Summary
A recent study of public sector retirement funds by The Pew Charitable Trust’s Center on the States found that “Oregon currently has the best-funded pension system in the country.” This claim for Oregon’s $50-plus billion system is only technically true if we leave out the liabilities generated by $6.2 billion in pension obligation bonds issued to help reduce PERS rates.
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A recent study of public sector retirement funds by The Pew Charitable Trust’s Center on the States found that “Oregon currently has the best-funded pension system in the country.” This assessment of Oregon’s Public Employees Retirement System (PERS) deserves a closer look.
First, it is important to emphasize how fast seemingly well-funded plans can become poorly funded. For example, in 1999 “Pensions and Investments” magazine was reporting jubilance in the state PERS world over widespread fund surpluses. A few short years into the next recession many funds were deeply in the red – including Oregon’s plan, which bottomed out nearly $18 billion underfunded.
Second, the claim that Oregon’s $50-plus billion system is the best-funded retirement plan in the nation is only technically true if we leave out $6.2 billion in liabilities generated by so-called pension obligation bonds that the state, local governments and school districts issued to help reduce their PERS rates. Issuing these bonds did two things: It raised cash which was added to PERS assets, effectively prepaying the expected pension fund obligations of the participating public employers. And, these public employers traded rate charges levied by PERS for bond payment obligations.
Oregon state and local governments have, in effect, moved liabilities off the PERS books and onto their own. The state itself issued about $2 billion in pension obligation bonds, while school districts, cities and other local governments borrowed an additional $4.2 billion for the same purpose. Of course, these are principal amounts; interest payments will add to the cash burden over time.
The Pew report appears simply to accept PERS’s own calculations which show that with the pension obligation bond proceeds, the system was 110% funded at the end of 2006. But Pew did not disclose that PERS also calculated its fund would only be 96% funded without those proceeds. It is hard to see how Pew can do an accurate analysis of the consolidated condition of the PERS fund without considering the “off balance sheet” liabilities generated by those bonds. Taxpayers still owe this money; and the debts were incurred because the PERS system had a growing unfunded liability that, at its peak, soared to nearly $18 billion.
The Pew study does mention that Oregon’s strong position is due in part to its pension obligation bonds, but it fails to reveal the high dollar amount of those bonds. It also fails to mention that the financial health of public employee pension funding in Oregon depends on the extent to which associated future beneficiary liabilities are likely to evolve. Of course, the “off balance sheet” element of Oregon PERS may be solidly funded. But, like the funded status of the “on balance sheet” portion of PERS, just how well funded any program is depends upon an appropriate evaluation of assets and liabilities. The Pew study failed to do such an evaluation, simply assuming that neither the market value of PERS assets today, nor the future stream of liabilities, will change tomorrow.
Historically, the measures used by fund actuaries and organizations like Pew use fairly simple modeling techniques to determine funded status. These models fail miserably when market conditions or the behavior of employees and employers change. More sophisticated modeling techniques do exist, but apparently Pew failed to use them when it came up with its state PERS rankings.
PEW also credits Oregon’s strong position in part to reforms enacted in 2003. These reforms did indeed claw back excessive crediting of asset returns to Oregon public employees. They largely put an end to the outrageous “heads-the-employeeswin, tails-the-taxpayers-lose” PERS benefit structure.
Pew does not mention, however, that those 2003 reforms occurred in large part due to pressure placed on the political establishment by outsiders; the insiders were content to continue the uncontinuable. Particular credit goes to Dr. Randall Pozdena. A Portland consultant and finance expert, Pozdena served on the Oregon Investment Council (the PERS investment board) for nine years and was its chair for three years. He is on record as having questioned the viability of the unique PERS benefit-crediting scheme in the early 1990s, but his concerns were dismissed by the Plan’s actuary. By the late ’90s, the over-crediting of asset returns to PERS members threatened to bankrupt either the fund or Oregon taxpayers.
Pozdena and the OIC board urged an independent evaluation of PERS funding status, against protests from the vested interests. Some cities and other public employers by then had joined the debate, and the rapidly deteriorating state of the fund was revealed in the press. Governor Ted Kulongoski, risking the ire of his labor constituents, pushed through some reforms aimed at saving the system from insolvency. Public employee labor unions challenged the legislation in the Oregon Supreme Court, and only about half the reforms survived.
By some reckonings, Oregon taxpayers dodged a $5-10 billion bullet. Although the growing problem ultimately would have revealed itself, in large part the timing and thus the size of taxpayer savings were due to the prescience and persistence of a citizen member of a public board.
Clearly, we should take claims of PERS’s good financial health with a grain of salt. The vested interests are not necessarily looking out for the best interests of those who ultimately pay the bills – Oregon taxpayers. Left to their own devices, without strong citizen oversight, we can expect these vested interests to try enriching their coffers again at our expense.
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