Both Gov. Kate Brown and the Oregon Legislature deserve credit for acknowledging the seriousness of the state’s public pension problem.
A task force commissioned by the governor kicked the tires last year on a handful of options for reducing the pension system’s $25 billion shortfall. And the Legislature followed up with modest efforts to fill the massive hole.
Voters this year should insist that their representatives keep the momentum going. The PERS problem remains huge and long-lasting, as indicated by the above graphic, which does suffer from one significant flaw: It doesn’t show how bad things really are.
The information in the graphic comes from a presentation prepared for a February meeting of the High Desert Education Service District board. The ESD, which focuses primarily on Crook and Deschutes counties, provides regional services to schools. But what the ESD does is less relevant here than what it is: a publicly funded entity that employs people on whose behalf it accrues pension liability. Its PERS outlook is roughly similar to those of many other government agencies.
The graphic shows projected payroll and projected PERS contributions over a 20-year period beginning in 2017. The ESD developed the data with the help of an employer rate projection tool made available recently by PERS. The tool has its limitations. Payroll, for instance, is simply assumed to grow at a rate of 3.5 percent annually. Still, it provides a useful look ahead and allows public entities to model cost-containment options.
The look ahead, in brief, involves a lot of dollar signs. The ESD’s pension contributions are expected to keep growing for many years. They’re also expected to continue growing in relation to payroll before the pressure begins to ease. During the 2029-30 biennium, PERS costs are expected to top 30 percent of payroll. Ouch.
But the pain is even greater than the graph indicates, at least in the near term. The ESD’s PERS costs appear to jump dramatically after the 2027-29 biennium. But reality is more complicated, explains ESD Director of Business Services Greg Munn. The ESD has created a side account, funded by bond sales, that will continue to depress PERS rates over the next decade or so. When that side account expires, PERS rates will jump.
What the graphic doesn’t show is the ESD’s debt service on its side-account bonds. If it did, says Munn, PERS costs in the near term would look more substantial and the escalation would be smoother.
Here is how the side-account math works. Public entities sell bonds, as the ESD has done, and plop the proceeds in the state PERS fund, which is managed fairly aggressively. The public entity reaps the rewards (and risk) of aggressive management while paying back the bonds at a conservative rate.
During the current biennium, PERS would normally assess the ESD a rate that would be the equivalent of more than 20 percent of payroll. But the side account earned a rate reduction of roughly 10 percentage points, says Munn. That’s reflected on the graph, which suggests that PERS costs amount to less than 14 percent of payroll. What the graph doesn’t show is the debt service on the bonds, which is somewhere between 8 percent and 9 percent of payroll, says Munn. There’s a lesson here for taxpayers, who will soon begin voting on legislative and gubernatorial candidates who will have varying degrees of interest in PERS reform. Some may say, incorrectly, that recent state Supreme Court decisions that have made further attempts to control PERS costs a fool’s errand. Before buying the PERS-surrender arguments, voters should consider the scale of the problem, which is so significant that public entities like the High Desert ESD have been willing to create side accounts and invite risk in the hope of realizing even one or two percentage points in net savings. A problem that big ought to favor the candidates with the greatest commitment to addressing it.