Gov. Kate Brown rolled out a financially and politically ambitious proposal Friday to rein in increasing public pension costs for schools over the next 15 years by diverting state revenue streams and requiring public employees to contribute to their pension benefits.
The proposal is an effort to ensure that any new corporate tax money lawmakers dedicate to schools will make it into the classroom, and not be swallowed up by the pension system to backfill its growing deficit. It could serve as a backup plan in case lawmakers can’t pass a tax plan.
Elements of Brown’s plan have circulated for some time, but she hasn’t offered much specificity to date. That changed Friday, as she unveiled a detailed set of options for lawmakers to consider.
The economics are based on a variety of assumptions, including the ongoing ability of pension fund managers to generate strong investment returns on the tax money diverted to help schools. Some of those revenue streams are volatile, and there is no guarantee they will generate the expected dollars. Elements of the plan could prove controversial to both business groups and public employees, and there is no assurance that lawmakers will agree to move it forward.
The plan only aims to protects one group of employers — school districts — and leaves state agencies, municipalities and other government employers around the state to fend for themselves.
But a summary of the plan drafted by Nik Blosser, the governor’s chief of staff, noted that Brown’s was the only proposal on the table that could stabilize pension costs for all K-12 school districts, providing certainty on budgeting the use of tax proceeds dedicated to schools.
The governor’s plan calls on lawmakers to create a dedicated account at the Public Employees Retirement System that would be invested alongside regular pension assets and drawn down gradually to offset schools’ pension costs.
She wants to seed the School District Offset Account with $800 million in one-time revenues, and Blosser’s presentation outlined a number of options to generate that money:
• Retain a portion of the personal kicker tax rebates that taxpayers are forecast to receive when they file their 2020 taxes. The governor’s preferred option is to maintain the first $100 in kicker rebates to each eligible taxpayer and send the rest to the offset account. That could raise an estimated $400 to $500 million and would require a supermajority vote in the Legislature.
• Transfer nearly $500 million of the $2 billion capital surplus at SAIF Corp., a state-owned workers’ compensation insurance company, to the school fund. This could be accomplished with a simple majority vote of the Legislature.
• Transfer $100 million in general/lottery funds that the governor included in her proposed budget, plus an estimated $83.3 million in tax revenues from the repatriation of corporate profits stimulated by federal tax reforms passed in 2017.
• Place a temporary surcharge on state fees and licenses.
On top of those one-time revenues, the governor is proposing to dedicate $1.6 billion in state revenue over the next 15 years to the fund. Those include tax dollars that lawmakers agreed to divert to help schools in 2018. But the governor wants to extend the period they would be dedicated to the school district account from 6 to 15 years. They include:
• Interest on unclaimed property held by the Department of State Lands and state debt collections exceeding historical averages. The governor’s office estimates that could raise $185 million over 15 years.
• “Above trend” capital gains and estate tax revenues. The portion of those taxes exceeding a rolling historical average would be diverted to the School District Offset Account for 15 years. The governor’s office said that could raise $1.4 billion for the fund, the largest source of funds in the plan.
One key plank of the proposal — and likely the most controversial with teachers — is to reduce school districts’ pension obligations by instituting new pension contributions from employees. The governor’s plan calls for educators who are active Tier 1 and 2 members of PERS — those hired before Aug. 28, 2003, and working — to contribute 3% of their pay, after exempting the first $20,000 of salary.
Those hired after that date, called Tier 3 or OPSRP members, would contribute 1.5% of their pay after exempting the first $20,000 in salary. Those changes could cut schools’ pension contributions by about $100 million per biennium starting in the two-year budget cycle that begins in July 2021, and increase gradually from there.
The governor’s plan is far more expansive than the school district PERS plan she successfully pushed for the Legislature to pass last year. It diverts revenue streams to the school fund for a longer period, and is particularly dependent on future capital gains tax revenues, which are historically volatile, and make up nearly 40% of the forecast receipts in the plan. The $1.3 billion estimate from capital gains is based on an analysis of historical trends by the Office of Economic Analysis, but the results would depend on future performance of financial markets and whether Brown can convince lawmakers to divert those tax revenues for 15 years.