
And, then there’s raising taxes. Oregon is an average tax effort state.
We spend a U.S. average share of our total personal income on state and local taxes, and business taxes are low. So, there’s some room to raise taxes without becoming an uncompetitive outlier. Politically, movement on taxes is required to get votes for PERS reform.
We know this much for sure.
Over the next 20 years, the $24.5 billion bill will be paid. And, it will be paid through some combination of benefit changes, asset sales, new taxes, and scaled-back public services.
For now, we’re going exclusively with the latter.
John Tapogna is president of ECONorthwest, an economic consulting firm. The views expressed here are his own.