REMARKS AS PREPARED
Governor Kate Brown
Testimony to Committee on Capital Construction
Friday, April 12, 2019
Oregon’s public employee retirement system, or PERS, is first and foremost an essential benefit for our public employees. In exchange for dedicating their lives to public service, Oregon has made a promise to provide them a secure retirement after decades of teaching our kids, fixing our roads, keeping our neighborhoods safe, fighting fires, or helping our children in foster care.
Over 900 public employers — school districts, cities, counties, police departments, and fire districts — are part of PERS and pay into the PERS system.
We must keep our promise to every PERS member, active and retired, to protect retirement security and the defined benefit plan in Oregon. And every Oregonian must step up to help us keep that promise. Employees should not carry this burden alone. Anything less would simply be kicking the can down the road.
Today, the PERS system is underfunded: the funded status is 80%. But what may surprise you is a majority of states are worse off. So regardless of what you may have heard, we are not smack in the middle of an immediate crisis like other states.
However, make no mistake: our crisis is just over the horizon, we can see it coming, and we must do something about it this session.
Since our funded status is at 80%, the PERS rates that public employers — like school districts — pay is increasing. And those rates are projected to increase significantly in order to keep the system adequately funded.
In 2007, before the last recession, the funded status of PERS was over 110%. After the recession the funded status dropped to 80%.
Today, we are at the height of our economic growth. We know another recession is coming at some point.
The system is ill-prepared for the next inevitable economic downturn, which will put both public sector budgets — and the retirement security of our valued employees — in serious jeopardy.
Let me give you a specific example: in the Hillsboro school district, PERS rates for the 2019-21 biennium are set at a little over 28% of payroll. Their rates are projected to increase in the 2021-23 biennium by 5 percentage points to over 33%. That will cost the district an additional $1.9 million.
This is on top of other increased costs. What will the district do? I think you all know the answer, because some are doing it now: cut teachers. The story is exactly the same for Portland, North Clackamas, Salem, and virtually every other district in the state. If we don’t stabilize PERS rates for schools, more teachers will lose their jobs. The first to go would be our younger teachers who better reflect our students and their experiences — and who are essential to our students’ success.
And the school investment fund that we are working on will not come to the rescue. Those funds are dedicated, as they should be.
Tweaks to the PERS system will not set us on a path toward stability. This problem has been a long time coming. However, I am not willing to go another legislative session without taking significant steps to stabilize school rates and address the PERS unfunded liability.
We are all in this together: taxpayers, elected officials, school board members, and public employees. We must have a commitment to shared responsibility to set us on a different path. And to do so this session. If we don’t make the difficult decisions now, things are only going to get worse. I am not willing to kick the can down the road to a future Legislature or Governor.
So today, I’m introducing a detailed framework for achieving my primary goal this session for PERS: stabilizing PERS rates for schools. My solution is focused on achieving this equitably and fairly through a shared responsibility model.
Before we move on, it’s important to provide some important context that defines how to equitably share this responsibility. Of the current roughly $16.7 billion in unfunded liability, 72% is due to employees who have already retired or are no longer working for a PERS employer. Oregonians have already received the value of these employees’ hard work. The Supreme Court has ruled that we must keep our promises and cannot reduce these employees’ benefits.
Of the remaining liability, 22% is due to currently-employed Tier 1 and 2 employees who were hired before 2003. Only 6% is due to currently employed OPSRPs or Tier 3 employees who were hired after 2003.
With that context, here’s my proposed framework:
First, the state must cover PERS rate increases associated with the unfunded liability from retirees. Accomplishing this is estimated to require roughly $2.5 billion over the next 16 years, under current assumptions.
To achieve this, we will create a new vehicle called a School PERS Offset Account to cover these increased school PERS costs. To be successful, we must seed it with a minimum of $800 million and dedicate additional future revenues to ensure there will be adequate funds available. I have identified in detail how I would fund this account, but I am also very open to other ways of funding it. Regardless where the money comes from, we must fund it at a sufficient level.
Second, we must protect the current PERS defined benefit plan and implement modest, dedicated employee contributions to secure each member’s retirement. Over two-thirds of all public employees are now in the OPSRP or Tier 3 plan, and it is working well. It is both cost-effective for employers and provides an important benefit for employees.
Let me be perfectly clear: I do not support changing this plan. My goal is to make OPSRP more stable. I am opposed to eliminating this type of retirement security like others have proposed.
We can ensure stability by creating a new PERS Stability Contribution program for current employees. The program creates new individual accounts, and each employee makes a PERS Stability Contribution to their own account. This will both provide greater stability to the system and further secure each employees’ own retirement.
My proposal on employee contributions includes exempting the first $20,000 of salary to minimize the effect on our lowest-paid workers, then having employees make PERS Stability Contributions of 3% for Tier 1 and Tier 2 and 1.5% for OPSRP. As I mentioned, these contributions fund individual accounts that travel with the employee and are dedicated to their own defined benefit plan. With the exemption and based on average salaries, these PERS Stability Contributions will average 2.1% for Tier 1 and 2 employees and 1% for OPSRP employees.
These contributions will come from IAP and will not reduce take-home pay.
When PERS is fully funded or at the conclusion of 14 years, these contributions will end. Then, at any point in the future if the funded status again falls below 90%, the PERS Stability Program contributions will re-start at 3% system-wide. This ensures that when another economic crisis sweeps the country, that we are never in this same place again.
This is the core of my plan: shared responsibility by both employees and Oregonians, with every party contributing to address the unfunded liability in a proportional way.
We can’t just ask current employees to cover their part of the liability without a significant commitment from the state. To cover the state’s portion of this, you, the legislature, has some decisions to make.
I am providing a list of possible sources, but the biggest two are as follows:
First, retaining part of the income tax kicker rebate, which disproportionately benefits wealthy Oregonians. I would give everyone the first $100 of their rebate and retain the rest.
Second, transferring excess surplus dollars from the state-owned insurance company or another similar transaction, SAIF.
Both of these options are framed as being extremely difficult politically. But in reality, the choice is very clear: do you, state legislature, want to smartly pay down PERS debt to help our schools? Or do you want to send out almost a billion dollars in tax refunds and insurance rebates?
It is the height of fiscal mismanagement to on one hand say something must be done about the PERS unfunded liability, and on the other hand do nothing to stop the state from sending out over a billion dollars in tax breaks to wealthy Oregonians and businesses over the next 12 months.
Employees should not be asked to put skin in the game unless the state is willing to put its money where its mouth is and commit to paying down the unfunded liability for retirees, which represents the majority of the liability.
I know this is very difficult. There’s something for everyone to both love and hate in this plan that I’ve introduced. But make no mistake: by stabilizing PERS rates for schools, we also stabilize jobs for teachers and educators. And overall, this protects the entire educational enterprise so that our economy can grow in the right direction. If we do nothing on PERS this session, there will be cuts to teaching positions. No one wants to see that.
Over the next several weeks I will be talking with educators, legislators and others who care about the future of our education system to get feedback on this plan.
I am open to changes, but I am not open to inaction.
Thank you very much.