Rep. Richardson's Newsletter
March 1, 2013
PERS Crisis: OSBA Introduces
After one month, the Oregon Legislature has introduced more than two thousand bills, yet on the topic of PERS reform the silence is deafening. The financial burden of Oregon’s Public Employees Retirement System (PERS) is crushing our school districts, state and local government. The time for action on PERS Reform is now.
The PERS crisis primarily results from extraordinarily generous retirement benefits of PERS members who were originally hired before 1996 (PERS Tier 1 members) and before August 29, 2003 (Tier 2 members). Oregon’s public workers hired since August 29, 2003 are under Tier 3, officially known as the Oregon Public Service Retirement Plan (OPSRP). Tier 3/OPSRP is a less generous and less expensive plan than either Tier 1 or 2. To read an explanation of PERS benefits for the various PERS plans, click here.
At the outset I want to make it clear, I do not fault Oregon public employees for taking advantage of generous PERS benefits. It is only natural to look out for one’s own best interests. The legislature, with the encouragement of the public employee unions over the course of decades, has gone too far in enhancing the PERS Tier 1 benefit package. This package is responsible for the vast majority of the escalating PERS costs that are plaguing all levels of state, local government and school budgets.
Suffice it to say Oregon’s Tier 1 PERS plan is one of the most generous retirement plans available anywhere. The PERS system currently has an unfunded liability of more than $14 billion and state and local public employers must pay the PERS cost increases from their budgets like they do all other debts. In the current two year budget (2011-13 biennium), our State, local governments and schools were required to pay $1.1 billion over and above their normal PERS costs; in the next two-year budgets (2013-15), the PERS costs are set to increase by another $906 million, and then an additional $678 million in the following biennium. (Click here)
What do these PERS increases mean to our schools, communities and State in 2013-15?
To our schools, without PERS reforms $330 million will be paid from school district budgets for additional PERS payments. Paying this amount will cost school districts nearly 27 cents for every dollar of payroll.
Think of what this means for our children. If a school needs five teachers, a 27% PERS payment for four of them would more than consume the money needed to pay the fifth.
Specifically, consider the following realities:
The Beaverton School District’s PERS payments increased by $24 million in 2011-13. After using reserves and making efficiencies in the 2011-12 school year, the additional PERS costs and other revenue shortfalls in the 2012-13 school year resulted in 344 teacher positions being cut, the school year was shortened by 5 class days, and class sizes were increased by 3 - 4 students. Looking ahead to 2013-15, the Beaverton School District will be assessed an additional $29.5 million in PERS payments.
For Salem-Keizer Public Schools, in 2011-13 its PERS payments increased by $32 million. PERS and other revenue shortfalls required Salem-Keizer to cut 426 staff positions. Looking ahead to 2013-15, Salem-Keizer PERS costs will increase by an additional $32 million.
The list goes on. The much smaller Medford School District’s PERS payments increased by $6 million in 2011-13 and it adjusted by using reserves and cutting 70 positions, cutting 8 non-instructional school days, and Medford’s staff agreed to assume their 6% employee contribution to PERS and teachers agreed to assume 7% of their health insurance costs. In 2013-15 Medford is being assessed an additional $6 million of PERS payments.
To our local government (counties, cities and special districts), the 2013-15 PERS costs will increase by $352 million—money that otherwise would have funded police and fire departments, libraries, parks, etc. (Click here)
To our State Budget, $224 million will be drained from budgets that otherwise could have been used for public safety, health and human services and higher education. (Click here)
From the above I hope it is clear, the escalating cost of PERS is draining an outrageous amount of revenue from every school, city, county and state agency, and can no longer be tolerated.
In December 2012, nearly three months ago, the Governor informed the legislature that to balance his proposed 2013-15 State Budget and to avoid some of the negative consequences from the crippling PERS cost increases, $865 million in PERS savings were needed. Now it is March and the legislature’s Democratic leaders have failed to take action on the important issue of PERS reform. The clock is ticking; time is wasting and no hearings are scheduled to address the problem of escalating PERS costs.
OSBA files Senate Bill 754. Finally, the Oregon School Boards Association (OSBA) stepped forward with its own PERS Reform proposal. The OSBA plan goes beyond the Governor’s tepid proposal and, if fully implemented, would provide total estimated PERS savings for 2013-15 of between $1.8 billion and $2 billion. For Oregon schools this would mean approximately $600 million of additional funds that otherwise would be sent to PERS.
Think of it. A biennial PERS cost reduction of $600 million would mean $300 million each year to hire more teachers, lengthen the number of days in the next school year, or reduce the number of students in our classes. Specifically, every $22 million of PERS savings could add one day of statewide classroom instruction per year; every $90-100,000 could pay for another teacher. With additional teachers, class sizes could be reduced and music, art and physical education could be restored.
Senate Bill 754 is a bold proposal that seeks to restore PERS to a more stable financial foundation by correcting several of the excesses that have contributed to the multi-billion dollar unfunded actuarial liability and the extraordinarily high PERS employer rates.
Senate Bill 754 has five main provisions.
First, SB 754 begins by limiting Cost Of Living Adjustments (COLA’s) to the first $2,000 of monthly retirement benefit payments. This would lower 2013-15 PERS costs statewide by approximately $810 million.
