Democrats appear to have lined up resigned support among business groups and public employers for their strategy to rein in the escalating costs of Oregon’s public pension system.
But they face united opposition from public employees and their unions on elements of the plan that would reduce retirement benefits.
The Ways and Means Capital Construction subcommittee held a public hearing Tuesday on the plan that legislative leaders unveiled last week. Senate Bill 1049, sponsored by Senate President Peter Courtney and House Speaker Tina Kotek, focuses on protecting public services by reducing current costs of the Public Employees Retirement System, but does little to reduce its $27 billion deficit.
In fact, two-thirds of the savings lawmakers are looking to generate come from extending the payback period for the current deficit by eight years. That would reduce employers’ required contributions to the system, but leave its funded status more vulnerable to an economic downturn.
The plan also includes a number of controversial modifications to employee benefits.
Public employees currently pay 6 percent of their retirement contribution into a defined contribution plan – similar to a 401K – that they have in addition to a pension. Democrats’ plan would redirect a portion of that 6 percent to the pension fund.
The change wouldn’t affect pension side of employees’ benefits but could reduce the balance in their 401K-like plans at retirement. It would be temporary – reverting to the status quo if the system’s funded status recovered sufficiently -- and lower paid employees would be exempted. But it could reduce balances in employees’ individual accounts by 7 to 12.5 percent at retirement, according to an analysis by the system’s actuary.
The bill also includes limiting the salary used to calculate some benefits to $195,000. It would reduce the interest rate that PERS uses to calculate members’ pension annuities under the system’s lucrative money match formula. It would also eliminate limitations on post-retirement employment, but maintain full pension contributions on retirees who return to work and use them to pay down the system’s deficit.
It’s not clear what conversations lawmakers had with union leaders before floating the plan. But a parade of union representatives and public employees told them Tuesday that they were dead set against any reduction in retirement benefits for current employees to pay for a deficit that is largely attributable to retirees.
Besides questioning the strategy’s fairness, they warned that the plan would cause a retirement exodus among the 47,000 employees who are already eligible to retire, undermining the current workforce and public employers’ ability to recruit and retain new employees. They also said employers would have to compensate employees at the bargaining table for any reduction in benefits, reducing any savings. Finally, they warned that the benefit reductions were legally risky, and would land the state back in court.
“This is a bad idea, plain and simple,” Jim Fotter, executive director of the Oregon Education Association, which represents some 45,000 educators in Oregon. “You can’t improve schools by losing educators and that’s exactly what would happen should this bill become law.”
Business groups, meanwhile, have filed four ballot initiatives that would make even deeper cuts to employee retirement benefits. Those initiatives include instituting a new 401(k) plan, requiring employee pension contributions of up to 6 percent of pay (versus 2.5 percent for older employees under the Democrats’ plan) and prohibiting public employers from taking on any new unfunded liabilities for public pensions. It’s unclear how many of those ballot measures would go forward if lawmakers pass the bill, or whether there would be sufficient financial backing for what would likely be an expensive campaign pitting business interests against public employees.
Tim Nesbitt, a former labor leader who runs a coalition of business groups backing three of those ballot measures, ticked off a number of reasons Tuesday why employee cost sharing was an appropriate step. He said it would still leave career employees with retirement benefits in excess of 50 percent of their final salary, which is what the legislature intended when it adopted system reforms in 1981 designed to increase benefits.
Nesbitt also detailed how some of the other benefit modifications would address some of the legacy issues that led to the structural deficit PERS faces today, including the money match formula.
He said business groups had always recognized that benefit reductions would have to be accompanied by efforts to refinance the system’s deficit. The question now, he said, is whether lawmakers are doing enough to reduce the system’s future costs to justify extending the minimum payment schedule.
“We’d hoped for more but if this is the best you can do, then we conclude you should do it,” he said. “It won’t mean you’re done with PERS because PERS is not done with us, but it will make a real difference for kids in today’s classrooms and for Oregonians in all walks of life. And that consideration ought to be what finally breaks the deadlock on this issue and provides a framework for further reforms in the years ahead.”
Like Nesbitt, employer groups said extending the deficit payback period would add risk for employers and taxpayers moving forward.
“I will be very candid, on the amortization, we’re nervous,” said Scott Winkels, a lobbyist for the League of Oregon Cities. “We understand why it’s happening. I think our comfort would be improved if we had additional revenues going into the system.”
Gov. Kate Brown floated a plan last month to tap a number of one-time revenue sources to hold down school districts’ PERS costs. Those included raiding the capital surplus in the state workers’ compensation insurance fund, redirecting tax refunds and dedicating windfall capital gains and estate tax revenues.
Those revenue streams are not explicitly part of Democrats’ new pension plan. Raiding the SAIF surplus was reportedly pulled off the table as part of a deal to head off business opposition to the new corporate tax plan that lawmakers passed Monday to raise money for schools.
State economists, however, issued an updated revenue forecast for the state Wednesday that showed taxpayers could receive a record $1.4 billion in “kicker” rebates next year because state revenues came in so far above the threshold the triggers the refunds.
Lawmakers are talking about using excess revenues to address various issues, including PERS. That could include the kicker.
Raiding those funds would amount to another tax increase and would require a supermajority vote by lawmakers. Redirecting the entire refund to PERS would only reduce its unfunded liability by 5 percent, and it’s unclear if lawmakers would use the money to pay down the deficit or generate more short-term cost savings for employers.
It’s unclear if lawmakers will try to tap the kicker to tackle the PERS deficit. But both Brown and Kotek issued press releases Wednesday suggesting that they will look to use excess available revenues to address a host of budget needs.
“I expect a substantial portion of these funds to be directed towards paying down our PERS unfunded liability, and further investments to be made in housing, foster care, our state police force, and towards college affordability so that our state’s prosperity is spread across every corner of the state,” Brown said.
Kotek chimed in, “Today’s economic and revenue forecast is good news for Oregonians. However, we need to approach these unexpected resources prudently. Any use of one-time funds should be focused on areas of significant need, such as housing and pension debts.”
Clarification: An earlier version of this story said Gov. Kate Brown and House Speaker Tina Kotek were contemplating diverting the personal income tax kicker rebate to fund PERS and other needs. There are additional end balances that could be available for those purposes without redirecting the kicker.