Last week Oregon legislators took a hard vote when they made changes to PERS. In his letter to constituents, Senator Michael Dembrow did the best explanation we’ve seen of what the bill does and why supporting it was important. With his permission, we’re sharing it with you.
If you’re curious about how each legislator voted on this PERS bill, you can see here who voted against SB 1049 in each house. Once you open the link, scroll down to “Third reading” on 5.23 for the Senate and 5.30 for the House.
You can see other legislators’ vote explanations here. Many explanations are shorter than Senator Dembrow’s, but his is very clear and thorough.
Last Thursday in particular was a complicated day for me in the Legislature. It began with one of the most difficult votes that I have taken as a legislator—making changes to the Public Employee Retirement System that include additional contributions by public employees—and ended with one of the most euphoric of moments: watching my House colleagues give final approval to our Juvenile Justice Reform package, dramatically rolling back key elements of Measure 11, restoring judicial discretion in a way that recognizes current science. In between those two votes we were able to close an awful loophole that currently allows individuals charged with domestic violence and abuse to hold onto their firearms, we cleared the way for a statewide ban on Styrofoam, and we put a moratorium on fracking here in Oregon.
In this newsletter I want to focus on the PERS vote. I know that it may be surprising to some of you that I would have supported a deal that reduces compensation for public employees, given that I spent many years as a public-sector union president and contract negotiator, and given that I’m myself a Tier 1 PERS worker and will be directly affected by this change.
Whether they be teachers, firefighters, social workers, corrections officers, whatever, public employees did nothing to create the current state of our retirement system. They work hard, perform duties that we desperately need, are committed to long-term service to this state. Asking them to take any kind of reduction in compensation will understandably be taken as a lack of respect for all that they do. It’s not anything that I would ask of them if I weren’t convinced that it was necessary in the short term and beneficial in the long run.
To that end, I’ll do my best to explain why I and most of my Senate Democratic colleagues voted for it, and why most of my House Democratic colleagues will likely support it when they vote next week.
Please bear with me—it’s long and detailed, but I hope you’ll find it informative.
SOME BACKGROUND
I’m sure you know that we have been unable to fully fund our schools and colleges, not to mention other public services, ever since the passage of Ballot Measure 5 back in the early 1990s. That tax-limitation measure shifted the responsibility to adequately fund schools onto the state legislature but did not provide the state with the revenue to do so. Money that was otherwise needed to fund our colleges and universities, our natural resource agencies, and other important state service had to be moved over to K-12 education, and even those funds were inadequate for the job at hand. We all know the result: larger class sizes, shorter school days, layoffs, skyrocketing tuition and other user fees all over the place.
On top of that, we’ve seen employment costs going up in the public sector, partly due to rising health-insurance costs and partly due to retirement costs. We’re starting to get healthcare costs under control, but PERS expenses remain a serious challenge. These are legacy costs, the result of contractual obligations made in the 1970s and 1980s, and which the Oregon Supreme Court has told us must be respected. They are not the fault of any workers, certainly not of current workers, most of whom were hired under a lesser PERS pension plan, OPSRP (“Tier 3”), created in 2003 to solve the problem going forward. But the legacy costs attributed to Tier 1 and 2 employees will be with us on a declining schedule for 2-3 decades to come.
In order to meet those obligations, we’ve seen PERS employer rates rising steadily over the years. That’s because Oregon, unlike many other states, is committed to taking steps to contain the growth of its unfunded liability. (Nearly every state is facing comparable challenges with its public pension system, and many are in much worse shape.) If we do nothing, public employer rates are scheduled for another round of big increases in 2021-23. Portland Public Schools, for example, stands to spend an additional $50 million during that biennium alone as a result of rising rates.
As a result of these rising rates, and the cutbacks that they’ve generated, we’ve seen calls for changes in the system for years. The Legislature did approve a recent series of changes in 2013, but the Supreme Court threw out most of those. Democrats have (appropriately, I believe) resisted changes to PERS that would be exclusively on the backs of public employees. We’ve insisted that any changes to PERS must be balanced by a significant increase in revenues, particularly revenues coming from the corporate sector (which has seen its share of contribution to the General Fund reduce over the years at the expense of individual taxpayers).
