“PERS Investments Lose Billions in Bear Market. Unfunded Liability Explodes.”

A newspaper headline in a dystopian novel? Maybe. But it’s becoming increasingly likely we will soon see something like this in a newspaper near you.

There was a time when PERS investments posted handsome returns. But the 2008 financial crisis changed everything, and to this day, they are posting mediocre returns at best. For the eleven years spanning 2008-2018, PERS investments returned just 5.49 percent annualized. (Don’t try to find this number on the Investment Council’s website. They have quietly removed all history prior to 2009.)

But what is most troubling about PERS investments is that even though we are near the top of the current economic cycle, PERS still finds itself in a very precarious position, with a high unfunded liability and the likelihood of big losses when the economy falls into recession.

For a clue as to how much PERS could lose if the stock market posts a significant drop, we need only look back to last year, when PERS investment returns were barely above zero. Most troubling was the performance of its public equity portfolio, the largest single asset class in the portfolio, at about $26 billion.

In 2018, the PERS public equity portfolio lost over 10 percent, over twice as much as the S&P 500. If we extrapolate a loss like this to a recessionary stock market when the S&P could easily drop 20 percent or more, PERS will face disaster: losses in its public equities could erase close to $10 billion from the value of PERS investments, making today’s unfunded liability look like the good old days and likely triggering a major crisis for the state of Oregon.

How are the legislature and the PERS Board responding to 2018’s warning? By placing a priority on keeping contributions to PERS low. Huh? If there was ever a time when more money than ever should be going to PERS, it is now, before the real crisis hits. But public employee unions and other special interests have prevailed in their campaigns to spend more on state services, like education, and less on PERS.

Recently, the PERS Board examined its assumed rate of return for PERS investments, a crucial number that affects how much public agencies will pay into PERS. If the rate is lowered, PERS contributions will be higher.

I testified at both their May 31 and July 26 meetings and pointed out their current rate of 7.2 percent is still way above actual PERS returns. I urged them to reduce their rate further to better fund PERS. Instead, they declined to reduce their rate at all, despite lowering it three times in recent years.

So, we should all be very worried.

With the assumed rate of return now set for the next two years, there is only one substantial action left that could possibly mitigate the worst of the coming disaster.

The Oregon Investment Council should immediately act to correct the dangerous asset allocation in its public equity portfolio that led to the big 2018 decline. With more than half the portfolio is invested in foreign stocks, it is perfectly positioned to get clobbered in the next downturn (as we saw in 2018), as most foreign countries, including the largest economies in Europe, are in a far weaker position than the United States.

Months ago, I wrote a letter to the Investment Council expressing these concerns and predicting significant losses in a market downturn. The ever-unaccountable and ever-opaque Investment Council never acknowledged my letter, despite the troubling results of 2018.

We Oregonians can do a lot better in dealing the PERS crisis. But it will take something that is in short supply among the agencies who manage PERS: courage, and a resistance to special interests who place their own agendas above the best interests of PERS and the rest of us Oregonians.