May 11, 2019
Contact: Tim Nesbitt, 503-780-8865
Statement Regarding the Legislature’s Proposed PERS Reform Package (SB 1049-1)
We are encouraged that the Legislature is finally stepping up to address the PERS funding crisis.
The plan proposed yesterday in SB 1049-1 will provide much needed fiscal relief for schools and public services at the state and local level beginning in 2021. Unfortunately, it will do nothing to blunt the impact of another round of billion-dollar-plus PERS cost increases over the next two years. Further, the bulk of future savings will come from extending the system’s debt payments rather than enacting true cost-cutting reforms. For these reasons, we see this plan as a first step to longer-lasting and more substantive reforms. As a first step, this plan should be implemented in the upcoming biennium.
The proposed legislation charts the right pathways to reform
SB 1049-1 incorporates reforms we have long supported.
Reinstating employee contributions to the pension plan can free up funding for services without cutting employee paychecks. The key to this approach is to “redirect” employee contributions that now go to a supplemental retirement savings plan to instead help pay for the pension plan. This is how the pension plan was financed before 2004. It makes sense to reinstate this practice now that the costs of the pension plan have more than doubled in the last decade.
It also makes sense to correct the excesses of a program that has generated extraordinary benefit payouts. The legislation takes important steps in this direction by capping high-salary pensions and by limiting the practice of inflating Money Match benefits.
But the cost sharing proposed in SB 1049-1 is minimal. We can and should do more (see below).
The two-year implementation delay is problematic, both fiscally and politically
We are particularly concerned that implementation of these reforms will be delayed until July 2021. Earlier drafts of the legislation proposed a January 2020 start date, which would have aligned PERS reforms with the effective date of the proposed revenue package, protecting the state’s new student success investments and providing fiscal relief for local governments in the next budget period. As the proposal now stands, the proposed reforms will be delayed for two years while PERS takes another billion-dollar-plus bite out of public services.
There is a political problem with this delay as well. Voters may yet be asked to weigh in on the revenue package in 2020. If PERS reform remains a distant and yet-to-be-realized commitment at that time, skeptics may fear that the funding for student success will be poured into a still-leaky bucket, and cynics may suspect that a 2021 legislature could yet block the reforms from taking effect.
Our organization has been committed to PERS reform not just to save public money but to put it to better uses – to sustain adequate staffing for public services, overcome fiscal deficits and rebuild our education system. For this reason, we would like to see more substantive reforms, enacted in 2020.
Extending the system’s debt repayment period
For the same reason, we have always recognized that reductions in the going-forward costs of the PERS benefit structure will have to be accompanied by plans to manage the system’s legacy costs, which remain beyond the legal reach of legislative reforms. Extending the period for paying off those legacy costs is a legitimate consideration to avoid burdening one generation of kids in our classrooms with the costs of mistakes accumulated over decades before them. But doing so without further substantive reforms or buy downs of the system’s liabilities from other sources will create significant risks for public jurisdictions and their taxpayers in the future.
It’s the same for a family facing a large credit card debt. First you reduce your monthly expenses. Then, if your income allows, you refinance your mortgage or other loans over a longer time period to pay off your debt.
The question for lawmakers now is whether they have done enough to reduce the system’s going- forward costs to justify extending the minimum schedule for paying off the system’s liabilities.
By extending the repayment period for a sizable portion of the system’s legacy costs, SB 1049-1 will add risk to the system in the long run, but it will also free up funding for services in the short run with long run payoffs for our people. So the risk should be carefully calculated and well managed.
More can be done to reduce going-forward costs
In this regard, we think more could be done to reduce the system’s going-forward costs in concert with extending the schedule for buying down the system’s liabilities. Here is a comparison of the savings proposed in Initiative Petition 24, based on a cost-sharing formula by which employees would pay one-third of the going-forward costs of their pension benefits.
System-wide Savings for Services from Employee Cost Sharing
|Budget Period||SB 1049-1*||IP 24**|
|2021-23||$293 million||$859 million|
|2023-25||$289 million||$898 million|
|2025-27||$287 million||$941 million|
Another measure of the relative differences between these two approaches can be seen in the effects on K12 budgets from the amounts proposed in SB 1049-1 and IP 24, including the benefit corrections contained in SB 1049-1.
