With Oregon state coffers flush with cash, will legislators shore up PERS?
Like it or not, ready or not, believe it or not, the Public Employment Retirement System (PERS) is once again emerging to the forefront of critical issues facing Oregon.
There are two schools of thought about the future of PERS. On the one hand is the belief that actions taken in previous years, coupled with investment returns over the last few years, will permit PERS to heal over the next 20 years. In effect, "punt and pray."
There's also the belief that despite actions taken, probable future returns will not permit the system to heal and will require government bodies — city councils, school boards, state agencies — to kick in more money to meets the system's obligations.
As I have previously said, Oregon lawmakers shouldn't punt-and-pray-over-PERS. I would be happier with the former. So would taxpayers. But we can't rely on wishful thinking.
The results of the investment side in the first six months of 2022 (and indeed the last decade) show that the punt-and-pray playbook will not solve PERS' funding challenge.
In the 10 years ending Dec. 31, 2021, the PERS investment account returned 10.2% compounded annually. In the single year ended Dec. 31, 2021, the fund returned 20.1%. These are very good returns for a fund the size of Oregon's pension fund.
Yet in the last 10 years PERS contributions by government bodies as a percent of pay (contribution rates) have increased significantly and are scheduled to go up again. In the last 10 years the unfunded liability has increased from $16 billion to $20 billion.
That's because the investment returns of PERS drive the government contribution rates. At this moment, I'd argue that actions in Congress and at the Federal Reserve, paired with market forces, will result in lower investment returns over the next decade. The strongly negative returns seen this year bear this out.
So, best to prepare for the worst now because there is minimal downside to that strategy if we end up with a happier trajectory later.
Our next governor and the Legislature must act to make, or change, policy. And they need to ensure that any decisions won't do too much damage if their guess on the future is wrong. In the current context that means injecting additional funds into PERS now, while the state is relatively flush.
If I am wrong and the system is in the process of a long-term healing, a new injection of funds will reduce future contributions. That means funds that can be used elsewhere.
If I am right, this change will avoid some of the substantial increases in contributions that will be required by every level of government. The risks of not shoring up the system now are much higher than the risks of increasing funding now.
Here is a specific proposal promoting the healing of our public retirement system: Initiate a $100 million annual additional state contribution to PERS for 10 years.
PERS is currently eating away at state, county, city and school budgets. If our goal is "to pay the right benefit, to the right person, at the right time," we must do more than accept the status quo.
Otherwise, we're ignoring the warning lights and facing what are sure to be increasingly expensive repair costs. The state will likely not continue to be flush with cash in the next biennium. Or, if it is, there will be more urgent priorities, as the PERS bill won't come due until 2025, when rates will reflect the Dec. 31, 2023, valuation.
The urgent always takes precedence over the important. Injecting additional funds now has merit, given the time value of money, but may not reflect what's likely, given the time values of politics. With enough forethought, perhaps the important can take precedence over the urgent.
Yes, the "PERS problem" was generations in the making. The problem is not easily solved. Nonetheless, the benefits of acting now to inject additional funds into the system far exceed the costs, present and future, of not acting now.
PERS is coming. We best be prepared. Every candidate for the Legislature and especially for governor should answer these questions: Do you support injecting additional funds into PERS? If so, how much and for how long? How they respond should be a big consideration on who gets your vote.
Jeff Gudman is a former member of the Lake Oswego City Council and the Republican candidate for state treasurer in 2016 and 2020.
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