The PERS Board received some very bad news in January. Investment returns on the Oregon Public Employees Retirement Fund (OPERF) for 2018 were barely above zero.

Actuaries estimate that if such returns hold through 2019, an additional $1.6 billion will need to be contributed to PERS by public agencies for the 2021-2023 biennium. This is on top of the 2019-2021 increase of over $800 million, which caused widespread shock when it was announced two years ago.

But the bad news is likely just beginning. More on that in a minute.

How did we get to this point? State leaders get some blame, having failed to enact any meaningful reduction in future PERS benefits, even common-sense reductions such as disallowing employees to “spike” their final salary (and retirement benefit) with saved up sick leave and vacation. Public employees are to blame, too, for their lock-step opposition to even the smallest benefit reductions for future retirees.

But it is the Oregon Investment Council (OIC), the body that manages OPERF investments, which has played the biggest role in creating this mounting crisis. Mediocre investment returns going back more than a decade have added billions to PERS’s unfunded liability and are a major driver of the big increases in PERS contributions.

For the last 10-year period that included both a rising and falling stock market, 2008-2017, the OIC produced a return of barely 6 percent annualized. Contrast that to Nevada, for example, whose retirement fund grew at nearly 7 percent annualized over the same period. This is a big difference, amounting to billions that OPERF did not receive.

But this isn’t the worst of it. With its current investment practices, the OIC has created a loaded cannon aimed directly at all taxpayers in Oregon. Recall that when the financial crisis hit in 2008, the public equity part of OPERF, the largest single piece at nearly 40 percent of all OPERF assets, had what could only be described as a near-death experience, losing over 42 percent of its value, a full 5 percentage points more than the S&P 500.

A recession is coming. And the OIC could once again post outsized losses. How? Their public equity investments are excessively allocated to foreign equities. When the world economy begins slowing and eventually drops into recession, this portfolio will likely get clobbered since most foreign economies have not even fully recovered from the 2008 financial crisis, including some of the largest economies in Europe. United States companies will likely fare much better.

When one year of flat investment returns produces an additional PERS contribution of $1.6 billion, imagine the damage a drop of 10, 15, or 20 percent will do. Unthinkably massive additional contributions would be required to keep PERS solvent, triggering a fiscal crisis for the entire state of Oregon.

The PERS Board is rapidly running out of options to manage PERS funding in a stable and predictable way. Essentially, the PERS Board has been reduced to praying for better investment returns from the OIC. If past history is any indicator, their prayers will not be answered, and they will find themselves at ground zero in the state’s biggest ever fiscal crisis.