Oregon’s Tepid Pension Reforms Leave $11 Billion Unfunded Liability

Earlier this year, Oregon’s Public Employee Retirement System (PERS), which provides retirement benefits to all public employees in Oregon, faced an unfunded liability of nearly $14 billion. Unlike most other pension systems, only 30% of public employees actually contribute towards their pension. Approximately 70% of public employees enrolled in PERS receive a perk known as a “pension pickup,” whereby taxpayers make contributions on behalf of employees in addition to the annual contribution the State of Oregon and local government agencies must contribute towards PERS. As a result, rising pension costs in Oregon come to the detriment of spending on services taxpayers think they’re paying for.

From 2010 to 2011, the Annual Required Contribution (ARC) to the Oregon pension system had grown from $472.4 million to $779.1 million. In 2011, Oregon actually failed to meet this $779.1 million ARC payment, and only contributed $646.6 million. The remaining amount piled onto the unfunded liability of the pension system for legislators to deal with, or ignore, later

Fortunately, Oregon has made an effort to address the unfunded liability. In the most recent legislative session, Oregon legislators made adjustments to the Cost of Living Adjustments (COLAs) beneficiaries were receiving; lowering COLAs to 1.5% beginning in July 2014. Legislators also reduced tax relief for PERS beneficiaries living out of state. These reforms, while substantive, were then followed up with additional cuts to COLAs in a special session that featured a “grand bargain” including a litany of unrelated and perhaps counterproductive legislation including higher cigarette and corporate taxes.

The reforms to the pension system, fortunately, lowered the projected unfunded liability of PERS to around $11 billion. This assumes that the cuts to COLAs remain in place, however, as several lawsuits have been filed against the reforms on the basis that the COLAs are contractually protected benefits.

Oregon is still left owing $11 billion more in pension benefits than it is currently funding.Despite this, Oregon Governor John Kitzhaber has declared that any further reforms are “off the table.” Given that the unfunded liability is likely to creep up again, due to the unwillingness of legislators to consistently make full ARC payments and ever fluctuating investment returns PERS receives, this means that ensuring retirement security and long-term fiscal well-being are also apparently off the table.

Some basic adjustments that can ease the burden on taxpayers include making public employees actually contribute to their retirement plans, like most of us. More substantive would be a discussion of whether or not traditional defined benefit plans are necessary and in the best interest of the public in the first place. Considering the political difficulty of just passing COLA reductions, however, this latter option will likely only be considered when the bills consider to pile up and Oregon finds itself deeper in debt.