The challenge is that we are constitutionally required to have 3/5 majority votes in both chambers to raise revenue. Despite many attempts, we’ve been unable to reach that threshold ever since passage of Measure 5. Republicans have been unwilling to provide the votes for tax reform. Most recently, attempts to combine PERS changes with funding increases failed in 2017 when we failed to secure any Republican votes for a potential corporate tax increase.
Within days of the 2018 election, however, we knew that there was a path finally to restore stable school funding—if we also committed to addressing PERS rates.
THE CURRENT LEGISLATIVE SESSION
While most of my focus this session has been on shepherding the Clean Energy Jobs bill and overseeing our other environmental priorities, School Funding and PERS have obviously been ongoing topics of crucial interest, particularly for those of us in Senate Leadership. Early on, I made my own PERS requirements clear—any changes to PERS would need to effectively bring down employer rates, be constitutional, and be fair, particularly to those members hired after 2003, who will not be receiving the more generous pensions of the Tier 1 and Tier 2 employees. The bulk of the financing could not come on the backs of employees. AND any changes to PERS would need to be PRECEDED by significant corporate tax reform.
As I’m sure you know, we did succeed in passing our top priority for the session a couple of weeks ago—historic increases in school funding. This was the result of years of effort, and more recently months of work done by our Student Success Committee, chaired on the policy side by Senator Arnie Roblan and Representative Barbara Smith Warner, and on the revenue side by Senator Mark Hass and Representative Nancy Nathanson. They used the framework of Measure 97, the failed corporate activities tax initiative from 2016, made it more broad-based and more modest, paired it with a small reduction in personal income taxes, dedicated it to K-12 and pre-K education, and came up with a proposal that will generate a billion dollars a year in stable funding and will grow as the economy grows. In the end, Oregon Business and Industries lifted its opposition and pledged not to support a ballot challenge. It was a huge, important victory.
In order to get the necessary votes, to get Senate Republicans back into the building (they used their constitutional ability to deny a quorum), and to get Business to stand down, there was an implicit understanding that we would follow school funding with PERS reform in short order, and that the changes to PERS would need to include contributions from current public sector employees.
We knew from earlier rulings by the Oregon Supreme Court that any changes to PERS could not affect the benefits of current retirees or earnings already accrued by current workers. An often-heard solution was to create yet another retirement tier, denying future employees access to a pension entirely, and have their retirement come entirely in the form of a “defined-contribution” or 401K-style program. This is the gist of at least one proposed ballot initiative that’s out there. For many of us—certainly for me—this was unacceptable. Having employees doing the same work side by side with such dramatically different benefits would further exacerbate the inequitable state of affairs that we currently experience. The OPSRP program that was created in 2003 remains a good, solid benefit package that will be sustainable over the long term once Tier 1 legacy costs are removed from the system. The Governor, Speaker of the House, and Senate President committed to coming up with an alternative that would preclude the creation of a new tier.
SB 1049 was the result.
WHAT’S IN SB 1049?
The goal of SB 1049 is to stop the increase in employer rates and gradually reduce them over the next decade. In the last five years, the cost that public employers have had to pay to cover pension debt obligations has nearly doubled. As I mentioned above, in the next biennium alone, the increase in PERS rates paid by PPS will be more than $50 million and will rise with each biennium for the next decade. Comparable increases will be felt by PCC, PSU, other school districts, and by city and county governments. Absent action to stop that, we’ll see ongoing layoffs, salary freezes, and inadequate services—despite our having just passed a historic school funding package. To prevent that, SB 1049 makes structural changes to PERS that includes slightly moving overall employee compensation away from retirement.
Two-thirds of the goal will be accomplished by a small increase in the amortization period for Tiers 1 and 2 from 20 years to 22 years. Think of the PERS debt as a mortgage; extending the amortization period is like refinancing a mortgage. Doing so makes payments more manageable but extends the payment period. Extending the amortization by two years is something that the PERS actuaries feel is manageable; they’ve told us that extending beyond that period would be imprudent and would put the system at risk if/when we enter another economic downturn. The Governor felt strongly that we should not take that risk.
