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Oregon’s Pension Puzzle

Oregon's public pension performance in the past decade has been stellar, but can they maintain it in years to come?

In the increasingly dreary world of public employee pension systems, Oregon was, until quite recently, a notable success. The state acted years before others in trying to restrain its unfunded liabilities, trimming billions of dollars off its long-term obligations in 2003. By the middle of the last decade, the system was actually running a surplus.

But you wouldn’t know that from reading the headlines in Oregon today. The state’s public employee pension system faces new financial challenges. Local governments are suffering under the burden of its costs. While there’s still a good case that the 2003 reforms were a success, it says a lot about the state of public employee pensions that even successful moves to limit costs are followed by years of painful choices and highly charged political debates.

In 2003, Oregon lawmakers responded to the fiscal and political headaches being caused by the Oregon Public Employee Retirement System (PERS), which serves state, city, county and school district employees. At that time, the stock market’s poor performance had stung PERS’ investments, and the state’s pension obligations were growing by 12 percent a year, more than the system could sustain. A few employees were even able to retire with annual pensions larger than their final salaries, sparking outrage from the public.

Rookie Democratic Gov. Ted Kulongoski decided to take on his allies in the public employee unions, persuading the Legislature to reduce benefits for both current and future employees. Among the changes, the state shifted the retirement age from 60 to 65 and opted to move from a defined-benefit system to a hybrid arrangement that included both defined-benefit and defined-contribution components. A messy political and legal fight followed. Some of the measures were eventually thrown out in court. Kulongoski faced a primary challenge from the left in 2006, but won re-election anyway.

From a fiscal standpoint, though, the medicine worked. The growth in the state’s obligations shrunk to a projected average of 3 percent per year. While many other states possessed only 60, 70 or 80 percent of the money they needed to pay their long-term obligations, Oregon topped out at more than 111 percent in 2007. That year, a Pew Center on the States report found that PERS was the nation’s best-funded state pension system.

The next year, though, Oregon’s investments were pummeled by the stock market’s decline. Oregon’s funding ratio fell all the way to 80 percent. The dramatic drop reflects the unusual way Oregon calculates its unfunded liability -- on a year-to-year basis, rather than as a rolling average. But it also reflected a real shift. “The reforms were aimed at the liability side of the equation and they are still having an impact on that,” says Paul Cleary, executive director of PERS, “but they did not insulate us from the market.”

Today the state’s funding ratio is back up over 85 percent, but state and local government, already reeling from the economic downturn, will have to pony up much more money to make up the difference. Alternatively, policymakers are contemplating a new round of benefit cuts, something the unions fear. “For a state like Oregon that did everything right even when it was painful to do so,” says Tim Nesbitt, Kulongoski’s chief of staff, “we still end up with a problem we have to fix.”

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Josh Goodman

Josh Goodman is a former staff writer for GOVERNING..

Twitter: @governing

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