You’ve read about PERS in our headlines
for years now. The big takeaway? Public employers are drowning in pension
debt. Oregon’s retirement system is about $22
billion in the hole and the problem isn’t going away anytime soon. So how’d we get here? Let’s start from the beginning. PERS is short for Public
Employees Retirement System. It’s a pension fund that’s supposed to help
usher Oregon’s nearly 350,000 current and former public employees into
retirement. PERS is supposed to benefit our firefighters, police officers and people like say, Joe. Let’s meet Joe. Joe’s a public schoolteacher who started
working in 1946, about the time PERS started. Every paycheck Joe put a required amount, which varied over time, into his retirement account. And that money was invested mostly in conservative things like government bonds. Fast forward 25 years to 1970. Joe retired. And according to the retirement
formula in place at the time called money match, Joe got back all the money
he put in over the years, plus, whatever those conservative investments earned on his contributions. That amount was then matched by Joe’s employer and the total was paid out as a monthly benefit based on things like Joe’s life expectancy and
the expected returns on the account as he drew it down in retirement Now, that’s pretty much how PERS worked for the first few decades of its existence. But as it turns out Joe’s pension was pretty lousy. Low interest rates from those
conservative investments translated to low pension benefits. So low that legislators and the PERS board started to tweak the system, which included
making the money match method more generous. So here are some tweaks they
made. First off, they allowed pension managers to invest in higher risk stocks to grow employee accounts faster. Also, in 1975, and this is crucial so pay
attention, they established a guaranteed rate of return for employee accounts. Meaning, no matter how markets performed, employees were guaranteed something. And that something was a rate that fluctuated between 7 and 8% ever since. But that rate wasn’t pulled out of the sky. Fund managers
really assumed markets would earn that every year. And for a long time
that turned out to be a pretty conservative assumption until it wasn’t. Let’s explore that through Joe’s son, Jim. He’s also a school teacher. Jim starts
working in 1975 and like his dad he contributes to his pension account. But unlike dad that money is flowing into high-risk high-return investments. Then from 1979 to 1999. financial markets go wild and the value of PERS investments
skyrocket. During those 20 years the, the funds returns average 15% annually well past that 7 or 8% guarantee. So where did the extra go? As it turns out, and this is the other critical piece of the PERS problem today, Jim got that too. See the PERS board, which was then dominated by public employees, voted to credit the bulk of those earnings to public employee accounts against the
advice of financial advisors. They didn’t set aside money for a rainy day or ask
employers or employees for adequate contributions to make sure they had enough to match what would become ballooned up retirement benefits. That aside, this worked out great for Jim. He and thousands of other public employees
watched their retirement accounts explode. And while Jim is jumping up and
down for joy, his employer had to eventually match his beefy account. On top of that, that same account now earns that generous 7 or 8% while Jim draws it down in retirement. People like Jim got all the upside of
the system with essentially no risk. In fact, Jim ended up earning more in
retirement than he ever did teaching. And he’s far from alone. By 2000, career
public employees were retiring on average with annual retirement benefits
equal to their full salary. That’s double what lawmakers had targeted when they
made the earlier changes to the system. And some members earn far more. But remember that rainy day? It showed up. First during the 2000 dotcom bust and again
during the 2008 Great Recession. Both depleted the PERS investment portfolio. So that’s essentially how PERS dug itself into the hole we keep referencing
in our headlines.