States and Cities Are Short on Cash
Governments are struggling as mounting pension obligations crowd
out the rest of their budgets. Oregon faces a severe, self-inflicted crisis.
out the rest of their budgets. Oregon faces a severe, self-inflicted crisis.
A public university president in Oregon gives new meaning to the idea of a pensioner.
Joseph
Robertson, an eye surgeon who retired as head of the Oregon Health
& Science University
last fall, receives the state’s largest
government pension.
It is $76,111.
Per month.
That is considerably more than the average Oregon family earns in a year.
Oregon
— like many other states and cities, including New Jersey, Kentucky and
Connecticut — is caught in a fiscal squeeze of its own making. Its
economy is growing, but the cost of its state-run pension system is
growing faster. More government workers are retiring, including more
than 2,000, like Dr. Robertson, who get pensions exceeding $100,000 a
year.
The
state is not the most profligate pension payer in America, but its
spiraling costs are notable in part because Oregon enjoys a reputation
for fiscal discipline. Its experience shows how faulty financial
decisions by states can eventually swamp local communities.
Oregon’s
costs are inflated by the way in which it calculates pension benefits
for public employees. Some of the pensions include income that employees
earned on the side. Other retirees benefit from long-ago stock market
rallies that inflated the current value of their payouts.
For example, the pension for Mike Bellotti, the University of Oregon’s
head football coach from 1995 to 2008, includes not just his salary but
also money from licensing deals and endorsements that the Ducks’
athletic program generated. Mr. Bellotti’s pension is more than $46,000 a
month.
“You
get to the point where you can no longer do more with less — you just
have to do less with less,” said Nathan Cherpeski, the manager of
Klamath Falls, a city of about 21,000 in south-central Oregon.
Klamath
Falls’s most recent biennial bill from the pension system, known as
PERS, was $600,000 more than the one before. PERS has warned that the
bills will keep rising. Mr. Cherpeski has had to cut back on repairing
streets and bridges.
Even
as the American economy is humming, many states and cities are still
hurting from the 2008 financial meltdown. The crash hammered their
pension funds and tax revenues, but didn’t reduce the amounts they owe
retirees.
It
wasn’t until 2016 that average state tax collections returned to
pre-2008 levels. In the meantime, states and cities have had to rebuild
pension funds to cover the rising numbers of retirees drawing benefits.
That has left less money for the police, school sports programs and
everything else. Local residents might not know why, but they are paying
more taxes and getting scantier services in return.
Costs
are rising even in places that previously acted to defuse the problem.
Colorado trimmed pensions in 2010, but a new $32 billion shortfall means
more pension cuts and tax increases are likely. Detroit sliced its
pension obligations in bankruptcy and persuaded philanthropists to chip
in, but it is not clear that the city has an affordable plan.
In
San Francisco, the school board wants voters to approve a $298 “parcel
tax” on real estate, ostensibly to raise $50 million to pay teachers a
living wage.
“That’s
a worthy objective, but it’s not the real reason,” said David Crane, a
former trustee of the California teachers’ pension system. He said the
school district’s retirement costs had grown by $50 million over the
last five years, devouring resources that would have gone to teachers.
Obligatory Contributions
Oregon
is a blue state, but in its restive red hinterlands, tax increases are
politically off limits and financial distress has been severe since
1994, when logging was curtailed to save an endangered owl.
Lately,
things have been getting even worse.
When
a man was reported yelling and firing his gun on the property of a
school in rural Josephine County, it took two hours for a sheriff’s
deputy to arrive, said Kate Dwyer, chairwoman of the board for the Three
Rivers School District.
The
county has cut sheriff patrols, closed its mental health department and
kept its jail at less than half capacity because of a lack of guards.
Dave
Valenzuela, the Three Rivers school superintendent, traces the latest
woes directly to PERS. The system is run at the state level, but it is
bankrolled in large part by obligatory contributions from local
governments.
This
year, Three Rivers was poised to receive its first increase in state
education funding in years, a reflection of growing enrollment. But
Oregon raised by more than 50 percent the amount that Three Rivers had
to contribute to PERS. So Mr. Valenzuela had to lop five days off the
school year, ask each school to cut its budget by 10 percent and lay off
the district librarian and English specialist.
PERS
sets the pension bill for each entity — local government, university
system and the like — based on the pay and demographics of its workers. Just about everyone’s bills are getting bigger.
That includes the state, by far the system’s biggest contributor.
Oregon now has fewer police officers than in 1970, is losing foster-care workers at an alarming rate and has allowed earthquake and tsunami preparations to lapse. A 2016 survey turned up “a large number of bridges with critical and near-critical conditions” because of “longstanding inadequate funding.”
