OR Governor Calls For State Pension Changes

January 27, 2003 (PLANSPONSOR.com) - Oregon's newly elected governor, believing the state's pension fund is too expensive, says the fund needs an overhaul to a cheaper, more efficient program.

Democrat Governor Ted Kulongoski has offered only a few specific details, outlining only general standards.   His plan thus far has been to defer to the state legislature to determine the best way remake the roughly $32 billion Public Employees Retirement System (PERS), currently faced with a $15 billion shortfall, according to a report by Reuters.

One proposal the governor has offered is a reduction in the number of board members from the current 12 to five.   With the reduction, Kulongoski also would like to see the face of the board change to include a representative each for public employees and employers, with the other three slots filed by financial experts.

Additionally, the freshman governor may entertain an idea of ending the 6% employee contributions for each pre-1996 employee. This is nominally the “employee” contribution, but, as a result of collective bargaining agreements, the municipality typically pays it. These contributions go into individual accounts that employees can choose to allocate either to the general pool managed by the Oregon State Investment Council or to separate variable annuity accounts. Employees can place up to 75% of their assets in a variable stock account.

However, a spokeswoman for the governor made it clear that a top priority is a proposal that would offer a solution both equitable to the approximately 300,000 public employees in the pension fund and affordable to taxpayers.

“Living” Document

Oregon’s pension fund has a few particular problems that Kulongoski sees as part of his repair.   Like much of the nation’s public pension funds (see  S&P: Pension Pressures May Push Public Funds ), PERS has been ravaged by a weak economy and precipitous decline in the stock market, diminishing the fund’s overall return while costs keep rising.

However, the real problem may be in the state’s antiquated pension mortality tables (See  Running the Fund: Blame It On the System ).   In order to help fix the problem, the governor wants the pension fund to use updated mortality tables that take into account the fact people are now living longer.   The board has been reluctant to update the current 25-year-old actuarial tables to determine lump-sum annuitization; and an oversight system heavily loaded in participants’ favor.

Because people generally live longer than they did circa1978, the plan is paying out benefits for an average four years longer than it expected—an error estimated in 2002 to be costing roughly $135 million a year. Oregon PERS had long put off fixing the actuarial tables, fearing backlash from the state’s powerful public employee unions. The board finally gave into taxpayer pressure in August, voting to change the tables and ordered benefits to be recalculated retroactively. However, originally expected tobecome final in November, the Board now says the final changes will be put up for approval February 25 (See   Oregon PERS Oks Expectancy Table Changes).

Actuarial updating will save the plan an estimated$442 million over several years – saving an estimated $53 million annually for taxpayers, by reducing benefit checks to workers who retire within this period by 7% to 12%.