Senator Doug Whitsett District 28 11/21/12
The Public Employment Retirement System was designed
to be a self-sustaining retirement program for
Oregon’s public employees. The program’s actuarial
liabilities were supposed to be matched by a
combination of employee and employer contributions
plus return on investment from the PERS Trust Fund.
That design has twice experienced woeful financial
failures within a single decade. In my opinion,
these failures have been primarily caused by a
fundamental flaw in the assumptions made by the
Board appointed to govern PERS.
The Board has assumed that annual investment returns
on the PERS Trust Fund will average eight percent.
This supposition has allowed them to assign more
than seventy percent of the payments required to
support the system to investment earnings. Their
goals have been generally achieved, with two notable
and disastrous exceptions.
The exceptions were the Dot-Com crash between 2000
and 2002 when the PERS Trust Fund closed with
unfunded liabilities of about $18 billion. The
second exception was the more recent real estate
driven market crash in 2008 when the Trust Fund lost
about $18 billion and closed with unfunded
liabilities of more than $16 billion.
PERS was rescued from its 2002 fiscal cliff by a
combination of actions. Retirement benefit reforms
crafted by a Republican majority in both legislative
chambers, and strongly supported by Democrat
Governor Ted Kulongoski, significantly reduced PERS
ongoing costs. The Legislature also convinced the
people to amend the Oregon Constitution to authorize
them to borrow money to pay down the PERS unfunded
liabilities. They then passed HB 3659 to implement
the sale of $2 billion in Pension Obligation Bonds.
Other subdivisions of Oregon government sold an
additional $4 billion in bonds to pay down their
part of the unfunded pension liabilities.
The legislative rationale behind borrowing money to
pay down the unfunded liability, at that time, may
have been appropriate. However, there is simply no
justification for their method of structuring the
bond debt payments.
PERS was able use the proceeds of the bond sales to
lock-in long term investments that paid a
significantly higher rate of return than the
interest cost of the bonds. This positive interest
arbitrage has been successfully used for ten years
to offset the cost of maintaining the State’s
obligation to PERS.
On the other hand, some of the other government
entities that sold Pension Obligation Bonds did not
lock-in those long term investments. Many of these
entities are now experiencing negative arbitrage on
their bond debt. The result is the requirement to
pay the full cost of PERS plus the debt service on
the bonds that they sold.
Unfortunately, those who structured the debt service
on the state Pension Obligation Bonds used some
creative financing. They apparently made assumptions
that the state workforce would grow larger with time
and that public employee wages would also increase
with time. The logic appears to have been that with
more employees being paid more money there would be
more funds available to pay the debt service on the
They structured the debt repayment to increase
significantly with each succeeding two year budget
cycle. For instance, the first full principle and
interest payment in 2005-07 was $240 million. The
payment for the current budget cycle is $304
million. The last payment in 2025-07 is scheduled to
be $544 million, well more than twice the amount of
the original payment.
Not only does this debt structure place the burden
of payment on a future generation but it
significantly increases the total debt service by
prolonging the payment of interest on the principle.
In fact, it will require $4.3 billion to pay back
the borrowed $2 billion including principle and
interest. After ten years, more than $3 billion
remains to be paid.
The Oregon Supreme Court struck down several parts
of the legislative reform reasoning that they
violated the constitutional prohibition against
altering contracts. The Court rightfully ruled that
a promise made is a debt unpaid, meaning that
retirement benefits cannot be reduced retroactively
by one party to the contract.
The Court went on to further state that these
collective bargained contracts bind the employer to
the terms of the contract for the full length of
employment. The employer is allowed to prospectively
improve the terms of the retirement agreement in
subsequent negotiations, but is not allowed to
unilaterally make the terms less favorable to the
This ruling appears to be in direct contradiction to
the Employee Retirement Income Security Act (ERISA)
that applies to private sector retirement funds.
That federal law secures an employee’s vested
retirement benefits up to the current date of
employment. However, it does not require the
employer to continue the terms of that retirement
into the future. The employee is able to either
accept the prospective changes in the retirement
plan or move on to another employer taking their
earned retirement benefits with them when they
We are now facing PERS’ second woeful financial
failure. Their current unfunded liability is at $16
billion including the future debt service on the
Pension Obligation Bonds. Total employer
contributions toward public employee retirement
benefits will be equal to as much as one third of
payroll for the next budget period. At best, that
untenable level of contribution will continue into
the foreseeable future in the absence of meaningful
reform. At worst, it could spiral upward in the
likely event that PERS investment earnings remain
below eight percent.
Fundamental changes must be made in both faulty
assumptions as well as in future retirement
benefits. The alternative can only result in fewer
public employees to provide critical public services
Please remember, if we do not stand up for rural
Oregon no one will.