By Richard Leonetti
For several years, Oregon Tax Research has warned that the Public Employee Retirement System was very expensive and required reform. The problems with the system are many, including a lack of public perception of just what those problems are.
For example, media reports will frequently refer to a public employer "match" that must be paid based on retiree's contribution and investment earnings. The use of the term "match" in this context can be misleading if not thoroughly explained.
In many private pension systems, employers provide a "match" to employee contributions into the plan. These can take several forms, with the employer typically providing $1 or 50 cents for each $1 the employee contributes into the plan each pay period.
PERS is quite different. Because of several extras - including inaccurate actuarial tables, automatic 2 percent annual cost-of-living increases and other ad-hoc cash benefits - PERS employers provide somewhere between a 158- and 350-percent match of the total of the employee contributions. Simply doubling the employee's account at retirement would not be enough to pay the benefits due to these extras. It is no great surprise that this formula leads to monthly pension payouts that are frequently larger than the public employee was able to earn while working.
Beginning July 1, the statewide average for the PERS match is $1.79 for every $1 the public employee has contributed. This is following a reduction in the rates. This is almost a double match. These rates will vary from employer to employer, with one of the lowest being $1.58 for state workers, while school districts will spend $2.12 on average (more than a double match) for each $1 contributed by a teacher. Virtually no public employee receives a true match.
The voters who really need to know the truth are residents of Portland. While drafting this commentary, I noted that the city would be contributing $3.04 for each $1 an employee contributed. When checking my data, I found that the rate had somehow been miraculously reduced to just $1.26. The miracle makes the rate look better but misleads, since Portland floated bonds to make a $258 million lump-sum payment to PERS in November 1999. The $1.26 rate does not include the repayment of those bonds. Multnomah County also borrowed and made a $180 million payment about the same time, shifting part of its costs from the more visible PERS rates onto less visible debt service. No gain for taxpayers has been achieved through what, in essence, is an accounting gimmick.
Such double contribution rates become huge costs for Oregon taxpayers. The most recent published figures come from the fiscal year ending July 30, 2000, when public employees paid $385 million into the fund, and the taxpayers' portion came to $559 million. That extra $174 million above a true match (or $348 million a biennium) would make legislative and local government budgeting much easier, if it were available.
The system should be reformed; it's the right thing to do. So that no one is hurt, the Legislature could change the system only for new hires and legislate a true $1 match for each $1 contributed by the employee. Actuarial tables that reflect realistic lifespan expectations should be adopted, and extraneous items such as the health care subsidy provisions should be eliminated. In effect, the changes should make new hires eligible for a very generous 401K-type plan. To make the system easier to reform in the future, if that becomes necessary, state elected officials should be ineligible for PERS.
Benefits under the reformed system, with the great investment returns PERS has achieved, would still provide a much larger retirement than the majority of the people who pay the taxes to support PERS can expect to receive. Such a plan would mean less future cost for taxpayers and less incentive for experienced employees to retire at age 53, as many did last year, because their retirement earnings averaged $53,832 per year - twice the state's average wage, and 6 percent more than their average working salaries. These reforms would not alleviate the growing unfunded burden on taxpayers - in fact, the reforms would not have any positive impact for perhaps 10 to 15 years. But the challenge for the 2001 Legislature is to do what is right instead of what the special interests supporting this overly generous system want.
Richard Leonetti is an Oregon Tax Research analyst who has long studied PERS. Oregon Tax Research is a Portland-based, statewide organization that provides nonpartisan public policy research.