It was very disappointing to see no mention in Kate Brown’s budget proposal about PERS, the 800-pound gorilla that continues to chew up a massive and ever-increasing chunk of state revenues.
While the State Supreme Court has famously blocked even the smallest PERS reforms, there are things that can be done without court approval. It is both troubling and puzzling why there is such a lack of urgency among our leaders to make some clearly legal, common-sense changes that will greatly mitigate yearly PERS cost increases.
The first change needs to happen at the Oregon Investment Council, which is responsible for managing the investments in the Oregon Public Employees Retirement Fund (OPERF). The sad truth is that investment returns on this fund have lagged both broad market indexes and the Council’s own benchmarks for over a decade.
The Council continues to cling to outmoded investment practices, including a preference for highly-managed investments versus passive investing and a very large overweight in private equity. The Council does not seem to see these poor returns as an urgent issue, if it’s an issue to them at all, and they continue on a business-as-usual path, unimpeded by pressure from our state leaders.
OPERF investment returns can be a lot better. For proof, look to the Nevada PERS fund, managed with mostly passive, index fund investments. It out-performed Oregon PERS by nearly one percent per year over the last decade. This might not sound like much, but on $75 billion in investments, it amounts to billions in returns over the decade that PERS did not receive.
The second change needs to come from the PERS Board, the entity that does the actuarial analysis of the PERS system and, every two years, sets the amounts that the public employers need to contribute to PERS. With the stroke of a pen, the PERS board can, and I argue, should modify these policies. Since they already have the legal authority to do so, modification of these policies would almost certainly withstand court challenge.
The PERS board’s assumed rate of return has not matched actual OPERF returns for years. This has resulted in large extra credits to high-tier PERS recipients (and increased contributions from public employers) to “make up” the difference between the assumed rate and actual returns.
The PERS board should, at each rate-setting cycle, set the assumed rate of return to the actual rate of return of the OPERF fund, annualized over the preceding ten years. This would all but eliminate the extra credits to high-tier PERS recipients. This action would have the effect of increasing the unfunded liability, but only on paper. It has no impact on the actual financial health of OPERF.
The PERS board should also reform its policy for amortizing (i.e. “paying off”) PERS’s unfunded liability. Currently the policy employs an amortization that can only be described as draconian: it sets employer contributions so that the unfunded liability is amortized over at most 20 years, and, for some funds, much more quickly. This creates unnecessarily excessive employer contributions.
Why is such an amortization schedule unnecessary? First of all, the PERS system’s unfunded liability is not all that large compared to many states’ liability, even when the assumed rate of return is lowered.
But more importantly, consider this. The worst decisions regarding PERS, the decisions that set us on the path where we are today, were made 40 years ago, in the 1970’s. If it took 40 years to create this problem, why do we need to solve it in 20? Such a harsh policy unnecessarily sops up an additional several hundred million dollars in state revenue yearly.
So I am calling on the PERS board to change its policy and amortize the entire unfunded liability over a 40-year period.
Increasing OPERF returns, setting a realistic assumed rate of return, and easing the amortization period of PERS’s unfunded liability will result in dramatically lower PERS yearly contributions. All of these changes can be done without new legislation and within the authority of these bodies. It will take courage, an openness to change, and critical thinking by all involved in PERS. I hope they will take up the challenge.
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