Oregon Can’t Postpone Judgment Day Forever
Because this problem is not limited to, or unique to, Oregon everyone should read this, and the underlying article. However, if you are an Oregonian, or are an Oregon PERS pensioner, you really need to read, and understand this. These pension issues will affect millions of Oregonians. The effects will be devastating for many.
"The national pension crisis is much closer and much more serious than politicians—especially, but not exclusively Democrats—would like you to believe."
We all want to believe this is far off and will not be a problem for me. It will.
"Just how bad is Oregon’s public pension funding crisis?
Bad enough that Rukaiyah Adams, the normally polished investment professional who is vice chair of the Oregon Investment Council, broke down in tears last week as she spoke of passing a record $22 billion in unfunded promises to future taxpayers.
“My call to the Legislature and to the governor is for leadership on this, and I mean right now,” Adams said during last Wednesday’s joint meeting of the Oregon Public Employees Retirement System board and the citizen panel that oversees its investments. “This is becoming a moral issue. We can’t just talk about numbers anymore.”
The numbers are bleak. Oregon’s pension system owes billions of dollars more to retirees than it has, and the last major attempt to fix the problem was shot down in courts."
While this sounds bad, the problem is actually much worse than even she is making out. Republicans, libertarians, classical liberals, and others want to address these problems now, to take control while the problem is smaller, since it will only grow with time.
"And keep in mind, through all of this, Oregon is still using the ‘rosy scenario’ estimates of rates of return on investments to calculate the shortfall."
Mead gets to the heart of the problem here. The pension fund, like pretty much all the public pension funds, use overly rosy estimates on the rate of return the fund will obtain for the next years. This works to fictitiously inflate the fund corpus. During any single year this change is minor, but over long periods of time it can easily result in forecasts which are twice the size of reality.
"A handful of lawmakers are set to meet Wednesday in hopes of jumpstarting a conversation on pension reforms in the 2017 legislative session. They have a list of ideas already vetted by state lawyers. They say the ideas could help plug an $885 million budget hit looming over the next two years, fallout after the Oregon Supreme Court rejected most of a package of pension reforms negotiated in 2013."
The Democrats remain in denial.
"But Democratic leaders, including Gov. Kate Brown, so far say they’re not interested. In an interview this week, Brown said she saw pension costs as a very important issue, but “from my perspective, that list is not legally viable and not likely to result in significant financial savings.”
It’s a similar story from Senate President Peter Courtney, D-Salem, and House Speaker Tina Kotek, D-Portland. They insist there are no more money-saving moves that could be both legally viable and economically significant.
Remaining pension reforms would also mean cutting pay and retirement benefits for current state workers — which would alienate Democratic benefactors in Oregon’s public employee unions."
So, they will let the pensioners burn, all to keep power a bit longer, and if they craft the correct response, perhaps they can Clinton this, completely evade, and escape the issue. Who knows?
The Democrats have a solution:
"So what is to be done instead? Corporations must be taxed heavily, of course:
Kotek and Brown are both backing a controversial, union-backed proposed tax increase on large corporations on the fall ballot. Measure 97 would raise $3 billion a year by taxing 2.5 percent of certain corporations’ sales over $25 million. But Brown also said that revenue should be spent as supporters have promised: to beef up spending on schools and social services.
A more perfect example of ostrich syndrome would be hard to come by. Hiking taxes on corporations will end up destroying jobs by forcing companies to relocate, which will depress future tax revenues.
Do read the whole thing. This can’t end well for Oregon—or for the countless other cities and states facing down very similar nightmares in their near future."
To interpret, the solution is to destroy the economy, by increasing business taxes, and over time . . . Oh, right, the destroyed economy, over time will return less in taxes. This epiphany has somehow eluded these Masters of the Universe.
There are basic axioms in life, one is whatever you tax you will get less of. Tax businesses more, you will get less business taxable income. We have seen this in the past in many different places, especially with these specialty taxes on "more than x income." Oregon recently did this with a couple of new laws, the result was receipts far lower than estimated. This is always the way. The businesses will simply act in a way to avoid the tax, either leaving the state, or perhaps establishing a subsidiary, which can somehow get around the specific tax law. Regardless, the receipts will be far less than anticipated.
I expect more dithering, more whistling past the graveyard, more ignoring the issues. The Terminator is arithmetic, it cannot . . . oh go watch . . .
Oregon officials face truth behind state’s soaring public pension costs
"Last week’s meeting was extraordinarily candid. And it provided a brief, reality-based peek behind the financial charade taking place not only in Oregon’s pension system, but also in systems across the country.
Experts openly acknowledged they’re understating the magnitude of Oregon’s problem. They’re relying on optimistic assumptions about investment returns. And they’re holding down required pension payments below what’s needed to keep pace with the debt, to avoid eviscerating school and government budgets across Oregon.
