The Oregon Public Employees Retirement System (PERS) is set to take another massive bite out of public budgetsstarting in the 2027-2029 biennium.  Still reeling from an even bigger increase that took effect last summer for the current biennium, public agencies will feel unprecedented pressure as they struggle to absorb this new shock.

The two increases mean that by 2027, PERS contributions will have increased almost 80 percent over the 2023-2025 biennium, from $5.26 billion to $9.35 billion, over 25% of payroll.

Shocking as these increases are, they shouldn’t be surprising. They are the inevitable result of years of failures by a succession of PERS Boards.

Such a big spike in contributions could have been prevented. Its main cause is the depletion of reserve accounts, known as “side accounts,” established years ago to soften contribution hikes by tapping the accounts each biennium.

Responsible PERS boards would have planned for the end of the side accounts by gradually raising contributions each biennium to blunt the future increase. Instead, PERS Boards showed a stubborn unwillingness to raise contributions enough, leaving the agencies exposed when the inevitable contribution increase arrived.

The 2008 financial crisis should have been a wakeup call. Overnight, PERS funding crashed to 80%. Suddenly the board was facing a large unfunded liability, which means too little money coming into the system to pay promised pensions under current assumptions.

One key assumption that the PERS Board controls is the assumed rate of return on PERS investments. A large unfunded liability means the assumed rate is set too high—PERS investments would not earn enough to meet pension promises. Lowering the assumed rate produces higher contributions from public agencies but improves system funding.

How did the PERS Board react after 2008?

For five years, the PERS Board did nothing to increase contributions,  leaving the assumed rate of return unchanged. Finally a new board chairman arrived in 2013 and lowered the assumed rate for three consecutive bienniums. In 2019, progress stalled again. Only one reduction has been made since then.

PERS Boards failed to understand that keeping agency contributions artificially low is like backing up water behind an unstable dam. Eventually the deluge will come, as it has now with these enormous contribution hikes. And there may be more to come. Despite the billions of new money coming into the system, its funding is even worse than it was 2008.

Why did PERS Boards behave this way, and what can be done?

For decades, conflict of interest has marred PERS decisions and their oversight. Lawmakers, governors, and judges are all PERS members in some form. PERS members held half of the PERS Board positions before 2003 reforms. Today two out of five board members can be PERS members.

Whatever the motivations, the results are unmistakable. For decades, PERS Boards had their priorities backward. First, they approved such generous pensions that by 2000 many retirees were collecting pensions equal to their final salaries. Then, when the 2008 financial crisis exposed the cost of those decisions, they refused to ask for enough contributions to fund the pensions they created.

 Reform is long overdue.

Lawmakers must mandate that all five PERS Board members and their spouses have no connection to the PERS system, either as a beneficiary or in any other capacity. We’ve seen how badly PERS was managed with PERS members having substantial influence on the decisions. Only by having a truly independent board is there hope for the PERS system.

Meanwhile, as public agencies scramble to manage over $4 billion in added PERS costs by 2029, we wait to see what PERS hands them next.