STUMP » Articles » State of the Pensions: Oregon » 1 June 2019, 18:12

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State of the Pensions: Oregon   


1 June 2019, 18:12

Yes, my blogging has been lighter of late (lots of real life stuff for me to do, including grading actuarial exams), but there has been a lot of pension-related activity, and especially public pensions. I may not blog it here, but I sure do update my watch threads at the Actuarial Outpost.

Some seems to me to be just the same-ole-same-ole, and I don’t have high hopes.

But let me amass all the stories I can find for each of the entities being profiled.

Let’s start with Oregon.


In case you’re not interested in my commentary, here are all the Oregon-related pension stories I came across recently. This is in reverse chronological order (mostly) – so you can track the changes which occurred.

So what’s going on, exactly?


There is one Oregon pension in the Public Pensions Database.

Evidently, this includes all the teachers in the state (and university profs, etc.)… and here is what the funded ratio has been doing:

(oooh, the proverbial 80% funded!)

Note that this is in line with similar pension funds in the rest of the U.S. This does not mean that’s a good thing. Its peer funds are also in trouble, and take a look at this contribution rate graph to see why:

Look at that. Before I talk about the Oregon pattern (and it does look odd), look at that yellow line.

That inexorably climbing yellow line.

That’s the “required payment” by employers as a percentage of payroll in the peer group. It has been inexorably rising, not only because many of those employers have not been making full payments, but also because there’s funky stuff making this sort of ramp-up in costs likely.

Now, Oregon doesn’t have that smooth increase, and I’d probably have to look at the details… which I’m not going to do right now.

But we can see that, since 2013, Oregon employers of PERS participants had been paying about 10% of payroll.

And it jumped up to 13.1% in 2018. “Oh, it’s just 3 percentage points extra!” the innumerate cry.

It’s an increase of over 30%.

You think they can just absorb a 30% increase in contributions to the pensions?

And that’s before I even start digging into what’s happening in 2019. [Also, it looks like that 13.1% of payroll contribution may be misleading to me… due to the info I found in various news articles, which are quoting much higher contribution rates.]


So, I guess that the municipalities swallowed that 30% contribution increase… but wait… there’s more!

Let’s grab one of the stories from above, from April:

Teachers must be part of the PERS solution:

Gov. Kate Brown finally did on Friday what many have long urged her to do: proposed real action to shore up the Public Employees Retirement System. Whether the most controversial pieces of Brown’s plan ever come to pass is anyone’s guess, but the reason for them is not open to question.

The howls are coming from the business community and from teachers. Both should dial back the volume and consider the consequences of continuing to do nothing.

Majority Democrats in the Legislature are pushing a business tax plan designed to raise $2 billion for schools. Teachers and school supporters are clamoring for more education dollars to keep class sizes down and improve graduation rates.

But even if the new revenue materializes, school districts still face mounting pension payments driven by the PERS system’s unfunded liability. PERS actuaries forecast a 38 percent increase in pension contributions for school districts in the coming biennium, totaling $1.1 billion.

Brown’s announcement Friday of a plan to address those pension payments would tap a variety of revenue sources, including diverting some of the income-tax kicker rebate to schools, dedicating a portion of capital gains and estate taxes and instituting a temporary surcharge on state licenses.

So a 38% increase after an already 30% increase.


Yeah, you can see why various entities were calling for something to be done.

FWIW, there were multiple pieces at the top where they talked about “revolting Republicans”, and the revolt was against the state tax increase, which would have been to go into the pension contribution.


I have written about why teachers pensions have been a problem.

Various proposals that were put out there were having the teachers increase their own contributions to the pensions, not only the employers.

The teachers were not well pleased with this. Okay, none of the public employees are happy about this, and the teachers outnumber everybody else.

