SALEM, Ore. — Pension board meetings are rarely the place of tears.
But last September, the financial experts who typically listen to numbers and forecasts and actuarial assumptions heard from Cathy Miller, a school board member who traveled from Redmond to deliver some stark news. For the second year in a row, she said, a sharp spike in retirement costs would force her district to cut school days or teachers or both.
“We are clearly at risk,” she told the board, warning of “substandard” classroom time or teaching quality.
Taxpayers will pay even more into government pensions next July as the Public Employees Retirement System tries to dig out from a $16 billion unfunded liability.
Public employee benefits have been a political hot potato in several states since the recession began straining government budgets, but Oregon has largely escaped the acrimony. That could change next year.
“We cannot ignore that PERS — and really PERS increases — alone are expected to add $308 million of cost for school districts, the equivalent of $560 per student” in the next two-year budget, said Gov. John Kitzhaber, according to the prepared text of a speech to school board members last weekend.
All together, the state, school districts and local governments will spend $900 million more over the next two years on pension costs, a hike of 45 percent, to help get the pension fund on a 20-year path toward full funding. Experts estimated at the end of 2011 that Oregon’s pension fund had enough assets to pay 73 percent of the estimated costs for all current and future retirees, a shortfall of $16.3 billion — assuming investments will grow on average by 8 percent per year, which critics say is far too optimistic.
How did we get here?
The immediate cause was the economic collapse in 2008, which wiped out 27 percent — $17 billion — of the pension fund’s value. A year earlier, it was nearly fully funded.
“Fundamentally, it’s really easy to figure out why those rates have gone up, and it’s because of the incredibly bad investment year in 2008,” said Gregory Hartman, a lawyer who represents PERS beneficiaries.
But critics say the problem is far deeper than the investment losses and extends to the system’s structure as it evolved over decades. Many problems were outlined in a 2011 report by the City Club of Portland:
nWorkers hired before 1996 get a guaranteed annual return on their account of 8 percent, regardless of the actual performance of financial markets. In some years when market returns exceeded 8 percent, the entire growth amount was credited to member accounts — one year, it was 21 percent. As a result, workers shared in the fruits of economic booms without losing out during busts.
nSome retiring workers can choose an option known as the “money match,” in which the pension fund doubles the money in a retiree’s account and converts it to an annuity. With accounts swollen by generous credits of investment returns, the option can result in a substantial retirement benefit.
nSome workers who reject the money match option can get credit for unused sick leave and vacation time to boost the value of their pension check.
nPublic employees are required to contribute 6 percent of their salary to their pensions. In the past, many agencies agreed to pick up the 6 percent contribution in lieu of pay increases.
“The latest round of funding problems is more attributable to recession, but an honest assessment of the situation would indicate that this is not a time when we can grow our way out of this problem,” said Tim Nesbitt, the chief of staff to former Gov. Ted Kulongoski, who worked on a report recommending changes to PERS to avoid a decade of persistent budget deficits.
The Legislature has twice scaled back pension benefits for new hires, in 1995 and 2003. But the system’s significant cost drivers are promises made to longer-term workers and retirees, and the state Supreme Court has ruled those benefits are largely sacrosanct because they amount to a contract between the government and its employees.
Still, Kitzhaber and a number of legislators have pledged to try.