Sam Carpenter on PERS reform

Oregon faces a looming fiscal crisis due to PERS and its unfunded liability. We must honor our contracts with retirees and current government employees – but doing so will require massive reform that completely changes retirement benefits for all future workers. Band-aids and passing the buck to future generations simply will not do.

The Public Employees Retirement System (PERS) and its successor, the Oregon Public Service Retirement Program (OPSRP), will cost Oregon many billions of dollars over the next 30 years. How many billions? That’s a serious question that few politicians in Oregon want to honestly answer.

One number frequently cited is the $25 billion unfunded liability. But that’s only a fraction of the total cost. The $25 billion figure is only what is currently unfunded, and it is discounted using an annualized 7.5% rate of return on funds currently invested for PERS and OPSRP. Worse, these figures are based on one dreadful assumption: that Oregon will only make payments on behalf of those already retired or working in government today. The calculations do not take into account the reality that every new employee who enters the system down the road adds to the burden! And don’t fall for the ruse that the OPSRP reforms of the previous decade make the problem go away. The truth is, the Tier 3 OPSRP still contains a hefty defined-benefit retirement, with an ongoing liability only slightly lower than Tier 1 and 2 Tier PERS. It all adds up.

An honest look at the total cost of projected PERS and OPSRP defined-benefit payouts over the next 30 years adds up to approximately $200 billion.

That’s right. $200 billion.

There is only one way to describe what the PERS defined-benefit problem really is: an unsustainable government-produced Ponzi scheme that will come crashing down without massive and decisive reform. Cost-savings here and payment-schemes there simply can’t solve the problem. The system is doomed to fail.

So, what is the solution?

Simply put, the only way to undo the debacle of PERS is to kill it for all future employees. Court precedents – as well as the basic tenet that Oregon must make good on its obligations – say that there can be no meaningful changes to the existing contracts with current retirees and government workers for their earned defined-benefits. We must pay what we owe. But we must also end the cycle now. We recommend immediately instituting a freeze on all hiring under the current system – and killing the defined-benefit retirement model in Oregon government for all new hires. In short:

  • Make good on existing contracts and pay what we owe to existing defined-benefit retirement plans
  • Starting immediately, all new hires enter into an employee-investment driven 401(k) style retirement plan

In addition, Oregon must still pay out an average of approximately $1.7 billion per budgetary cycle over the next 30 years to make up for the remaining unfunded liability. While this is an expensive obligation (approximately 10% of Oregon’s general fund budget), it is achievable – that is, achievable only after we stop the ongoing explosive growth of PERS. But with good fiscal management and sound limited-government policy, Oregon can meet its obligations without raising taxes or sacrificing the quality of life for its citizens.

Finally, there are other factors that will assist reform. A booming economy due to the Carpenter administration’s systematic downsizing of government and a massive increase in government efficiency will ease the ongoing burden of PERS.