Even
prosperous communities are being pinched. The Beaverton School
District, outside Portland, had to get rid of 75 teachers last year when
its mandatory pension contribution rose by $14 million. That was after
shedding 340 teachers in 2012.
“I
have town hall meetings, and the parents are just confounded by this,”
said Mark Hass, a Democratic state senator from Beaverton.
A Golden Touch
Oregon’s unusual method for calculating pensions tends to generate lavish payouts.
For decades, PERS calculated pensions two different ways, and retirees could choose whichever produced the bigger numbers.
The
first way was similar to what most states do, basing pensions on each
worker’s final salary and years of service. But Oregon’s lawmakers
included a golden touch, redefining “salary” to include remuneration
from any source.
That
was how Mr. Bellotti, the former football coach, came to be the state’s
third-highest-paid pensioner, at roughly $559,000 a year.
When
he retired in 2010 as the university’s athletic director, the standard
pension formula was applied to his salary, plus a share of the outside
licensing fees and product endorsements the football program brings in.
(His pension details, along with those of other retirees in the system,
were first obtained in 2011 from PERS by two newspapers, The Oregonian and The Statesman Journal.)
Mr.
Bellotti said he never asked for a supersize pension. In 1995, he said,
the university started to include a percentage of all endorsement and
licensing fees in coaches’ salaries.
“It was basically to augment the university’s ability to pay a competitive salary to its coaching staff,” he said.
When
Mr. Bellotti retired, he was partway through a five-year, $1.9
million-a-year contract, which he said was still below the league
average of about $3 million.
PERS made up for it with a big pension. “It was pay later as opposed to paying now,” he said.
A
spokeswoman for the medical center said Dr. Robertson’s pension was
based on his salary, incentive payments, clinical pay and unused sick or
vacation time.
Oregon’s
second way of calculating pensions dates back to 1946: For decades,
every public worker got a simulated tracking account. It was credited
with 6 percent of each paycheck, then left to compound at a
predetermined rate.
In the early years, a low rate was used because the pension system invested in bonds that didn’t yield much.
But
in the 1970s, lawmakers started nudging the rate up, eventually to 8
percent. Then, the system’s trustees decided 8 percent should be a
guaranteed minimum. In years when markets produced higher returns, the
accounts compounded at those rates, after money-management fees. During
the 1990s bull market, accounts compounded by up to 21 percent a year.
When
workers retired, their employers were required to “match” the account
balances, doubling them. Then PERS would base the pensions on the total.
Planet Tiffany’
Randall
Pozdena, an economist who supervised the pension system’s investments
in the 1990s, gave speeches warning that the situation was
unsustainable.
“The
only way you’re going to get out of this is if the state is hit by a
golden asteroid from Planet Tiffany,” he recalled saying.
But
efforts to change the system, including a 1994 ballot initiative, were
blocked by the State Supreme Court, which ruled that accruals could not
be reduced during any public worker’s career.
So,
when lawmakers required government retirees to pay Oregon’s 9 percent
income tax, as everybody else did, they also increased pensions by 9.89
percent, giving retirees extra money to pay the tax with.
“It’s
an affront to everybody who pays taxes,” said Bruce Dennis, a retired
carpenter from outside Portland who earned a $54,000-a-year pension by
swinging a hammer for 45 years. No one gives him extra money to cover
his taxes.
“At every step of the way, they’ve made decisions that went against the interests of the public,” he said.
Starting
in 2003, the tracking accounts were phased out. But workers who already
had the accounts were allowed to keep them. New hires got a more modest
retirement plan.
“The
cost of this pension system is not caused by the people we are hiring
today,” said Steven Rodeman, executive director of the Public Employees
Retirement System. “This is a legacy problem from the 1980s and 1990s.”
For
workers with the tracking accounts, PERS dialed back the annual returns
to 8 percent, then to 7.5 percent in 2016. That is still more than what
PERS’s investments have generated over the last decade. And so the
pension fund’s financial hole continues to deepen.
Across
Oregon, local officials have been told to brace for 15 to 20 more years
of rising pension bills. That’s when the current generation of retirees
will start dying out.
“All we can do is wait,” said Jay Meredith, finance director of Grants Pass, the seat of Josephine County.
In
the meantime, mounting pension costs mean that a generation of
schoolchildren is growing up in the area with no theater program, no
orchestra, no wood shop and minimal sports, chorus and art.
That’s if they can get to school.
Ms. Dwyer, of the Three Rivers School District, reported the problem to a public-works official.
She recalled his response: “I have trucks, but I can’t put gas in them to come to you and dig it out.”
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