PERS bill is small but necessary step
The PERS bill approved by Oregon legislators last week is hardly a model of lawmaking perfection.
However, given the Legislature's current makeup, the daunting legal precedents from the Oregon Supreme Court, and the urgent need to do something — anything — to curb rising retirement costs, Senate Bill 1049 represents a necessary step forward for Oregon.
And that's what's important: What's best for all of Oregon, not its factions and special interests.
Senate Bill 1049 will give some relief to school districts, local governments and state agencies, all of which are facing rapidly escalating rates to fund the Public Employees Retirement System and its ballooning unfunded liability.
What that means in the short and medium term is relatively smaller class sizes and better municipal services. It also will result in more tax dollars going directly to essential state services, such as health care and corrections, rather than to the retirement system.
The legislation is fairly modest in its actual impact on public employees' retirements. The law, after it is signed by Gov. Kate Brown, will require workers covered by PERS to contribute from 0.75% to 2.5% of their salaries to the system. This will not reduce employees' take-home pay, since the money will be diverted from their existing individual account programs, and most public agencies are picking up the cost of the IAPs anyway.
The net effect is that some money that otherwise would flow into a worker's individual retirement account instead will go toward paying down the $27 billion unfunded liability. At the end of a 30-year career, this will reduce an employee's expected retirement income by about 1% to 2% per year. That's not insignificant, but employees should contribute to preserve the viability of the retirement system.
Another change coming from SB 1049 is more cosmetic than financially meaningful. It fixes one of PERS most annoying features by capping the final average salary, on which an employee's benefit is based, at $195,000 annually. This will avoid the embarrassment of having people like former University of Oregon football coach Mike Bellotti getting more than $500,000 per year, or former Oregon Health & Science University President Joe Robertson receiving in excess of $900,000 per year.
The effect on the PERS unfunded liability will be small, but public perception will improve.
The largest short-term savings for PERS will come from SB 1049's extension of the timeline to pay down the unfunded liability. Republican lawmakers complain that this extension is just delaying the pain — and they are correct, up to a point.
Pushing the debt further out into the future will burden Oregonians with the PERS liability for an extra decade. But those same future Oregonians are the students in school today, the young families in need of health care or millennials looking for good careers in an economy that cannot afford to be overburdened with public retirement costs. They can pay now with reduced opportunities, or later with prolonged tax obligations.
With Democrats holding a supermajority in the Oregon Legislature, the fact that PERS is being addressed at all is significant. Sen. Betsy Johnson, D-Scappoose, deserves recognition for forcing the issue forward in the Senate, while House Speaker Tina Kotek used her persuasive powers to wrangle the bare number of votes required in her chamber.
Other Democrats went against the wishes of their public union backers to support SB 1049. They won't necessarily receive profiles-in-courage awards, but it's true they took political risk with their votes and even could see primary challengers as a result.
Sadly, the PERS discussion isn't finished. The legislation could be challenged in court, where public employee unions have succeeded in rolling back PERS restructuring in the past. There's still the possibility of ballot measures, by way of the initiative process, to make further PERS changes. And perhaps most crucially, the performance of financial markets over the next few years will determine whether current PERS projections remain valid.
Oregon is hardly alone as a state with a looming pension problem. What often gets lost in the discussion is that this state has done an arguably better job of paying as it goes. That's why PERS rates are sky high now — Oregon has been willing to sacrifice current services to keep the retirement system solvent.
SB 1049 will divert some of that money back to classrooms and other essential services, and despite the legislation's many flaws and critics, that's a good thing for Oregon.