The $1 Billion Elephant in the Room

Stories about former Duck football coach Mike Bellotti receiving large PERS payouts stokes the fire to reform how much pubic employee retirees should receive.Rep. Shawn Lindsay, R-Hillsboro, tweeted about it and coffee shop conversations clucked about it. Oregon public employers will have to cough up an additional $1 billion per biennium to keep up with financial demands of the Public Employee Retirement System (PERS). That will mean fewer teachers, firefighters and health care workers.

Ted Sickinger's account in The Oregonian reminded voters, public workers and policymakers that rising contributions to an underfunded PERS is the biggest single factor squeezing public budgets. According to Sickinger's report, PERS controlled $54.7 billion in assets in 2011, but that only covers 73 percent of its liabilities.

James Dalton, who chairs the PERS board, told Sickinger: "We have a $16 billion unfunded liability. The question isn't if you're going to pay. The question is when you're going to pay."

It isn't hard to see a connection between rising pension payments, along with spiraling health insurance premiums, as reasons for a declining public workforce. Data indicates nearly 250,000 public sector jobs were axed in 2011, with more cuts expected this year. Almost half of the public employment losses in 2011 were laid-off teachers.

There are 656,000 fewer public sector jobs than in pre-recession 2008. Economists say shrinking public payrolls create a drag on U.S. economic recovery by negating private-sector job gains.

The Oregon legislature has tried to curb public pension liabilities, but some of its legislative remedies have been struck down in court for effectively breaking the contract with public employees by changing terms of their retirement. Public employees say they gave up pay increases many times in return for longer-term pension benefits

That strategy, which was pursued in most states and at the federal level, now may be coming home to roost. Forest Grove School District Business Manager Mike Schofield estimated 30 percent of the district's budget goes to retirement benefits. Sickinger's story suggested the additional PERS burden amounts to $700 per household.

"School districts wonder why, year after year, bonds are voted down by taxpayers," writes Sally James of Gresham in a letter to the editor. "Parents and taxpayers wonder each year why they pay more out of pocket for the education of students with less to show for it."

Sympathy for the plight of public employees is undermined by stories such as former University of Oregon football coach Mike Bellotti receiving a half a million dollars annually from PERS. According to PERS, there are 837 participants who pocket more than $100,000 in payouts per year, but they represent only 1 percent of the system's 105,000 retirees.

Sensitivity to the PERS issue is clearly on the rise. The influx of Republicans elected in 2010 to the Oregon legislature raised questions about lawmakers participating in PERS. Lindsay, an attorney, was one of a handful of freshmen lawmakers who declined PERS participation. However, actively championing reform can be politically costly. The promising political career of Greg Macpherson, D-Lake Oswego, was cut short after he led the most recent legislative effort to trim PERS costs.

While Oregon's PERS challenge is daunting, it is actually one of the better of public retirement systems in the nation, according to Pew Research. However, that consolation doesn't make it any easier to balance a school district or municipal budget.

A chronic problem of public retirement systems is over-estimating annual returns, which results in inflated contributions to PERS participants. For example, the Oregon PERS board predicted an 8 percent return in 2011, but earned only 2.2 percent. But the seemingly easy fix of lowering earnings predictions would have the paradoxical result of requiring even higher public employer contributions to make up the difference.

As Dalton — who was the lone vote for a lower earnings prediction last year — says, it isn't whether you will pay, but when. The question is, can public schools and critical public service providers survive the wait.