The Problem With Oregon PERS

The Oregon PERS system was created in 1945. During its seventy-one year existence, there have been two versions of PERS. The original version lasted from 1945 through 1970. Under that version, legislators and judges were not PERS members. The second version of PERS began in 1971 and still exists today. Under this version, both legislators and judges are PERS members and PERS benefits have been substantially increased.

The Original PERS. From 1945 through 1970, there were two constant PERS provisions:
(1) A PERS employee would receive a retirement benefit of 50 percent of final average salary (FAS), including social security, after a full career; and, (2) PERS employers and PERS employees each contribute half of the funding required for the retirement benefit. Employers funded 40 percent, employees funded 40 percent and social security, which was funded by equal employer and employee contributions, funded 10 percent. There were no exceptions to this joint employer/employee funding requirement.

The Second Version Of PERS. The second version of PERS began on May 7, 1971, when the Oregon Attorney General ruled legislators could join PERS. The following is a summary of many of the changes made to PERS made by the legislators between 1971 and 1989. These changes were made through a system controlled by PERS legislators and from which non-PERS Oregonians were denied any meaningful participation.

1971. One month after the Attorney General Opinion that allowed legislators to join PERS, the legislators enacted two PERS enhancements:

(1) They increased the employer’s funding requirement from 40 percent of the retirement benefit to 50 percent of the retirement benefit; and, (2) They added a Cost of Living Adjustment(COLA) to PERS retirement payments. Under the COLA provision, a retired PERS employees retirement benefit would increase each year by the cost of living increase in the prior year. That increase, however, could not be more that 1.5 percent annually.

1973.The legislators made three significant changes to the PERS benefits:
(1) They allowed a retiring PERS member’s unused sick leave to be included as part of his or her FAS. This benefit requires the employer to pay a retirement benefit for time the employee did not work.
(2) They again increased the employer’s funding requirement from 50 percent of FAS to 60 percent of FSA; and,
(3) They increased the maximum COLA increase from 1.5 percent annually 2 percent annually.

1975. The legislators passed two PERS laws for legislators only and one law that benefitted all PERS members:
(1) The legislator only laws provided that:
(a) any person who ever served in legislature could retroactively join PERS, making them the only persons who had ever been allowed to join retroactively; and,
(b) legislators were the only persons who could earn PERS retirement credit after age 65.
NOTE: In 1974 the people of Oregon passed the Oregon Ethics Code which had been referred to them by the legislators. Section 3(1) of the Ethics Code provided that no public official could use his official position or office to obtain financial gain for himself, other than for official salary, honoraria or reimbursement of expenses. But less than six months after the Ethics Code went into effect, the legislators violated the Section (3)(1) by passing the above laws which did not involve their official salary, honoraria or reimbursement of expenses and which had no purpose other than to provide personal financial benefit to the PERS legislators who enacted those laws.
(2) They also passed a law that applied to all PERS members which stated that all PERS employee accounts would earn a minimum rate of return each year and that the people of Oregon would guarantee that minimum rate so that if the actual account earnings did not equal the guaranteed rate, the people would make up the difference. The guaranteed minimum rate was to be decided by the PERS Board which was dominated by PERS members.

1979.The legislators passed the PERS pick-up law, which was to last for two years. The PERS pick up law provided PERS employees with a double benefit that significantly increased employer contributions:
(1) The first benefit allowed PERS employers to pay the PERS members employee contributions, including the employee contributions for the management employees who made the pick-up decision. The general PERS employee contribution is 6 percent of the employee’s salary.
(2) The second benefit provides that the amount picked up is not considered salary to that employee for any purpose except one. It is treated as salary only for the purpose of computing the employee’s FAS for PERS retirement benefit purposes. This artificially increases the employer funding requirement by another 6 percent.
In 2010, PERS estimated that 70 percent of PERS employees received the pick-up and that the PERS pick-up would cost $874,000,000 during the 2011 – 2013 biennium. That’s $437,000,000 per year which could havebeen used to hire 4,370 teachers for Oregon’s children but was instead used to pay PERS employee contributions.
1981.The legislators passed two new PERS laws:
(1) They made the PERS pick-up law permanent, rather than have it expire; and
(2) They increased the employer funding requirement from 60 percent of FAS to 100 percent of FAS.
NOTE:At the end of 1981, just eleven years after legislators were allowed to join PERS, the legislators had completely revised PERS. The 50 percent of FAS retirement benefit had been eliminated. The employer now had to fund a benefit equal to 50 percent of FAS, an increase of 150 percent over the 1970 contribution, and in addition to the employer funded benefit, the employee would also receive the employee funded benefit plus social security. The equal employer/employee funding requirement had also been eliminated by the pick-up. Today, at least 70 percent of the PERS employees pay nothing towards their PERS retirement, with the employer paying everything. The PERS legislators also created the following new PERS benefits: the COLA; the use of unused sick leave as part of FAS; and, the guaranteed minimum rate of return on employee accounts.

