Oregon PERS Part 3: A Historical Look into a Troubled Past

In this last blog of a three part series about The Oregon Public Employees Retirement System (PERS), we’ll take a historical look into a past filled with hardship, new beginnings, record inflation and controversy.

House Bill 344 creating The Oregon Public Employees Retirement System (PERS) was passed March 17, 1945[1]. The bill was motivated by several factors including the ineligibility of social security for state and local government employees, the emergence of pension plans in other states across the US, the “hidden costs of pensions” in the state budget as workers continued to be on the payroll long after they effectively retired and the devastation of the Great Depression that drove the majority of our nation’s elderly to live in poverty. The new legislation, effective July 1, 1946, immediately became known among legislators as one of the best retirement programs in the country despite strong employee resistance to the notion of being “forced” out of their jobs by retirement. 

Since its inception, the program has been heavily debated and reformed many times.

Today, the system is a three-tiered system comprised of Tier 1, Tier 2 effective for employees hired after December 31, 1995 and Oregon Public Service Employees Retirement Plan (OPSRP) effective for employees hired after August 28, 2003. In part 1 and 2 of this blog series we reviewed the current and proposed 2013 legislative changes to PERS; part 3 will focus on significant historical changes driving today’s runaway costs and Unfunded Account Liability (UAL), a deficit of over $14 billion, and what the Oregon Supreme Court rules irrevocable by future legislation.

During the 50’s, money match was the only method for calculating pension benefits. Employers only had to match payments on the first $3,000 of an employee’s annual salary. Providing a maximum benefit of about $125 a month after 30 years of employment – in reality very few received as much as $50 a month during a time of record inflation where the cost of living had doubled over the last decade[2]. But new hope came in 1953 when Oregon public employees became eligible for social security benefits thereby supplementing PERS benefits for retirees.

While supplementing PERS with social security helped, problems still existed as retirees who had not been in the system long enough were slipping through the cracks and disability was inadequately addressed. In response, legislators formed a committee to study PERS and make reform recommendations to the 1967 legislature. Oregon State Employees Association and legislators campaigned heavily and as a result a bill signed May 12, 1967 was enacted permitting the fund to invest in a common stock investment program, converting from a money-purchase system (employee bears risk) to a guaranteed minimum benefits formula that combines Social Security, annuity account balance derived from required employee contributions and 50% of their final average salary after 30 years of service. The bill also included provisions allowing legislators to receive retirement benefits for the first time[3] - a heavily debated issue that, still today, many see is a conflict of interest.  However, in a move that still plagues the system today the 1969 State Legislature reinstated money match because of a few disadvantaged employees[4] .  This gave retirees the advantage of choosing the higher of either the money match or full-formula calculation along with a guaranteed rate of return (increased from 5.5% in 1975 to 8% today) on regular account earnings. The changes, effective for retirees after January 1, 1968, were the most significant updates since its PERS inception and the guaranteed rate and reinstatement of money match continue to be the driver of key PERS issues threatening the state today.

In 1979 legislature permits a 6% “pick-up” which allowed public employers to contribute to PERS on behalf of the employee in lieu of increased wages. Today approximately 70% of employees receive the “pick-up” today.

The booming stock market of the 80’s proved to be profitable for PERS members. Typically, when a guaranteed rate is required as it is for Tier 1 members, amounts earned in excess of the guaranteed rate are used to set up a reserve to offset future periods where earning are less than the guaranteed rate. Instead, the Board, populated at the time by mostly PERS members, credited member accounts with the actual returns on investments rather than the guaranteed rate in effect at the time, sometimes crediting as much as 20% in a single year. PERS employees retiring on money match could retire and earn more in annual benefits than their final salary, with guaranteed payments for life.

In 1994, Oregon voters passed Measure 8, a ballot proposing the elimination of the guaranteed rate, the 6% employer “pick-up”, and the inclusion of unused sick leave in the final average salary calculation. But in 1996 the Oregon Supreme Court overturns Measure 8, ruling that it violates the Contracts Clause in the United States Constitution. The court reasoned that PERS is a unilateral contract between government and the employee; the employee on the date of hire receives a contractual right to whatever retirement program is promised on the date of hire.

In effort to cap the rising PERS costs and in response to harsh public scrutiny, legislature passed a bill creating Tier 2 effective for new hires beginning January 1, 1996 that eliminated the guaranteed rate of return and prohibited the inclusion of unused vacation time in the final average salary calculation. The creation of Tier 2 meant that most employees falling under this agreement, even though eligible for money match, benefitted more under the full formula method. As the late 90’s come to a close the stock market, fueled by the Dot-Com success is experiencing excellent returns and once again the PERS Board credits member accounts with actual returns rather than the guaranteed rate giving all the upside benefit and none of the downside benefit to members.

The Dot-Com crash in 2001 exposed inherent issues in the PERS system including a sizable unfunded liability as a result of losses sustained in the market. This led to the enactment of the Oregon Public Service Retirement Plan (OPSRP), the current plan in existence for employees hired after August 28, 2003 and discussed in the first blog of this series.

Gretchen Stangier, a Certified Financial Planner (CFP®), has been providing financial planning and advisory services to PERS members for over 15 years. If you have questions or would like to understand how your benefits may be affected by PERS, call our office at 1-877-257-0057 to schedule an appointment.

[1] The Oregon Public Employees Retirement System History: The First 60 years, page 7.

[2] The Oregon Public Employees Retirement System History: The First 60 years, page 8.

[3] The Oregon Public Employees Retirement System History: The First 60 years, page 11-12.

[4] City Club of Portland Bulletin, Vol. 93, No., 49, May 27, 2011, page 10