A State Forges Ahead With a Controversial Plan to Control Pension Costs

Oregon lawmakers have approved a controversial bill meant to bolster the financial health of the state’s underfunded pension system for state and local government employees.

Public worker unions have criticized the legislation as unfair and potentially illegal under state law and are indicating that they’ll fight it in court. The bill calls on state and local employees to take on some of the burden of paying down the state’s pension funding shortfall.

Legislators moved ahead with the measure amid concerns about rising pension costs for schools and other public employers.

Oregon is far from the worst off state when it comes to pension funding difficulties.

But the legislation is one of the latest examples of how state and local policy makers around the U.S. are straining to fund promised retirement benefits, without cutting into other spending priorities.

The House approved the bill on a 31-29 vote last Thursday. It cleared the Senate about a week earlier. Some lawmakers described it as one of the tougher votes they’ve had to take. Gov. Kate Brown, a Democrat, pushed for changes akin to those in the bill and is expected to sign it.

Brown cautioned in April that the state’s retirement system “is ill-prepared for the next inevitable economic downturn, which will put both public sector budgets—and the retirement security of our valued employees—in serious jeopardy.”

Oregon’s retirement benefit system for public employees is a hybrid of sorts, involving both a 401(k)-style, or “defined contribution” account, and a traditional “defined benefit” pension.

Following state policy changes adopted in 2003, public employees there have 6% of their salary placed into a defined contribution account under what’s known as the Individual Account Program. But employers cover the entire contribution for the defined benefit plan.

One of the more contentious provisions in the legislation would redirect a portion of employee contributions that now go to the 401(k)-style account toward the pension side of the program, with the aim of boosting its funding level.

The legislation makes a number of other changes as well.

It would extend the timeframe for paying down a large share of the state’s current unfunded pension liability, pushing out the estimated date when it would be paid off to 2041, from 2035.

“Re-amortization” maneuvers like this typically promise lower near-term annual costs for employers, while raising overall expenses to pay down pension debt in the long-run.

Estimates presented at an Oregon Public Employees Retirement System board meeting last Friday suggest that switching the amortization period in the way proposed in the bill could raise the overall cost of paying off the pension system’s funding gap by about $3.8 billion.

The bill also calls for dedicating future state revenue from sports betting—which has not yet been approved by the state’s lottery commission—toward the pension system.

This revenue would go to an “Employer Incentive Fund.” Established under a law enacted last year, that fund program provides state matching dollars to go along with money that public employers in Oregon set aside to cover their pension obligations.

The new measure also provides a one-time $100 million allotment to the incentive fund, which an analysis of the bill says could generate at least $400 million in employer matching funds.

Lawmakers estimate the legislation should lower the overall pension contributions employers are making by $1.2 billion to $1.8 billion per two-year budget cycle, between 2021 and 2035. But the re-amortization component of the plan is one of the key factors driving the savings.

Alex Pulaski, communications director for the Oregon School Boards Association, called the legislation’s approval “a win for schools.”

“In a perfect world the bill would have gone further to cut PERS-related costs without relying so heavily on delaying payments,” he said by email. “In effect we have pushed our mortgage payment years down the road.”

But he said the bill means schools should save an estimated $200 million annually in pension payments starting in 2021. “We are grateful that legislators were able to make progress, and these savings allow schools to put more resources in the classroom,” he added.

Employees would begin seeing some of their Individual Account Program contributions redirected beginning in July 2020. The amount would depend on which benefit plan people are apart of, which varies depending on when they were hired.

People earning $2,500 per month or more in two plans that cover workers who were hired before Aug. 29, 2003, would see 2.5% of their 6% Individual Account Program contribution redirected to a “pension stability account.” For those hired later, the figure is 0.75%.

After the House passed the bill, the governor’s office said in a statement that going forward, Brown will not look to public employees for further contributions to reduce pension liabilities.

About 56,000 active employees are part of the plans targeted for the 2.5% redirect and roughly 119,000 are covered by the plan that will be subject to the 0.75% contribution shift.

The Oregon Public Employees Retirement System had about 176,000 working members and around 145,000 retired beneficiaries as of last June. Its defined benefit pension program had about $69.3 billion of net assets at that time, according to its most recent financial report.

As of December 2017, it’s unfunded actuarial liability—a measure of the gap between projected benefits owed in the years ahead and the anticipated money that will be available to pay them—was pegged at around $16.7 billion, leaving the plan about 80 percent funded.

By comparison, in Illinois, a state with some of the worst-funded pension systems in the country, the funded ratio for the state employees retirement system was just 35 percent as of 2017.

Following last week’s vote, a coalition of unions chided lawmakers saying the House “turned its back on public employees.” But they also said the bill had excluded more “draconian” cuts that the governor had previously proposed.

“In a state that pays their educators 22% less than they would earn in the private sector, cutting compensation even further is unconscionable,” John Larson, president of the Oregon Education Association, said in a statement. “We will continue this fight in court.”

A description of the legislation distributed by public labor groups warns that it will send the state into an “expensive and lengthy battle at the Oregon Supreme Court,” similar to an earlier lawsuit workers brought over changes to their benefits that were approved in 2013.

That dispute ended with the state Supreme Court overturning reduced cost of living adjustments, a ruling the unions say left the state owing about $5 billion in added benefits.

Unions that have opposed the legislation include the teachers union, SEIU, the Oregon State Firefighters Council, Oregon Nurses Association, Oregon AFSCME, Oregon State Police Officers Association, and the Association of Oregon Corrections Employees, among others.

Oregon’s defined benefit pension system was fully funded as recently as 2008, when the funding level was around 112%. But in the wake of the recession the ratio declined into the 80% range and has only gotten up above 90% in two years since.

This has created a situation where state and local employers have had to increase contributions.

Brown earlier this year cited the Hillsboro school district as an example.

Contribution rates for the 2019-21 biennium for the district are set at just over 28% of payroll. But the school district’s rates were projected to jump in the 2021-23 biennium by 5 percentage points to over 33%.

For the district, according to the governor, that would mean an additional $1.9 million in costs.

Public sector unions have floated some of their own alternative ideas for shoring up the pension fund.

One recommendation they have is to tap a surplus of over $1 billion held by a workers compensation insurance fund in the state. Another is trying to cash in on underused state real estate holdings, and a third is looking at expanded lottery offerings to generate new revenues.