PERS 'reform' should proceed with caution.

Byline: PAUL HOLBO For The Register-Guard

FOR SEVERAL YEARS, some local officials and a few legislators have called for the "reform" of the Public Employees Retirement System.

Editors and political candidates gradually picked up the refrain, and in 2000 several local jurisdictions (including the city of Eugene and the Eugene Water & Electric Board) initiated lawsuits or passed resolutions. The past Legislature failed to take action except for establishing a task force `to provide viable recommendations' about PERS for the session now beginning. The new governor has joined the `reform PERS' chorus, while the new Legislature is expected to give this issue a prominent place on its agenda.

Judging from the statements of legislative task force members, as well as letters to newspaper editors, there is a great deal of misunderstanding about PERS. If there is to be a `reform" of PERS, misconceptions need to be corrected. In addition, it is useful to see who has been responsible for the PERS "problem.'

One unfortunate myth is that PERS retirees do not pay state taxes. From the beginning of PERS there was an exemption from state taxes on the pensions of PERS retirees, which continued for some years in large part because the Legislature thought that this exemption was a means of avoiding salary increases. In 1991 the Legislature enacted House Bill 2352, eliminating the state tax exemption for PERS retirees.

Retirees challenged this law in court as a breach of contract, among other matters, and in January of 1992 the Oregon Supreme Court ruled that PERS retirees had a contractual right to an exemption from state income taxes. However, the court said that the state of Oregon could collect such taxes and called on the Legislature to remedy the contradiction. Following further litigation, the Legislature ordered PERS to pick up the cost of increasing pensions by 9.89 percent to reimburse retirees for taxing their pensions.

In brief, it was the Legislature that created this PERS "problem.' The state continues to tax PERS retirees' pensions and places this money in the state's general fund, while PERS gets the bill for the compensatory payments to the retirees whom the Supreme Court judged to have been improperly taxed - amounting to $1.5 billion over the next 25 years. This $1.5 billion is a substantial portion of the total PERS "problem,' and it means that employer members such as the Eugene, EWEB and school districts must in turn pay more to PERS.

As for the much-publicized 37 percent (sometimes reported as 40 percent or 50 percent) recent jump in assessments that some local jurisdictions are to pay to PERS, it should be understood that this is the ratio of change, not the rate itself. The actual rate goes up 4 percent. So employers' PERS assessment of 10.7 percent of payroll costs increases to 14.7 percent of payroll. That's a 4 percent increase; 14.7 percent is 37 percent more than 10.7 percent.

Another myth is that PERS retirees earn more than they did when working. Rep. Tim Knopp, R-Bend, the head of the PERS task force, himself appears to believe this. The Jan. 5 Register-Guard quoted Knopp as contending that `retirees who worked for public agencies for 30 years or more often receive pensions much larger than their salaries were.'

This assertion is false in several ways. First, of 83,223 PERS retirees, only 2,131, or 2.56 percent, receive more than their final average salary. As for 30-year employees, in 1997 the 348 new retirees with over 30 years' service averaged 89 percent of final average salary. In 1999 the 303 new 30-year retirees averaged 95.9 percent of final average salary. Only in 2000 and 2001 did the 30-year retirees exceed their final average salary. Of the 3,763 new retirees in 2001, those exceeding their final average salary numbered only 423. The average retirement benefit for new retirees in 2001 was 74 percent of final average salary.

Second, using final salary figures for comparison can lead to significant misconceptions. For example, for health and other reasons, persons planning to retire sometimes reduce their last months of employment to part time, so their final salaries are greatly reduced. In consequence, they number among those whose retirement income is higher than their last salary check.

Third, some of the retirees who are allegedly overcompensated had participated in the risky variable program, which benefited from the stock-market boom of the late 1990s, as did many 401(k) plans in the private sector.

Former Rep. Al King, D-Springfield, a member of the House PERS Task Force, wrote in a Dec. 23 Register-Guard guest column that reforms should ensure that `participants choosing a variable account would see their account balances rise and fall with the market.' He appears not to know that this is already the case under PERS rules.

PERS retirees who took the risk of joining the variable program suffered sharp cuts in their retirement payments in February of 2002 (the month for annual adjustments) and will see their payments reduced sharply again on Feb. 1, 2003.

Those who complain need also to understand that there have been no ad hoc increases for PERS retirees since 1989, and that someone who retired that year now has 81.3 percent of the purchasing power available when he or she retired. The figure for 1981 retirees is 80 percent.

Still another complaint of letter writers, editors and legislators is that the PERS Board is the "problem.' These complainants specifically object to three PERS policies: 1) the money-match program, an optional pension formula, rarely used before 1991, which unexpectedly became popular and increased employer obligations when the stock market rose in the late 1990s; 2) an 8 percent assumed interest rate for non-variable accounts; 3) outdated mortality tables (resulting in too high payments now that people live longer).

As a result, the House PERS Task Force and others have called for board members to resign or be removed. But Democratic governors appointed all current members, and the state Senate (with Republican majorities since 1993) ratified their appointments. Is a new board likely to be better?

Recall, moreover, that the Legislature, not the board, created the money match program and dictated the 8 percent rate (see Oregon Revised Statutes 238.255). And the board, belatedly, has updated the actuarial tables (amending Chapter 459 of Oregon Administrative Rules 459-005-0055). The change will likely take effect on Jan. 1, 2004, and will reduce payments to future retirees.

My own impression from monitoring and occasionally attending PERS Board meetings is that the board does make proposals to the Legislature, and comments on changes in laws affecting PERS. But basically it implements the Legislature's decisions affecting PERS.

It should also be recalled that two studies of compensation in the 1980s (including one with the participation of Associated Oregon Industries) found that private employees generally received higher salaries and that public employees received better retirement and other benefits - and that there was rough overall equivalence.

Finally, it is worth remembering that public employees were required by state law to be members of PERS. (There were occasional exceptions in the 1960s, and some local jurisdictions did not take part in PERS).

Moreover, in the late 1970s, the Legislature mandated a state pickup of the employee contribution to PERS instead of increasing salaries, which the employees wanted in a time of rampant inflation. (Both sides had a short-sighted view.)

Consequently, PERS retirees are sometimes sensitive to the repeated implications that now they are `on the gravy train' or `living on easy street.'

In recent years, faculty members in public universities (some of whom move from one institution in the country to another) have been permitted to take part in the nationwide TIAA-CREF retirement plan and some other programs instead of PERS. Given the constant attacks on PERS, creation of a limited benefit Tier 2 for new hires, and demands for the abolition of PERS, new faculty (or new athletic coaches) will likely choose not to be affiliated with PERS.

Other state and public employees may face a different future. It will be interesting to see what new shape PERS has, or what is left of it, at the end of the coming legislative session.

The 8 percent assumed interest rate may become a cap rather than a minimum. Other changes and improvements are possible. A bold move would be for jurisdictions to invest more aggressively in order to match future obligations to employees now that the market is comparatively down.

The House PERS Task Force, in contrast, favors a more conservative investment strategy for the Oregon Investment Council.

This task force has come up with some good administrative and substantive ideas, however, as well as ill-advised ones.

The first step for lawmakers and the public is to separate myths from reality. The second is for the Legislature and the governor to proceed prudently and with eyes on the long run.

Paul Holbo of Eugene, a retired University of Oregon administrator, is a board member and past president of the Lane County Association of PERS Retirees.