Oregon Privatization Report Offers Bold Solutions to Pension Crisis

In November, Oregon Gov. Kate Brown’s Public Employees Retirement System Underfunded Actuarial Liability (PERS UAL) Task Force released its final report, identifying myriad reforms with the potential to help meet the governor’s target of reducing the Oregon Public Employees Retirement System’s $22 billion underfunded liability by $5 billion over the next five years. While the PERS UAL Task Force did not include privatization of the state’s Liquor Control Board in its final report, it may provide another means to reduce underfunded liabilities, too.

A few of the report’s options include outsourcing or privatizing government services and institutions, many of which have been done successfully in other states, including privatizing the state’s publicly–managed workers’ compensation insurance fund — the State Accident Insurance Fund (SAIF) — as well as selling or leasing underutilized state-owned assets.

These are sensible places to start, and in the interest of ensuring that state and local government employers are able to live up to their pension promises over the coming decades, there should be no sacred cows. In this case, operating a liquor wholesale and retail enterprise and workers’ compensation insurance business are not core functions of government. These are private sector functions in most other states.

Further, state governments tend to lack strong incentives to manage such enterprises effectively. Recent experiences in other states point to successes in utilizing the private sector for such functions, and Oregon sits in a prime position to benefit from these experiences.

Since West Virginia previously served as the state’s sole provider of workers compensation insurance—as opposed to Oregon’s SAIF, which acts as the most dominant player in a competitive market—benefits from privatization likely will be more modest for Oregon when compared to the Mountain State’s, but West Virginia’s  privatization of workers compensation insurance has been a resounding success.  The state has seen insurance rates slashed and employers have saved hundreds of millions of dollars since the state-run workers’ comp insurance was privatized in 2005.

While the PERS UAL report lauds the Oregon-run State Accident Insurance Fund (SAIF) as being helpful to Oregonians for its special advantages over private insurance providers—such as exemption from state and federal taxes and the ability to price policies below cost—such advantages necessarily hurt competition in the marketplace, and result in reduced tax revenues, which will have to be offset by taxpayers. The Task Force report notes the lower revenues and also offers non-privatization fixes that force SAIF to transfer excess revenues directly to pay down PERS’ liabilities, but would not privatizing such a dominant, anti-competitive entity—it covers 50 percent of Oregon employers and 71 percent of employers that are not self-insured or in the high-risk pool (the “competitive market,” according to the report)—that fills a function private providers can easily fill themselves make more sense? Along with West Virginia, Michigan, Nevada, and Utah all answered affirmatively, successfully privatizing their workers’ compensation insurance markets as well.

Although privatizing liquor wholesale operations was not included in the Task Force report (increasing liquor taxes was included), Oregon taxpayers would likely benefit if the state left the liquor business. As many Oregonians know, Washington State voters passed a referendum in 2012 to privatize the entire state liquor monopoly, the first state to do so since Prohibition. While prices spiked in the early years of implementation—in part due to a major tax increase built into the policy (which Oregon need not replicate)—they have moderated significantly since then as the market has matured. More importantly, consumers are benefitting from more choices, while the predicted social ills of privatization have not materialized.

Pennsylvania also recently privatized wine sales and additional privatization measures are working their way through that state’s legislature now. And in 2014, Maine signed a 10-year contract with a private operator for their liquor wholesale operations. The deal may generate up to $450 million in net revenue for Maine, which will be used to pay down legacy debt obligations.

The sky didn’t fall in these states. Rather, state governments got rid of an antiquated remnant of the early post-Prohibition era, replacing it with modern competition and consumer choice.

While privatizing construction, food services, and other aspects of state universities has a history, converting a state university into a private one is unprecedented in recent history. While the potential proceeds generated from public-to-private conversion of state universities is substantial (up to $2.3 billion, according to the report), the Task Force notes that billions in charitable contributions would be necessary for the process to work. As an alternative to this proposal, Oregon could do something similar to Ohio State University, which entered into a public-private partnership agreement where a private consortium operates the school’s energy infrastructure. The deal provides a $1 billion upfront payment to school while shielding the university from price volatility in energy markets for the next 50 years and the private operators are responsible for improving energy efficiency by 25 percent over the next decade. Other state schools are looking to enter similar arrangements.

While workers’ comp, real estate, liquor operations and state universities present obvious opportunities for Oregon to look for savings, policymakers should pursue other options to ensure pensioners receive the benefits they were promised while minimizing the budgetary impact on taxpayers. Every dollar received from an asset sale or lease that is dedicated to reducing the pension liabilities actually offsets more than a dollar of taxpayer costs in the long-run because paying down unfunded pension debt today saves taxpayers money by avoiding long-term interest payment costs.

Ensuring best management and operation of state assets—regardless of whether provided by the public or private sector—is crucial in ensuring Oregonians get the most “bang for the buck” from their tax dollars. The Task Force report notes, “The state does not have a single, easily accessible database of all state-owned land that is vacant or underutilized and potentially available for sale.” This should concern Oregonians, who should view leveraging the state’s assets to pay down pension debt as an attractive option compared to the primary alternatives—raising taxes or cutting spending on other programs as pension payments grow and consume larger shares of the state budget.

Phoenix and Los Angeles recently started providing online public databases that list properties for sale, with Phoenix already generating $15 million over the past year after an Arizona Republic study showed the city had failed to accurately track properties for years, with negative effects on residents and local businesses. Without a comprehensive database, trying to estimate the potential benefits from the liquidation of state properties remains elusive, while shielding potential buyers from the existence of available properties. Regardless, allowing updated listings of vacant, underutilized, and for sale properties available to the public represents a good first step in ensuring the best utilization of state properties, and should be pursued.

Without swift actions to pay down the pension debt, like privatizing unemployment insurance or alcohol sales, Oregon may be forced to take these actions further down the road—with a lower payoff. Despite substantial reforms in 2003 and 2013, the hit from the Financial Crisis brought PERS ’s funded status down to 80.2 percent, but today it sits at 78.7 percent.

Required defined benefit contribution rates are currently equal to 21.4 percent of employee payroll, 9.6 percent of which is for paying down the unfunded liability for benefits already earned. Lump sum contributions, like those that would come from an asset lease or sale, or other privatization measures, would significantly reduce these unfunded liability amortization payments.

This shot in the arm would not only give Oregon’s pension system and budget some much-needed breathing room, but it would give the state’s contribution rates time to catch up to what they should be. PERS currently uses an optimistic (though close to the national average) assumed rate of return of 7.5 percent, making current contributions lower than they should be. Additionally, the state’s “collared” funding policy, designed to prevent out-of-control growth in contribution rates, means that during the years immediately following the financial crisis, statutory contribution (what the state will actually contribute) rates were lower than required contributions (the amount required to fully fund the plan).

These are structural problems that extend far beyond the potential for lump-sum contributions after privatization measures. Indeed, without addressing some of the more systemic problems facing the system, such measures could just amount to throwing good money after bad.

But, for the time being, these task force recommendations are praiseworthy. And, if PERS’ funded status improves as a result of these privatization measures, it could reduce the cost of making more conservative assumptions and improving the state’s funding policy.

Gov. Brown has said that the state’s $22 billion in unfunded public pension liabilities “looms over nearly every decision that we make.” She should be commended for pushing this task force to seek solutions. The rising pension costs and debt are squeezing the state budget and crowding out spending on other public services. Paying down Oregon’s pension debt and ensuring the solvency of the system won’t be easy, but it is doable.