Daily protests against police violence and racism, along with the continued fight against the coronavirus, have placed substantial pressure on the city government in Portland. While social unrest and public health concerns dominate the discourse, conversations regarding fiscal stress have received less notice. One area of fiscal concern: the $4 billion in public pension debt that the city faces. That $4 billion equates to about $6,500 for each of the city’s residents.
Most of Portland’s net pension liability (NPL) is associated with the city’s single-employer Fire and Police Disability and Retirement (FPDR) Fund. The city’s 2019 Comprehensive Annual Financial Report shows that FPDR’s pension liability of $3.55 billion dwarfs the $0.55 billion unfunded liability for Portland’s general employees, who participate in the Oregon Public Employees Retirement System.
The Fire and Police Disability and Retirement Fund is unique among major public employee retirement systems in the United States in that it does not hold significant assets. Benefits are funded on a pay-as-you-go basis, i.e. from annual tax receipts. In 2019, the city contributed $151.6 million to the plan, roughly covering one year of benefits and administrative costs. System assets of just $20 million—or 0.6 percent of total pension liabilities—were primarily available to meet liquidity needs. FPDR contributions accounted for 6.3 percent of government-wide revenues.
When comparing Portland’s FPDR liabilities to pension debt in other cities, it is worth noting that the system’s future benefit payment and administrative costs are discounted at a relatively low rate. While many governments use discount rates around 7 percent, FPDR uses a rate of 3.5 percent. This rate was the yield on high quality, long-term municipal bonds on the fiscal year-end date, which, according to Government Accounting Standards, governments must apply when prefunding is not available.
Origins of Portland’s Pension Debt
In the early 20th century, Portland struggled to create sustainable public safety retirement plans. Voters approved two reorganizations of the plan after insolvencies in the 1910s, but by 1941 pensioners were only receiving 30 percent of promised benefits.
During and immediately after World War II, the city suffered a crime wave that the police department proved unable to handle. In 1947, Mayor Earl Riley commissioned August Vollmer, a retired police chief from Berkeley, CA, to assess the Portland police force and offer recommendations.
Vollmer concluded that Portland’s “totally inadequate [police] pension system” resulted in “a high percentage of personnel who are over-age or physically unsuited for active police service.” In other words, older and physically disabled officers were remaining on the force because they could not live on the low pension benefits the city was then paying.
Portland’s City Council responded by placing a measure on the November 1948 ballot to provide increased pension benefits for public safety employees, funded on a pay-as-you-go basis by a dedicated property tax of between 0.1 percent and 0.25 percent of assessed value (the cap was later increased to 0.28 percent). The measure passed with a 60 percent majority of the vote.
In editorializing for the measure, the Portland-based Oregonian newspaper criticized the city’s previous pension arrangements for not being “actuarially sound,” not recognizing that a pay-as-you-go system is, by definition, actuarially unsound.
The 1948 Reform Has Worked—So Far
Irrespective of this criticism, the pay-as-you-go system has reliably paid benefits for 70 years without bankrupting the city. Indeed, the FPDR’s property tax levy was just 0.11percent in the fiscal year 2019-2020, well below the cap and only slightly above the statutory minimum.
The pension tax rate has been constrained due to the rapid growth of Portland property values. Between 2010 and 2019, the real market value of Portland’s taxable properties rose from $89 billion to almost $150 billion.
As long as the city enjoys robust property value appreciation and collects most of its tax levy, FDPR’s funding mechanism should remain sustainable. But recent events raise the question of whether the secular trend toward higher real estate values will continue.
Property price appreciation is by no means guaranteed. As we saw nationally during the Great Recession (2007-2009), property valuations can fall. In some cases, steep declines in municipal property values are possible over the course of years or decades.
In Detroit, for example, the total assessed valuation fell 67 percent between 1960 and 1980. Property prices fell in response to economic shifts, the city’s population decline, and civil unrest.
Portland, by contrast, has enjoyed strong population growth but that has started to slow in recent years. According to Census estimates, Portland’s annual population growth averaged 1.6 percent in 2014, 2015 and 2016. It continued to grow, but only averaged 0.6 percent growth in 2017, 2018, and 2019.
Might population growth stop and even reverse in 2020? There is so much economic uncertainty during the pandemic and recession that a wide range of potential outcomes is possible. With many downtown offices closed indefinitely due to the coronavirus pandemic and shutdowns, workers may have less reason to remain in Portland, and other cities, if they’re able to work remotely from less expensive suburbs and other areas. Thus, if COVID-19 accelerates a trend toward remote work, these temporary move-outs of big cities might become permanent.
Meanwhile, ongoing protests and vandalism have made life in certain areas of Portland less than ideal for many. Local business owners have been critical of the city’s handling of both the protests and its response to the coronavirus pandemic. A recent Oregonian story highlighted downtown business owners eager to reopen but apprehensive due to concerns about civil unrest.
Portland Mayor Ted Wheeler’s office circulated a plan this week to revive business downtown, which has been walloped by the double-whammy of the pandemic and more than 60 nights of civil rights protests in the city’s core…
“We just need it quickly,” said Adam Milne, the owner of Old Town Pizza & Brewing, whose downtown location is currently closed. “A lot of business owners are stuck trying to decide what to do. If this plan gets developed in three months, it’s going to be too late for a lot of businesses.”
Businesses throughout Oregon have struggled to stay afloat amid the coronavirus pandemic, but downtown business owners say they are facing unique challenges that have made their recovery especially uncertain.
Many business owners have pointed to the protests downtown, which have been marred by nightly clashes between federal officers and protesters and given Portland a reputation for upheaval.
The pandemic has kept tourists and office workers away from the city’s core, too, contributing to a sharp decline in foot traffic.
Worst-case, if the city does not recover from its current malaise, its long-term good fortunes could eventually reverse. Granted, Portland is far from a perfect parallel to Detroit, which suffered the dramatic decline of its key automotive industry. Portland’s high-tech dominated business sector should expect continued tailwinds in the near future. Additionally, the city’s proximity to natural beauty and outdoor activities may continue to lure young professionals.
But the future, as 2020 has demonstrated, is unpredictable and it is unlikely that anyone predicted Detroit’s decades-long slide back in 1950. Because future property valuation and revenue trends are unknowable, the prudent course for Portland is to maintain full funding so that pension benefits can be paid regardless of what the city’s future might hold.
Thus far, Portland’s experiment with pay-as-you-go financing of a major pension system has not produced large, adverse consequences. Whether that remains the case in upcoming decades may depend upon whether the city can continue to grow.