PERS facing a new peril: negative cash flow crisis

Analysts have considered Oregon’s obscenely over-generous Public Employee Retirement System a train wreck for more than 20 years. But voters have never given Republicans the keys to the governor’s office, and John Kitzhaber was the only Democratic occupant ever displaying the temerity to respond.

In retaliation, Oregon’s powerful public employee unions cut the campaign flow to Kitzhaber, punished him in other ways and pursued a series of blocking actions in court. Meanwhile, the shortfall has grown to a daunting $26 billion, and arms of government, including the public school system, are groaning under the weight of ever-escalating payment obligations.

Gov. Kate Brown, fresh off a re-election fueled in good measure by the Oregon Education Association, is repaying the OEA by proposing a new business tax burden aimed at infusing another $2 billion into public schools. But The Oregonian warns much of that money “could eventually disappear into the pension system, leaving little for Brown’s promise of smaller classes, more teachers or a longer school year.” 

Just when we assumed things couldn’t get worse, they got worse. Analysts are now sounding the warning about a negative cash flow running $3.3 billion in 2018, bestowing Oregon the sixth highest negative rate in the country, projected to rise alarmingly over the succeeding years.

PERS paid out $4.7 billion in benefits last year, but took in only $1.4 billion in premiums, despite hiking the assessment on public employers substantially. By 2038, the annual payout is projected to reach $8.3 billion, and no one is sure where the money will come from.

The obvious source is investment earnings, but that’s the system’s seed corn. Start raiding earnings at an ever-increasing rate and eventually you face insolvency.

What’s more, the state gets the best return on investments promising a huge payoff 10 years down the line, but none in the interim. When it’s facing rapidly growing cash-flow needs, it has to start relying on short-term investments paying off more modestly, but on a sustained basis. Doing so depresses overall earnings, thus exacerbating an already massive shortfall — one analysts think is already too large to ever fully pay down.

The Democrats dominating Oregon’s legislative and executive ranks could redirect the IAP contributions into a reserve fund, cap the final salary factoring into benefit awards, apply market rates to money-match annuities and eliminate rampant spiking abuses if they had the resolve. Unfortunately, they seem too dependent on campaign contributions from the OEA and other public employee unions.