1983.The legislators passed the following laws:
(1) They required judges to join PERS. This new law provided that:
(a) Persons who became judges for the first time after 1983 were automatically PERS members if they were less than 72 years old. PERS judges had a 7 percent PERS employee contribution but the law required that 7 percent employee contribution to be picked up for the judges.
(b) Existing judges were given the option to join PERS or stay in their original retirement plan. If they stayed in the original plan, they had to pay a 7 percent employee contribution to that plan. If they joined PERS, however, the 7 percent employee contribution would be picked up for them. Joining PERS gave the judges a 7 percent salary increase, plus an increased retirement benefit, and it imposed a financially penalty on the judges who did not join PERS.
Under this law, judges became the only elected officials who were required to join PERS and the only employees whose employee contributions were required by law to be picked up.
(2) They changed the public records law to make nonfinancial membership records maintained by PERS exempt from disclosure. PERS interpreted this law as prohibiting the disclosure of the PERS status of elected officials.

1987. The legislators passed another law that allowed a small group of legislators to again retroactively join PERS.One of those legislators was John Kitzhaber. He was first elected to the Oregon legislature in 1979. He did not join PERS at that time. In 1987, he was the President of the Oregon Senate and he voted for this law that would allow him to join PERS retroactively back to 1979. He did not declare a conflict of interest when he voted for the bill and he then retroactively joined PERS, thereby gaining eight years of PERS credit that he otherwise would not have had.

1989.Legislators made PERS funding Oregon’s top financial priority by requiring all public employers to pay PERS assessments first. When there is not enough money to provide public services and to pay PERS assessments, public services are reduced so that PERS assessments can be paid in full.

After judges became mandatory PERS members in 1984, there have been many significant PERS cases most of which refused to allow PERS benefits enacted after 1970 to be reduced.
One case involved Ballot Measure 8.In 1994 the People of Oregon passed Ballot Measure 8 which amended Oregon’s Constitution to eliminate the use of unused sick leave as part of final average salary (created in 1973), the guaranteed minimum rate of return on employee PERS accounts (created in1975) and the PERS pick up (created in 1979). In 1995 PERS members sued to have Ballot Measure 8 declared unconstitutional. In 1996 the Oregon Supreme Court ruled Ballot Measure 8 unconstitutional. That decision allowed PERS members to keep the post-1970 PERS benefits that to date have cost the people of Oregon over $9 billion dollars. The 2015 Moro decision changed this so that now prospective reductions in PERS benefits are permissible.

The most recent PERS case involved the 2013 legislative reduction in the COLA that had been passed by the legislature in exchange for increasing taxes. This was Governor Kitzhaber’s Grand Bargain. In 2014PERS members sued to invalidate the COLA reductions. In 2015 the Oregon Supreme Court held that the COLA reductions for dates prior to the enactment of the 2013 legislation were invalid.

NOTE: Although the COLA reduction law was passed in exchange for tax increases, once the COLA law was invalidated, the tax increases stayed in effect. The PERS legislators who control the Oregon legislature could have invalidated the tax increases in the 2016 legislative session but they did not even try to do so.

It has been estimated that due to the COLA lawsuit decision and the under performance of the PERS investments employer PERS payment over the period July 1, 2017 through June 30, 2022 will be increased by at least $5 billion dollars. This will result in a severe reduction in government services, including K-12 education, public safety and human services, so that PERS payments can be made in full.

Since 1971, PERS laws have been made exclusively by legislators who were or who could become PERS members and since 1984 every PERS lawsuit has been decided by judges who were PERS members. Today, no PERS law can be made or changed without the consent of PERS members. While PERS members are entitled to a seat at the table when PERS retirement benefits are being decided, they are not entitled to every seat at the table. But that is what PERS members have had since 1971. Even though PERS members have never made up more than 8.5 percent of Oregon’s population, they have 100 percent control over the PERS laws. That is the problem with PERS. Non-PERS Oregonians who pay for PERS and make up the vast majority of the population have been excluded from any meaningful participation in what the PERS laws will be. This will only change when legislators are not allowed to join PERS and PERS lawsuits are decided by judges who are not PERS members.

Daniel C. Re
dcre@hurley-re.com