From April, in response to the governor’s proposal – OREGON GOV. KATE BROWN TURNS HER BACK ON PUBLIC EMPLOYEES

In last year’s gubernatorial election in Oregon, Kate Brown defeated State Representative Knute Buehler. We’ve written about how anti-pension Buehler is before: he expressed interest in switching all newly hired public employees to a defined contribution system. Public employees rallied around Gov. Kate Brown because she was pro-public pension, believes in workers rights, and is an ardent supporter of public education. What they didn’t know was that Brown would eventually turn her back on public employees and their pensions.

On April 12th, Governor Brown rolled out a plan to “shore up PERS funding,” which is currently 80 percent funded – one of the best funded systems in the nation.

Yeaaaah, I wouldn’t crow about that. First off, it’s not true.

In browsing the Public Plans Database, I did a selection from fiscal year 2018 (the most recent fiscal year available) and fiscal year 2017 (as there are more plans with complete data from that year).

For fiscal year 2018, Oregon is ranked 41st out of 129 plans. An excerpt:

For fiscal year 2017, Oregon was ranked 74th out of 175 plans.

Secondly, it’s irrelevant where it lands in the ranking. We could talk about valuation assumptions (of course), but also if one is top of a list with a lot of extremely distressed plans… ranking doesn’t tell you how good 80% is.

But I also want to direct you to the funded ratio graph again:

At the top of the market in mid-2008 (before the drop), the pension was better than 110% funded. It dropped down to 80% funded AFTER THE MARKET DROP.

In a decade of market growth, Oregon’s pension fund has essentially treaded water. What if another market drop occurs? What funded ratio would it be at then, eh?

Back to the piece:

Legally, the governor may run afoul of the state constitution with this plan. According to the 2016 Legislative Counsel analysis, it is unconstitutional to require current employees to pay for PERS’s unfunded liability. Even if a bill was drafted to find a loophole around the state constitution, the governor’s proposal would create a new system that has never been challenged in court.

So, I haven’t linked to the final plan, but this is something I’ve asked about Tier II of Illinois TRS:

But here’s the deal: money is fungible. As long as current employees aren’t paying higher than their normal cost, then the employer contributions would be covering the unfunded liability (plus whatever is left over from the normal cost). (Reminder: normal cost is the cost of the pension benefit accrued by the active worker that year.)

Someone else did address some of the arguments being made:

The five myths of PERS reform:

Myth No. 1: Oregon PERS is better funded than most state pensions.

Oregon is in better position than other states systems as measured by the percentage of pension debt that is funded, but the unfunded portion is still huge for such a small state. We are one of the worst funded states when you look at our ability to pay our debt — the ratio of our unfunded liabilities to the size of our incomes, tax base or per capita. In fact, studies show that per capita, we are worse off than debt heavy California. As the editor of the Bend Bulletin put it, “It’s like towing a yacht with a Prius.”

I don’t know if that’s true, for what it’s worth.

When I go to the State Data Lab, it says Oregon has a taxpayer surplus and that California is in a big deficit, per taxpayer.

If I go to the Tax Foundation site, their tax burden ranking is a bit old, but Oregon is at #10, compared with #6 for California.

When I look at the percentage of state revenue needed by state, California has a much higher percentage for pensions compared Oregon.

So my point — I don’t think this claim is necessarily true.

Myth No. 3: The Oregon State Supreme Court has ruled, and there is nothing more we can do to lessen our PERS obligation.

In 2015, the Oregon Supreme Court recognized its previous misinterpretations of contract law and overturned its position that PERS obligations could not be changed once employment was initiated. In its new position, outlined in the case Moro v. State, benefits and who pays for those benefits can change until the time of retirement.

This is not true in places such as Illinois, of course.

Myth No. 4: Most of the burden is generated by PERS Tier 1 and 2 retirees, who have retired, so there is nothing we can do.

Tier 1 and Tier 2 beneficiaries have generated most of the unfunded liability. But Tier 1 and 2 members still comprise more than 40% of payroll in the workforce. A lot of costs to school districts could be offset current employees would contribute (Tier 3 at a lower rate since they have lower benefit structure), to the cost of their PERS pension.

It is long past due, since we have been the only state in the nation where our government employees have not contributed to their pension fund. It’s true that about 70% of the PERS debt is attributable to those retired, and there are limited ways to recover these legacy costs.