Second, SB 754 reforms the common practice known as “spiking,” which inflates the final average salaries of soon-to-retire employee incomes. Spiking results in larger monthly annuity payments. The monthly payments for Tier 1 and Tier 2 PERS employees is calculated based on the average salary from the employee’s highest paid three years. Presently for Tier 1 and Tier 2 retirees, “final average salary” (FAS) currently includes, in addition to actual salary, amounts attributed to deferred compensation, overtime, accumulated unused sick leave (ORS 238.350), vacation leave, and other unused paid leave. By removing from final average salary calculations amounts paid for overtime and accumulated leave the PERS actuary estimates that statewide, $129 million will be saved in the next two years alone.
Third, SB 754 removes the income tax reimbursement bonus for PERS retirees who live outside of Oregon and do not pay Oregon income taxes. If qualifying PERS retirees return to Oregon and resume paying Oregon income taxes, they can reapply for this 10% bonus. The actuarial savings from this PERS reform is $55 million in 2013-15.
Fourth, SB 754 redirects the 6% IAP employee payment (currently paid by the employer for 70% of PERS members), to a new account in the PERS fund for each PERS Tier 1 and Tier 2 member. These funds can then offset some of the costs of PERS Tier 1 and 2 member’s retirement annuities. The cost savings for 2013-15 from this adjustment alone is estimated to be $725 million.
Fifth, SB 754 adjusts the anomaly of the PERS “Money Match.” The Money Match is an alternative calculation to the Full Formula annuity. Essentially, the Money Match occurs when the PERS employer matches whatever amount is in the PERS employee’s account at retirement and the resulting sum is used to calculate the retiree’s annuity. Historically, calculating retirement annuities based on an assumed annual investment yield of 8% on a members account that has been doubled has resulted in unreasonably high benefits to retirees and unreasonably expensive costs to the PERS Fund and PERS employers (ultimately paid by taxpayers). To reform the Money Match anomaly, after the member’s account has been doubled by the employer SB 754 reduces the annuity calculation rate to a more defensible 4%. If this sounds confusing, it is. The bottom line is that 4% is a more rational figure for Money Match calculations and the adjustment saves PERS employers approximately $221 million in 2013-15.
Thus, anticipated savings resulting from the OSBA’s SB 754 PERS reforms total approximately $1.8 billion to $2 billion. These provisions, if allowed to be enacted by the Democratically controlled House and Senate leadership, would be reflected in reduced PERS employer payments for our school districts, cities, counties, districts and state agencies. Any PERS reform legislation passed will be challenged in lawsuits funded by retired public employees or the public employee unions. However, the fear of legal challenges is no excuse for continued inaction.
As the Editorial Board for the West Linn Tidings recently opined:
“Legislators cannot control all outcomes, but they can press ahead as
leaders and make
contingency plans in case their decisions must be revisited. There is more than one way to
To provide contingency planning, substantial reserves should be included in the 2013-15 State Budget. SB 754 provides that legal challenges will go directly to the Oregon Supreme Court. If some of its provisions are found to be unconstitutional, so be it. At least the legislature will have tried to rationally reform the PERS Tier 1 and Tier 2 excesses that are diverting hundreds of millions of dollars from education, public safety and social service programs, and will continue to do so for the next 10-20 years without necessary changes.
Every proposed PERS reform, Democratic, Republican or non-partisan, should be measured against rational criteria. I suggest it include the following:
1. Will the proposed PERS reform substantially reduce the unfunded actuarial liability?
2. Will the proposed PERS reform substantially lower employer PERS rates for 2013-15 and beyond?
3. Will the proposed PERS reform actually lower PERS costs and not merely defer them to a later time resulting in a higher total cost to the PERS system and Oregon taxpayers?
4. Will the proposed PERS reform provide career PERS members with a retirement benefit designed to replace 70%-80% of their final average base salaries after Social Security benefits are included in the calculations?
Regardless of the source of any proposed PERS reform, if it fails when measured by the above criteria, it should not be accepted as the significant PERS reform so desperately needed.
In addition to the above, PERS reform legislation is needed that removes from PERS those whose responsibilities for PERS oversight might result in a conflict of interest—namely: legislators, judges and PERS administration employees.
In closing, there are powerful forces working in the Capitol to block all meaningful PERS reform. The public employee unions know how to wield power.
Ultimately, every legislator must look within and ask, “Regardless of the potential consequences in my next election, am I willing to reform a retirement system that I know is excessive, that has unsustainable costs and is substantially impairing the education of Oregon’s children, the safety of our streets and neighborhoods, and the well-being of our poorest citizens? Am I statesman or just another politician?”
How these questions are answered by the Democratic legislators who control the House and Senate agendas will determine whether significant and desperately needed PERS reform is enacted or whether the legislators merely “kick the can” further down the road and ignore the financial consequences of their political timidity.
As a final thought, even with the OSBA’s recommended reforms, PERS Tier 1 and Tier 2 benefits will still provide a generous public employee retirement that would be envied by their private sector neighbors. And, even if PERS benefits are scaled down from past excesses, ample lifetime annuities will continue to honor and commemorate the years of service provided by the public employees who earned them.
900 Court Street NE H-373
Salem, OR 97301
Capitol Phone: 503.986.1404
District Phone: 541.601.0083
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