Savings in K12 Budgets from Cost Sharing and Benefit Corrections
|SB 1049-1*||IP 24**|
|First full biennium impact||Savings equivalent to:
2.4 school days
|Savings equivalent to:
4.9 school days
* SB 1049-1 proposes to require employees with salaries above $30,000/year to contribute 2.5% of salary (Tier 1 and 2) or 0.75% of salary (OPSRP) to support future pension benefit accruals.
**IP 24’s cost sharing would range from 2.8% of salary for employees in the lowest benefit tier (OPSRP) of the pension plan to 6% for those in the most expensive benefit tiers (Tier 1 and 2 Police and Fire).
These amounts compare to a national average of 6% employee contributions for similar public plans nationwide, according to the National Association of State Retirement Administrators.
More can be done to limit the growth of liabilities for public employers and taxpayers
We are also concerned that, by extending the period for buying down the system’s liabilities, even modest surprises to the downside (as happened in 2016) will undo much of the expected savings for services. Notably, the “risk sharing” mechanisms addressed in prior testimony to the Ways and Means Committee remain absent in this legislation. In other public pension systems, these mechanisms include increases in employee cost sharing if liabilities increase beyond certain upper limits. A similar provision is contained in Initiative Petition 24, whereby employee contributions would increase if the going- forward costs of the pension plan increase.
The case for benefit corrections
SB 1049-1 identifies two features of the PERS pension program that have contributed to generating excessive pension payouts – the lack of a reasonable benefit cap for highly-paid employees and the use of a formula that double counts inflation when converting Money Match balances into lifetime pensions. See Solution #3 in our list of “Seven Sensible PERS Solutions” at www.PERSsolutions.org.
PERS was designed to deliver pensions in the range of 50% of final salary, in addition to Social Security, after a 30-year career. Over the last three decades, pensions for 30-year employees have averaged 78% of final average salary and, since 2003, have been supplemented by a second retirement savings plan. Clearly, there is room for benefit corrections to align future payouts with the system’s target for an adequate retirement income. The benefit corrections contained in SB 1049-1 are long overdue.
Further, it is important to acknowledge that the OPSRP benefit plan created in 2003 was stripped of the excesses of the Tier 1 and 2 benefit plans. There are no Money Match options, guaranteed rates of return on employee accounts or use of sick leave or vacation balances for employees, now two-thirds of the public workforce, who are in the OPSRP benefit plan.
Under SB 1049-1, OPSRP benefits will remain intact within the $195,000 salary cap. These benefits compare favorably with plans in neighboring states. The benefits provided by the Washington State pension plan for teachers, by comparison, are about two-thirds of the value of Oregon’s OPSRP plan.
Reforming the practice of re-employing retirees
Finally, we are pleased to see in SB 1049-1 the proposal we developed to reform the manner by which state law allows the re-employment of PERS retirees who continue to draw full pensions. The current practice allows employers to forgo payments to the system for these retirees and shifts more of the burden of the system’s legacy costs to younger employees. Further inequities result from limiting these re-employment deals to Tier 1 and 2 retirees only.
As proposed in SB 1049-1, employers will now have to make full payments to PERS for these re-employed retirees, which should generate in excess of $50 million a year to buy down of the system’s unfunded liabilities. Also, as we recommended, the re-employment option will be expanded to full-time service for Tier 1 and 2 and OPSRP retirees.
Given the workforce recruitment challenges that will arise with the infusion of an additional billion dollars a year into K12 budgets, we strongly support this expansion of the re-employment practice for a limited period. The five-year limit should enable school districts and other public employers to address recruitment and retention challenges while ensuring that they work to expand promotional opportunities for younger workers during this period.
We also recommend that such re-employed retirees contribute to the buy down of the UAL through a “salary sacrifice” provision that will enable them to become part of the solution to addressing the legacy costs of the system.
DOWNLOAD: Projected Savings for Services from PERS Reform Packages (5/11/19)