PERS facing $30 billion shortfall::1

Coronavirus has hit the economy hard. Nearly all the stock market gains from the past two or three years have been wiped out. And in addition to proving painful for investors and retirees, it’s likely to fuel the third major Public Employee Retirement System crisis since the dot-com bust.

PERS has two major sources of funds: investment returns and employer contributions. PERS investments are managed by the state treasurer, under guidance from the Oregon Investment Council. The employer contributions originate from city, county and state agencies, public school systems and various kinds of special service districts.

PERS charges these employers a rate equal to some percent of their payroll to fund the costs of their employees’ anticipated retirement benefits. Currently, the average rate is approximately 25% So for a city employee with a salary of $60,000 a year, the city must pay an additional $15,000 to PERS.

One of the many factors that affect the employer rate is the system’s unfunded actuarial liability, or UAL. It represents an estimate of how much money would be needed to pay off all existing beneficiaries if the system were liquidated.

Think of it this way: If you sold everything you owned and drained every account you had, would you have enough to pay off everyone you owe? If not, you have unfunded liabilities.

PERS currently has a UAL of $24.5 billion. That means, if PERS liquidated all assets to pay all existing members, it would come up $24.5 billion short.

The employer rate is set to fill that gap over a period of approximately 20 years. So, if the UAL increases, the employer rate increases. Similarly, if the UAL decreases, so does the employer rate.

Here’s where investment returns come in.

Because of the way PERS benefits are calculated, the system’s investments must earn an average of at least 7.2% a year to head off an increase in its UAL. And that’s a very aggressive, very optimistic target.

In good times, when PERS investments earn above-average returns, the investment revenue reduces the UAL, which in turn reduces the employer contribution rate. If, on the other hand, PERS investments tank, the UAL balloons. In that case, units of state and local government must make bigger contributions to fill the gap.

PERS investment returns correlate closely with stock market returns. Generally speaking, in a bull market, PERS investments run with the bulls. But when the market drops, PERS investments suffer with the rest.

The stock market is currently down more than 20% from the beginning of the year. PERS investments figure to be down about 11% as a result. Based on past experience, such a drop would add another $6 billion to the retirement system’s unfunded liability, pushing its total UAL to about $30 billion.

Let’s say the economy improves and the stock market recovers all its losses, ending the year unchanged. PERS investments would be up by about 5%, based on past experience. Even so, the system’s unfunded liabilities would rise about $3 billion, climbing to about $27 billion.

Based on these observations, it’s very possible state and local governments will face an employer contribution rate of 30% or more. That $60,000 employee would now come with an $18,000 additional cost.

Where would that additional money come from? It would, of course, come from us — the taxpayers.

The Legislature and local units of government would be under tremendous pressure to raise taxes to pay for skyrocketing PERS costs. That would require significant budget cuts, translating into fewer teachers, police officers and foster care workers.

The net result? Bigger class sizes, reduced law enforcement and more children stranded in the foster system. It’s not just a financial crisis, it’s a human crisis.

PERS has been a ticking time bomb for two decades. Attempts at meaningful reform have been put off by timid politicians and thwarted by powerful public employee unions.

In the first PERS crisis of 2002, the system’s unfunded liabilities ran less than $4 billion. In the second, beginning in 2008, its UAL ballooned to $16 billion. Today, we’re looking at a crisis with a UAL of $30 billion or more, or nearly $19,000 per Oregon household.

We are entering an era in which PERS cannot be merely tweaked or reformed. We are entering an era requiring a radical overhaul of the entire system.

It can begin with some straightforward steps:

One, move all new public employees into a 403(b) defined contribution plan. These are similar to the 401(k) plans held by many private sector employees. TriMet has already made the switch, thereby saving it from insolvency.

Two, change the PERS Board’s assumed rate of return on investments. Because of the mismatch between assumed and actual investment returns, PERS is accruing liabilities much faster than it’s growing assets. Bad assumptions were unsustainable 20 years ago, but they’re disastrous now.

These are steps that can be handled quickly in an emergency session of the Legislature and an emergency meeting of the PERS Board.

There’s never a good time to upset the public employee unions, but we’re in a crisis. Immediate action is necessary to save the state from fiscal disaster.

Eric Fruits serves as vice president of research at the Cascade Policy Institute, a free market, public policy research organization. Holder of a Ph.D. in economics, he also is an adjunct professor at Portland State University. He testified before the Oregon Supreme Court on PERS reforms enacted by the Legislature in the early 2000s.

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