Reaction to the PERS Decision

Understandably, there has been considerable reaction to last week's Oregon Supreme Court decision that went against the PERS beneficiaries.  It didn't quite take away as much ($1.6 billion) as the earlier decision gave to beneficiaries ($2.1 billion), but the winners and losers aren't the same folks.  A number of retirees will have to pay back some of the money they've received...

That money will come from the accounts of 75,000 public employees who joined PERS before 1996 and from monthly payments to 36,000 retirees who left public service after April 2000.

It's been interesting reading (and gaining via discussion) the reactions of various people to the decision.  A whole bunch of past and current government employees are blaming Governor K.  How exactly was he supposed to prevent this Supreme Court decision? 

At any rate, I'll use the following sensible Salem Statesman Journal editorial as the base for some thoughts.  The SJ is also a good place to read a fair amount of venting about the decision. 

If you're looking for someone to blame in the PERS fiasco, start with the weak-willed pension board members of the past. They shoveled money into public workers' retirement accounts instead of holding enough in reserve. The result: Retirees are stuck with a bill topping $1.6 billion. Yes, that's "billion," as in $1,600,000,000 -- a Phil Knight-sized bundle of cash.

Retirees won't see much of that bill. Much of it simply will be lopped off their future retirement checks. But some retirees must repay thousands of dollars to the Oregon Public Employees Retirement System. Some could see their pension drop by 10 percent a month.

That's absolutely unfair to those retirees.

Unfortunately, it's also the best route out of this debacle.

The Oregon Supreme Court on Thursday refused to block those repayments and reduced pensions. The court reasoned that the legal challenge was moot because of a settlement between governments and the new PERS board, along with pension changes made by the 2003 Legislature. But by failing to address the legal issues head-on, the high court may have left the door open for continued lawsuits and uncertainty.

The PERS Board trustees did a poor job of managing the billions of dollars entrusted to them.  In 1999, they gave the beneficiaries a whopping 20 percent return when their guaranteed 8 percent return is already more than is sustainable via historical long-term market returns.  To payout that money, the trustees underfunded the reserve account, reducing their ability to withstand a market downturn. 

That downturn highlighted their risky investing style that left not the beneficiaries but us taxpayers owing billions to recoup the losses.  Balking at tax increases to cover those losses, we now have shorter school years, more crowded classrooms, less state police, etc., etc.  And if we complain about the still-unsustainable guaranteed annual PERS increases, too many folks reflexively and ignorantly presume we must be anti-government, right-wing zealots.  With our federal budget, how is being fiscally responsible a right-wing trait?

It's not the trustees who are punished for their lousy decisions...with this Supreme Court decision it's the retirees who received the extra money who will suffer.  We know by Oregon law that the maximum amount their retirement checks can be reduced is 10 percent.  Few face that large of cut, though from reading some of the feedback, a few folks evidently fear worse.  I wonder how many of them planned ahead and kept money in reserve just in case the court decision went against them.  Did the trustees warn them adequately?

Do the retirees have to pay back the cash via lump sum or have an amount removed from their paychecks for a period of time?  Won't they have to file amended tax returns, which will have the state paying out a bit of the revenue from its strained new budget?  Will the state change the law to allow public retirees to work more than about half-time to supplement their incomes?  And with further litigation on the topic rather likely, will any of it delay or change the answers to these and other questions?  One thing we do know is that governments are usually better at taking money we owe them than at paying what they owe us.

Here's what happened. Once a model pension system, PERS ballooned out of control over the years. Its board and the Legislature focused on putting the most money into workers' retirement accounts -- a reasonable goal, except it ignored the huge long-term financial obligations being created. A few folks tried to sound the alarm, but they were derided as being anti-public employee.

As PERS rode the stock-market boom, it reaped big returns on its investments. It then overpaid worker accounts in 1999, making the same mistake as many U.S. consumers: spending for the present instead of saving enough for the future. When the economic downturn came, PERS was ill-prepared, just like a homeowner who'd bought too big a house or had gone overboard on credit cards.

PERS was in such dire straits that Republicans and Democrats cooperated in the 2003 Legislature to reform the system. The state Supreme Court struck down some of those changes earlier this year, a decision that benefited workers and retirees. The latest decision went the other way, siding with employers.

Many of the retiree complaints focused upon how the government had broken a promise to them by reducing their retirement.  True; sad.  Been there, lived that.  What amazes me though is how many of our PERS beneficiaries believe that retiring at 80 percent or 100+ percent of their working income (often before they're old enough to qualify for social security) is legitimate and fair for their years of effort.  Such luxuriant retirement systems are extremely rare because they're extremely expensive. 

When talking with Tier 1 friends, many quietly agree that they have a great retirement system.  The Tier 2 & 3 folks don't believe their retirement systems are that good, as their main comparison isn't what's typically found in society, but Tier 1.  The biggest complaint is that the workload continues to get worse for teachers, state employees, etc.  Thus, the folks feel they're earning every bit of their retirement and then some. 

