The Oregon Public Employees Retirement Fund (OPERF) has been cruising along for more than 12 years without a major decline. That’s good news, right? Well, not really.

Let us recall what happened the last time OPERF faced a large decline. The year was 2008, not a good year for most investors. But OPERF managed to post outsized losses. The public equity part of the portfolio dropped a shocking 42.8 percent, compared to a 35.6 percent drop in the S&P 500. And it took twice as long to recover as the S&P 500 – over 4 years compared to the S&P’s 2 years.

Has the Oregon Investment Council, the body that manages OPERF, learned any lessons from their near-death experience in 2008? Asked another way, does OPERF have better protection against steep drops than it had in 2008? In short, no it does not.

Let’s keep our focus on the public equity part of the portfolio. Public equity represents the largest single allocation in OPERF. At nearly $30 billion, public equity comprises over 40 percent of OPERF. So it is very important, especially given the experience of 2008, that this portfolio not be exposed to excessive downside risk. But with the current makeup of the public equity portfolio, it is once again positioned to take heavy losses when the economy falters.

The public equity portfolio uses a very unusual, and dangerous, asset allocation. The entire public equity portfolio is inexplicably managed under a single all-world benchmark. This benchmark holds the investment in U.S. equities to just 47 percent of all public equities. Not only does this allocation violate one of Warren Buffet’s axioms of never betting against the United States, this portfolio is now perfectly positioned to get clobbered when the next recession hits, since few foreign economies have fully recovered from the 2008 financial crisis, including many of the largest economies in Europe. Italy is already in recession, and many foreign banks are far from healthy.

Over my investing life, I have visited several financial advisors. Now I realize that comparing my little investments to OPERF may sound ludicrous, but no financial advisor I have seen has ever recommended such a low allocation to U.S. equities. The normal allocation is 65 – 75 percent U.S. equities.

The next recession is a lot closer than most people think. Twelve years without a recession is practically unheard of, and now the yield curve has inverted, considered by many to be a classic sign a recession is getting closer. And keep in mind there is a whole generation of young adults who were small children when the last recession hit. A recession could be exacerbated by these young adults if they react en masse with panic when their investments fall.

If the recession is severe, OPERF’s losses will be substantial, an outcome which would cause PERS’s unfunded liability to explode and shine a bright light on the policy failures of both the OIC and the PERS Board. That is one good thing that could come out of this scenario, but only if it jars state leaders into finally starting to question the policies of both the OIC and the PERS Board. Both organizations are long overdue for increased scrutiny, and it may finally force us onto a path that recognizes just how big the PERS problem is and how dangerous it is to Oregon’s future.