Oregon Having Wrong Conversation On Pension Reform

On September 30th, the Oregon legislature will hold a special session to address the state’s public employee pension system that is currently underfunded by $14 billion. With only 82 cents for every dollar promised to current and future public employees, under the rosiest of assumptions, Oregon is in need of common sense pension reforms. The scope of the funding problem becomes even more apparent when using investment return assumptions more in line with reality. State Budget Solutions, using a fair market valuation (tying investment returns to those of US Treasury bonds), calculated the funding level to be 37%. Under this calculation, Oregon is actually short by $75 billion, and the per capita liability sharply rises to over $19,000.

However it is calculated, state and local governments are increasingly aware of grim future Oregon faces should it continue ignoring the problem. As more public employees retire, increasing portions of state and local budgets are dedicated to pensions rather than public services. In other words, taxpayers are paying more and getting less.

Prompted by this realization, earlier this year, Oregon passed tepid pension reforms that modified the annual cost-of-living (COLA) increases in pension payouts, and closed off tax relief for pensioners living out of Oregon. While Oregon taxpayers will doubtlessly save from these measures, significant problems remain.

Some obvious problems include:

• Oregon is still expecting a 7.75% return on pension investments (down from 8% this summer), an unlikely assumption that can have significant repercussions on funding levels going forward
• Only 30% of Oregon public employees even contribute to their pension plans, Oregon taxpayers “pickup” the tab on their behalf
• Oregon allows public employees to “spike” their salaries by saving up and cashing in on things like unused sick leave and vacation pay in their final years, thereby inflating their inflating pension benefits they will receive for life

These issues, taken together, represent an enormous source of savings or losses, depending on the course of action Oregon decides to take. The available choices are bitter pills to swallow. Using more reasonable investment return assumptions would force Oregon to allocate even more money to the status quo pension system. According to an analysis conducted by the Oregon Public Employees Retirement System (PERS) when the system was assuming 8% investment returns, reducing investment assumptions to 7% would drive up 2015-2017 costs to taxpayers by $1.2 billion.

In terms of potential savings, eliminating the “pension pickup” could significantly reduce liabilities. A 2012 report estimated reductions in the total liability by over $650 million had the reforms begun December 31, 2011.

According to another 2012 report, removing sick leave and vacation pay from pension calculations would have reduced PERS’ long-term total liabilities by over $600 million had they been exempted from pension calculations beginning in 2011.

Are these options on the table at the September 30th special session? No.

Oregon Governor John Kitzhaber has proposed a sloppy solution designed to appease Republican and Democratic politicians. In exchange for cuts to COLA payments, Kitzhaber has proposed approximately $244 million in tax increases, including increases in corporate and cigarette tax rates. In addition, Kitzhaber has proposed, among other “investments,” $100 million in higher K-12 education spending and $40 million in additional college spending.

In other words, Oregon will contemplate bigger government in exchange for kicking the can down the road.

Far from being a left-right, Democrat-Republican issue, pension reform in Oregon ought to be about creating a sustainable, affordable system that doesn’t saddle Oregonians with the unreasonable burden of shouldering the bulk of the costs. Making promises you can’t afford, and seeking to inadequately correct it on the condition of raiding Oregon taxpayers even more and spending even more on unrelated projects, doesn’t resemble responsible governance. Oregonians deserve an honest and serious discussion on pension reform unclouded by politically motivated gimmicks.