Twenty percent of the savings in the bill will come from a reduction in contributions into employee IAP accounts beginning July 1, 2021. The IAP is a 401k-style account that each worker has in addition to their regular PERS pension account. Ever since the PERS reforms of 2003, the 6% employee contribution (in some cases paid by the employee, in other cases “picked up” by the employer in lieu of salary increases) has gone into the IAP side-account. Under SB 1049, employees with annual salaries above $30,000 will have some of that 6% redirected into a new, special account designed to help pay down the PERS debt. Tiers 1 & 2 employees will see a redirect of 2.5% from their IAPs; OPSRP employees will see a much smaller reduction of 0.75%. These redirects will continue until PERS is 90% funded (currently it’s at around 80%), projected to take around 10 years. After that, the full 6% will again go into the IAP, as long as the fund remains 90% or more funded.
Based on email communications that I’ve received, some PERS members are being led to believe that their entire retirement package will be reduced by as much as 12.5%. This is false and misleading. The PERS actuaries project that this redirect will lead to a 7.5% cumulative reduction in the IAP of a Tier 1 worker who works for another five years before retiring; a 12.5% reduction in the IAP of a Tier 2 employee who works for another 10 years; and a 7.1% reduction in the IAP for an OPSRP employee who works for another 20 years. But remember that these are reductions to the IAP ONLY, and the IAP is a small part of an employee’s overall retirement package. The overall effect of the reductions is a much smaller impact on a 30-year employee’s overall retirement benefit, after including the defined-benefit pension portion that is untouched by this legislation. Any reduction, if it’s not made up for in some other way, is going to be painful, but it’s important that we be clear about the actual effects.
Moreover, the sooner we can get to the 90% funding level, the lower those cumulative impacts will be, and so the Legislature has committed to paying down the debt whenever possible. SB 1049 takes a first stab at that by directing $100 million in unanticipated revenues from the General Fund to reduce the debt, and it directs 80% of annual revenues from a new lottery sports betting program there as well.
Getting us to commit to this kind of shared investment was really important for me, and I pushed hard to make sure that happened. I also pushed to make sure that employees can make up for any money being redirected out of their IAPs by putting an equivalent portion of their future salary increases back into the fund if they so choose. They can thereby stay on their expected retirement schedule (though of course, since the IAP is a 401k, their final balance will be a function of how well the PERS investments have done over the years). That was really important to me, and I’m pleased to see that it made it into the final bill. I do believe that with the coming reduction in employer rates, public employee unions will be able to bargain hard and secure salary increases that will more than offset the reductions.
Finally, an earlier version of the bill included a change in the way that we would henceforth calculate benefits for Tier 1 employees on “Money Match,” one of the retirement alternatives, that I found repugnant. To my way of thinking, it was clearly an abrogation of the PERS contract that affected benefits already earned and would likely prove to be unconstitutional by the Supreme Court. It would also have led to a landslide of premature retirements. Fortunately, my way of thinking prevailed, and that provision was dropped. I do believe that the remaining sections of the bill will withstand a Supreme Court challenge.
There are a couple of other provisions in the bill that are non-controversial. One is a $195,000 cap on earnings that generate PERS benefits, effective January 1, 2021. This obviously doesn’t affect many workers, but it will help keep costs (and benefits) down. The second is a provision that will allow retirees to continue to work at a PERS-covered job after retirement (currently, their hours are limited) if they so choose, beginning next January. They won’t earn additional benefits; rather, the dollars that the employer would have put into their PERS account will now go into paying down the debt.
THE VOTE
By the time it came to vote on Thursday, I knew that I would be a yes vote, as tough as that would be. I knew that committing to the passage of SB 1049 made it possible for us to secure that formidable school funding package. Passage of SB 1049 will also allow that package, with its corporate tax reform component, to weather a potential ballot referral and will likely prevent more draconian anti-PERS measures from making it to the ballot or being successful there.
The bill of course passed by the narrowest of margins, 16 votes in support. Even though they have been calling incessantly for PERS reform, only three Republican senators voted for it. Why is that? Presumably, SB 1049 doesn’t go far enough for them in requiring employee concessions and turning the system entirely into a 401k plan. I of course disagree. On balance, this proposal is a reasonable, responsible compromise that maintains good benefits, strengthens our retirement system, is accompanied by significant corporate tax reform, and will help stabilize public services.
We are very pleased with how much effort has gone into this step forward with PERS, and have sent thank you notes to legislators who voted for this change. Please do so as well. Or complain, if you don’t agree. Check your legislator’s votes at the link above.