In general, for the pensions in trouble, the problem is people who are already retired. When you can’t even fully cover their liabilities, you’re in real trouble.

I’m looking at you, Illinois, New Jersey, and Kentucky.

Myth No. 5: PERS reform “break the promise” made to retired government employees.

PERS reform should not and cannot, based on court decisions, take away benefits from government employees who have retired and are counting on the earned benefits. We owe these benefits, both legally and morally, that have been constitutionally promised.

However, some of the past contracts have been excessive and cannot continue without change for those who have not yet retired. A lack of PERS reform for current employees will perpetuate a classroom funding crisis in Oregon that has gone on for much too long.

— Former state Rep. Knute Buehler, R-Bend, was the Republican candidate for governor in 2018.

Hmmmm. As noted above, this is the person that the public unions were against. And they found out that electing a Democrat did not fix the fundamental problem.


So, let’s look at the final proposal.

After tight vote, Oregon governor to get pension reform bill

SALEM, Ore. (AP) — After looking like it would fail, the Oregon House was able to narrowly send the governor a proposal Thursday that would rein in rising pension costs by trimming public employee retirement benefits.

Lawmakers initially voted down the proposal Thursday 31-29 with nine Democrats and all Republicans voting against. The chamber remained in suspense for over a half an hour as legislative leaders called a recess to convince defecting Democrats to change their votes.

In the end, Reps. Andrea Salinas and Mitch Greenlick returned to the floor and, without comment, switched to a “yes” vote, sending the measure to Gov. Kate Brown who has indicated she will sign the measure.
The plan essentially refinances the PERS debt, extending the state’s repayment period from 20 to 22 years. More controversially, the measure also redirects 2.5% of employee salary toward PERS. That translates to a 7 to 12% cut to employees’ secondary retirement account, which is a 401(k) type plan that supplements the public pension.

The proposal is expected to save school districts tens of millions of dollars, according to data provided from the Speaker’s Office. Portland Public Schools, for example, would save over $50 million in the 2021-2023 biennium.

But public employees__which include teachers, firefighters and child welfare workers__fiercely oppose the idea, saying that the state is forcing workers to pay for a problem they didn’t create.

Yes, and the taxpayers didn’t create the problem either.

Everybody is going to have to give up a little.

Opponents also said the measure doesn’t make any meaningful efforts to pay down the debt, and that lawmakers will still have to return to the Capitol and confront this issue again in a few years.

Some Republicans and Democrats echoed that sentiment on the floor, with many saying the reform isn’t substantial enough and that they made a promise to public employers not to cut benefits.

A statement from the governor’s office said that the legislation stabilizes PERS rates and that, “going forward, Gov. Brown will not look to public employees for further contributions.” She will instead look for other sources to pay down the debt, according to the statement.

Oh, lord, I think the “other sources” will be a pension obligation bond. You can jump down to the end of the post to see why I think that.



Oh, all right. Here is the argument.

How Oregon State Pension Mismanagement Led To $26 Billion Underfunding

Dramatic investment underperformance

Based upon the pension’s March 2019 financial statements, the pension has dramatically underperformed (11%) versus the Russell 3000 index (16%). That’s 5% annual underperformance on a $75 billion portfolio, or nearly $4 billion a year. Let’s call it $40 billion over the past decade, without compounding.
High fees

In the same interview, the CIO demonstrated a callous disregard for the high fees the fund pays. “Skills are sufficiently rewarded in certain alternative asset classes, like private real estate, private equity, minerals, mining, timber, agriculture,” he said. Spoken like a true ex-Wall Streeter.

Paying Wall Street gunslingers billions to chronically underperform is “sufficient reward?” Let’s ask state workers and taxpayers how they feel about that.

Oregon deserves better, in my opinion.
Gambling in high-risk investments

Let’s talk about the pension’s reckless gambling in high-cost, high risk funds.