“We’re beyond crisis,” Katy Durant, chair of the Oregon Investment Council, said in an interview after last week’s meeting. “We should have been addressing this 20 years ago and it’s just been building. It’s a little bit like a Ponzi scheme. Sooner or later it’s going to catch up with you.'"
They are lying about the returns the fund will obtain in the next few years, commonly saying it will make more than 7%, knowing that it will likely make under 4%. On top of that, they are only taking part of the "premium" payment which is necessary so as not to eviscerate schools and government budgets.
How exactly will deferring this compounding problem alleviate the problem? This is like a man with too much debt, taking on more to help. It doesn't help.
We should have been addressing this 20 years ago, but back then the few voices like mine were considered crazy conspiratorial types. It wasn't conspiracy, it was arithmetic. But back in the 1990s with the stock market flying high, the public pension thought return on investment would fix everything. Then the tech bubble crashed, and reality set in, but not enough for actual change.
"There’s the sheer size of the deficit — $22 billion — at record heights even after a seven-year economic recovery. It’s no longer a cyclical problem that a string of big investment returns could erase, board members agreed last week. The imbalance of assets and liabilities is now structural."
Sorry, it was always structural. Relying on luck to get a pension fund out of a pickle is not reality, that is poppycock. This effect is exactly what many of us foresaw, because we simply did the simple math. Like this:
As it stands, pension payments cost government agencies and school districts across the state about $2 billion every two years, and they’re panicking about the $885 million, or 44 percent jump, in required payments over the next two years.
“That’s just next biennium,” PERS Director Steve Rodeman said at the meeting. “There’s going to be one just like that in the next biennium and very similar to that, under almost any scenario, in the one after that.”
In other words, to pay down the debt over 20 years, the increase in pension payments over the next two years should be more than three times higher, or nearly $2.7 billion.
But, Rodeman said, “You bump up against reality in terms of how quickly employers can adjust to the higher rates they’re going to need to be charged.”
So the pension board artificially “collars” required contributions. In essence, by not making the needed minimum payments, the board is borrowing from the pension fund, adding interest costs and making the overall liability even larger."
Wow, terminator indeed. The investment side is just as bad.
"The investment council, meanwhile, is bumping up against a different reality. Its members believe the system’s assumptions for how much its investments will earn are unrealistic. The assumed rate of return is 7.5 percent a year. Over the last 10 years, pension fund investments have earned just 6.2 percent annually. Last year it was 2.1 percent. So far, this year, it’s 4.6 percent.
“Can’t we rip the band-aid off and deal with reality?” Durant, the outgoing chair of the council asked at the meeting. “We keep stacking more and more on because we’re unwilling to deal with reality.”
It’s a math problem facing pension systems around the country. Pension payments are determined, in large part, by the income the system assumes from its investments.
If a pension system lowers its assumed returns, it has to make up the difference to keep its promise to retirees. That, in turn, requires higher payments — at the expense of other priorities — from government employers."
For the foreseeable future the fund will not on average return 7.5%, it will probably return only about 4.5%. So, the numbers fictitiously inflate the fund, but then reality deflates the fund.
The system is already deferring payments, so it cannot require higher payments, or if it does it cannot require realistic payments as those are too high for the schools, and governments to afford.
Catch-22. They cannot require reality because it is unaffordable, they cannot forecast realistically because it would bankrupt the system. So they don't. They pretend.
The straightforward solution is to calculate the pension going forward for the existing pensioners, it would require a significant haircut, and the buyout for the as yet unretired pensioners, pass a Constitutional Amendment allowing these changes, and then convert the unretired payouts into a 401(k) style defined contribution plan, and roll the retired's money into an IRA or other similar arrangement of their choice.
While this is well outside of my legal specialty, it should be doable. It would maximize the funds to the individuals, limit the costs, and fully replace the untenable pension system with a functioning defined contribution arrangement.
Instead expect all manner of shenanigans, and horseplay to continue milking this rolling disaster for a decade or more till the wheels fall off, and all the pensioners get it good, and hard.
If I had a PERS pension, I would consider class action.
The pension problem will, however, continue to grow, and once the state pension fund is finally required to account for the shortfall, and adjust the rates of return are adjusted to reality, the actual problem will be impossibly large. So large, that the only solution will be to drastically cut pension payments to pensioners, and increase payments from the public entities to impossible to survive amounts, or go into pension bankruptcy.
I do not know what bankruptcy will look like, but it will be ugly, with payments far lower than those of today. It is time for those already receiving payments, and those who will to begin to strongly lobby for real pension reforms in the state. The sooner the better, the sooner, the larger the payments to pensioners will be.