When I posit that if their compensation weren't as high that the state, school districts, etc. could afford to hire more employees and thus lighten their workload, conceptually they agree, but their priorities become evident.  They're not willing to compromise on pay and benefits, and the government needs to come up with the money to hire more folks...somehow...as few of them are inclined to vote for higher taxes.  Little wonder we have fiscal problems.

How many people volunteer to accept less pay?  We've had and are still threatened with airlines going into bankruptcy because some or all of their employees won't accept less.  Of course, some folks like to bring up the fact that a number of airline executives have taken huge pay and retirements from these failing companies.  Obviously, that's inexcusable...but it's certainly not a reason to avoid addressing the fact that compensation beyond what the employer can afford must be fixed or the system will eventually fail.

On the macro scale, for current government workers those decisions generally offset each other. But the effect on many retirees is stunning, as their pensions shrink and some must make substantial repayments to PERS.

Although that seems unfair -- and it is -- consider what would have happened if the PERS board had broken the rules by putting too little into worker accounts. Retirees rightly would have demanded that PERS pay up.

In this case, the reverse happened. Through no fault of their own, thousands of retirees must pay for short-sighted decisions of the past.

Many of our government employees and retirees are very sensitive about what they perceive as Oregonian's blaming them for the state's fiscal situation.  They believe they work(ed) very hard for their pay and benefits and deserve every penny.  Most believe they've given up better paying opportunities to work for us, the public. In other words like most of us, they have an inflated opinion of their self-worth.  Our politicians (and the government unions) have worked hard to bring their compensation up to that inflated amount (which keeps rising), buying their votes and earning their political contributions with our tax dollars.   

When the PERS Board went above and beyond the call of duty in inflating PERS benefits, the City of Eugene sued.  Now that overpayment will be undone.  This Supreme Court decision basically focused upon procedural issues...it will have little impact on the considerable PERS structural issues which continue to weigh-down the state's finances. 

It's sad that the change will hurt some retirees.  But, the fact remains that guaranteeing 8 percent returns for Tier 1 employees means that PERS will continue to take a rising percentage of the state's budget for almost 25 years (previous blog here).  That will continue to squeeze our government services, schools, etc.  That has to change, and despite what many of our politicians and pundits say, there are ways to get it done (some ideas are in the comments of that previous link). 

There is no way to change PERS without causing pain to somebody.  That's why most of us taxpayers are in pain now...decades of changes in favor of the beneficiaries versus just a couple of changes favoring the taxpayers a bit.

Comments

[Jeff]

You know what's so amazing about all this? That a sensible editorial actually appeared in the S-J...

One thing I've seen the "retirees" (I have a problem with calling anyone that prior to their 65th B-day) complaining about is how much their medical insurance is costing them. Well, duh - they're in the highest bracket not covered by Medicare, and they stuck themselves there by "retiring" from a job with decent medical benefits prior to Medicare taking over.

Bloody "me, me, mine!" baby boomers.

[ronled]

The fat lady has not yet sung.

I argue here about the confinement of the City of Eugene case to the parties before the court. The proposition is that all the folks that were not a party will not be subject to the new rate ruling. The 20 percent stands, for folks that were not a party in the case, it will just take a couple years to make its way through the courts.

Take that very same reasoning, that of participation in the court action itself, and apply it to tier one. The tier one formulation was a creation of the legislature. Yet the case that led to the creation of multiple tiers was not a class action but rather just a subset of beneficiaries. The Strunk case recognized particular rights for tier-one folks, based, as per the Balmer exception, only on the basis of stari decisis. The effect of Strunk in rejecting modification of earlier rate rulings could be confined to the tier-one folks who were ALSO actual parties in the 1996 OSPOA case.

Bear in mind that the battle, in my mind, is among the various PERS beneficiaries because the 1999 ORS 238.600(2) provision that will eventually get addressed directly; forcing a pro-rata split of a finite and final fund.

"Compromise" is not something that a local government needs to voluntarily ask of workers. (That is an upside down view of the world.) The local citizens within a particular geographic territory merely offer what they are willing to offer, and no more.

There needs to be just one local government that simply says enough is enough and refuse to pay a single cent to PERB in employer contributions and the house of cards falls down into a single "final" determination of the claims to the fund. The Strunk case overturned the claim by the OSPOA majority that the tail of a few public employees could treat the citizens as if they were the subjects of a king and his band of loyal servants.

Stick in your mind the notion that the legislature fully and completely terminates PERS in its entirety. Every little battle and court opinion, today, must be considered in a light that allocates the finite fund among the various claimants. It is pure fiction and PR to think that the fund itself can step over and reach into the citizens pockets; but for very limited exceptions.