It appears the pension has almost 45 percent of its assets invested in high-cost, high-risk so-called “alternative” investments. It’s reckless and irresponsible to gamble in hundreds of these funds which lack many of the hallmarks of prudency, such as transparency, liquidity, and low fees.

For example, over 20 percent is in private equity investments which utterly lack transparency. Neither the public, nor the OPERS staff, really knows what’s going on with these investments.

Okay, let me address these in order:

1. Comparing one year of investment performance (or was it only quarter-to-date… really? That’s what you’re going with?) is stupid for pensions. Why not compare a 10-year or 20-year return?

2. I agree that high fees don’t make sense, necessarily.

3. High risk investments. First, I’m not seeing 45% in high-risk assets:

So, let’s see: 10.7% real estate, 20.8% private equity, 7.7% commodities, 2.3% hedge funds. That’s about 42%. I guess that’s “almost” 45%, and maybe it was 45% in the 2019Q1 report.

I do question the appropriateness of using private equity or hedge funds in public pensions, because of the opaqueness of the assets. Real estate and commodities, though — those are not so opaque. So one can get some good valuations there.

Now, this crap was dumb: Oregon’s CIO Prepares ‘Snarky Remark’ to Defend Millions in Fees to Fund Managers, but let’s look at the fund performance:

So, if the asset managers screwed them over, pretty much all public pensions were being screwed over. (And, note, the peer funds had higher allocations to alternative assets than did Oregon).

I assume Ted Siedle would argue that — in general, he has argued against high fees and alternative assets for public pensions. I do agree with him there.

But that means there’s nothing special about Oregon’s situation.

And frankly, it’s not really all that special with respect to public pensions.


Oh, by the way, Oregon State Treasurer Tobias Read decided it was a dandy time to join with my own state’s comptroller to make noises about inclusion of people with disabilities.

Here’s a link to the NY press release: National Investors Call for Workplace Disability Inclusion

Investors representing more than $1 trillion in combined assets, led by New York State Comptroller Thomas P. DiNapoli and Oregon State Treasurer Tobias Read, today called on companies they invest in to create inclusive workplaces that can benefit from employing the millions of talented people with disabilities who remain underrepresented in the workforce. Signatories to the joint statement included New York City Comptroller Scott Stringer, Illinois State Treasurer Michael Frerichs, the California State Teachers Retirement System, and Fortune 500 asset manager Voya Financial.

“Disability inclusion provides businesses with a great opportunity to improve their bottom lines, while boosting diversity and innovation,” said Comptroller DiNapoli, Trustee of the New York State Common Retirement Fund. “We want to know that our investment dollars are being used to maximize a company’s potential and its long-term profitability. Disability inclusion expands the pool of talent companies can hire from and creates welcoming workplaces that foster different perspectives, giving an enterprise a competitive edge.”

“Companies that embrace disability inclusion in the workplace benefit from increased innovation as well as profitability,” said Oregon State Treasurer Tobias Read. “We are asking the companies we invest in to adopt policies to improve the representation of people with disabilities in their workforce and continue to identify opportunities for improvement.”

And more blah blah blah.

Look, I have a son with cognitive/behavioral disabilities. I would love for him to be gainfully employed when he’s an adult. But ffs, his skills are fairly limited right now. He can be extremely disruptive. This may change by the time he’s an adult, but come on. Hiring him is not necessarily going to help the pensions achieve their investment goals. This is an extreme reach for relevancy.

Oh, and Oregon is part of an anti-gun group of funds. Again, priorities, guys.


In older STUMP posts, I saw Oregon looking at issuing pension obligation bonds, and then I found out they already had issued a bunch of POBs. That was from October 2016.

My comment then:

See what bad things happened and don’t do it again.

And “maybe we might get lucky!” after one round of Russian Roulette doesn’t mean you should try it again.

So we shall see what will happen with the new pension change.

I think they’re still going to have trouble.

And the governor said “other sources”, so I’m expecting this awful idea to bubble up again.

I hope the next market “correction” will occur before she does that, though.

Best wishes, Oregonians!


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