Without fix, PERS losses threaten future.

Byline: AL KING For The Register-Guard

OREGON'S PUBLIC Employees Retirement System losses are turning into an Achilles heel of our state and local governments' financial future. The guarantee of an 8 percent annual return during down investment years is proving to be unsustainable.

Recent headlines revised Oregon's 2001 PERS shortfall to $9.7 billion from $8.7 billion, and the total through October 2002 brings the total losses to about $15.4 billion. This is greater than the state of Oregon's $11 billion budget for two years. Oregon cannot sustain rising future losses. PERS must become sustainable, and at the same time it must remain an attractive employee benefit.

PERS investments have been managed prudently and successfully; however, the PERS Board has not retained adequate reserves in good years to fund losses in down years. Losses are funded by increasing the contributions of employers - the state or local governments. This rate has raised from about 9.5 percent of payroll in the 1990s to 12.5 percent currently. The rate is going to about 16 percent to cover the 2001 losses, and is projected to be 20 percent after 2002 losses. The contribution rate tops out at 30 percent in 2016, assuming normal market volatility.

Since payroll is about 80 percent of Oregon's budget, this will constitute about 15 percent of Oregon's future budgets to retain current service levels - or, if there is no increase in funding, a 15 percent reduction in services. Government leaders in Oregon who would like to see an increase in school funding are now acutely aware that the public will not support increased taxes if the increase is perceived as paying for public employees' retirement plan guarantees.

Last August, I invited the top actuaries of a Fortune 500 insurance company to visit with PERS to see if they might have some suggestions for how to meet the PERS obligation of an 8 percent annual guaranteed return. The conclusion was far more sobering than I had feared. Oregon PERS is probably the most complex retirement plan in the world and is more generous than virtually any private sector retirement plan. Potential future losses threaten to overwhelm Oregon's ability to provide service and meet all future retirement obligations.

In the early days of PERS, we had many employees with modest account balances and the size of the system was small in comparison with the state's general fund. Now, PERS is a huge portfolio covering one in 10 adult Oregonians, and we have thousands of career employees with large account values with careerlong investment accumulations. When the stock market drops, the difference between the 8 percent guarantee and market performance can easily generate a loss equal to the full value of Oregon's total annual budget. This is not sustainable - and as the guaranteed values continue to rise, then the potential for future losses increases. Oregon may be nearing the end of the era when we can meet all the retirement plan obligations and satisfy the 8 percent guarantee.

Oregon can continue to provide generous contributions to employee PERS accounts and honor its pension obligations, but additional losses could exceed our ability to live up to this responsibility. Employers and PERS participants alike are looking ahead at increasing obligations and are concerned about this issue.

The answer to making PERS financially solvent into the future is to make the earnings benefit sustainable. This would mean that participants choosing a variable account would see their account balances rise and fall with the market, and employees desiring a guarantee would accept the going rate on guaranteed accounts for reasonable periods of time, or some combination of both. Public employees would have the same opportunity and risk as private sector employees. Oregon would need to continue as a prudent investment manager, but would not face liabilities that can exceed its ability to budget or raise taxes.

Some people propose balancing Oregon's budget by reducing PERS benefits or salaries, but I believe Oregon's public employees are paid fairly. They should not be the focus of balancing our budget.

However, if we don't control PERS losses quickly, we will see PERS retirement accounts financially pitted against school funding - because we will not be able to increase school budgets and pay for more PERS losses at the same time. This is a losing proposition for our employees, Oregon's citizens and our school kids. As horrific as such an outcome may be, it is also a strong possibility.

Changing PERS will require a concerted effort by negotiators, legislators, the Supreme Court, and collective bargaining units around the state. This is extremely difficult and time consuming. It will be tempting to claim success with only half measures, which could lead to even more difficult circumstances in our future. But we are not without hope.

Gov. John Kitzhaber initiated negotiations between representatives of all the stakeholders, and Gov.-elect Ted Kulongoski will make this issue a top priority. This issue will be central to Oregon's next Legislature, along with the budget and education funding.

Oregon does not have a lot of time to address this issue if we continue to lose $8 billion per year on PERS. Future added losses could put the entire PERS system and the budgets of state and local governments in peril, reduce our ability to continue to have a generous annual retirement contribution, and jeopardize our ability to fund schools and meet the missions of state and local government agencies.

Al King of Springfield represents District 11 in the Oregon House of Representatives. He serves on the House PERS Task Force, and is a member of the Springfield School Board.