The Current Plan, Oregon Public Service Retirement Plan in Review: Part 1

The Oregon Public Employees Retirement System (PERS) has been one of the most controversial issues for the state of Oregon since Governor Snell signed House Bill 344 into law effective July 1, 1946. Since the market downturn in 2008, the system is faced with a potential Unfunded Account Liability (UAL) of over $14 billion of which 99%[1] of the deficit is attributable to Tier 1 and Tier 2 program liabilities. What’s worse is there are approximately 150,000[2] vested Tier 1 and 2 employees, as of September 30, 2010, that have not begun collecting benefits and that’s in addition to the already 110,000 active retirees in Tier 1.

Oregon can’t ignore the weight of the PERS program on state employers and taxpayers.

After researching different points of view, it’s clear that the real story and issue lies in the history of the program and little can be done without the support of the Oregon Supreme Court. In this three-part blog series, we’ll review the current retirement plan and significant events leading up to the plan, what’s being proposed for the 2013 legislative session that sets the  budget for the July  2013 – June 2015 biennium  and finally; a look into a past filled with hardship, new beginnings, record inflation and controversy.

In the mid 90’s, nearly 50 years after the creation of PERS, public concern over rising taxes and the potential future effects on social services finally caught the attention of lawmakers and as a result the first significant steps toward controlling rising retirement costs were taken and Tier 2 was created.  The new plan, effective January 1, 1996 eliminated the guaranteed rate of return on regular accounts for new members and prohibited the use of accumulated unused vacation in the final average salary calculation. While some saw this was a step in the right direction, it was perhaps the technology bust in the early part of the 21st century that magnified the inherent issues in the PERS system and lead to the enactment of the Oregon Public Service Retirement Plan (OPSRP), essentially creating a third tier effective for employees hired after August 28, 2003.

Many substantive reforms targeted at reducing Tier 1 and Tier 2 benefits were originally passed in the 2003 legislative session that created the current plan, OPSRP, but were immediately challenged and overturned by Oregon Supreme Court who ruled that prior promises made to employees are constitutionally protected and cannot be changed. This history is critical to understanding why state legislators can do little to right the ship without the help of the courts, why the state has three active retirement plans and why the state can’t escape the burdens of the past that will likely haunt citizens, legislators and taxpayers for generations to come.

Employees hired after August 28, 2003 are subject to the OPSRP plan that has been described as a “hybrid” plan – meaning it has both a defined benefit component (aka, pension) as well as a defined contribution component (aka, Individual Account Program (“IAP”)). Under the plan employees receive retirement benefits from a combination of three sources that result in a monthly combined benefit of ~90%[3] of final average salary including: (1) a state pension based on a full-formula method[i] plus (2) social security and (3) an annuity portion that is created as a result of the 6% annual required employee contribution to their “IAP”.   The plan also increases the full-service retirement age by five years[ii] and includes a 2% capped annual cost of living adjustment (COLA).

In part 2 of this 3 part series, we’ll examine what’s being proposed for the upcoming 2013 legislative session and the likely effects on public employees.

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 about your retirement benefits and what it means to you, call us toll free at 1-877-257-0057 to schedule an appointment.

Image courtey of: http://www.oregon.gov/pers/Pages/index.aspx

 


 

[1] City Club of Portland Bulletin, Vol. 93, No., 49, May 27, 2011, page 23

[2] City Club of Portland Bulletin, Vol. 93, No., 49, May 27, 2011, page 8, Table 3.

[3] City Club of Portland Bulletin, Vol. 93, No., 49, May 27, 2011, page 9

 


 

[i] Full-formula calculation Pension Benefit = (Final Average salary * years or service * pension factor (1.5% for OPSRP general). Example: ($50,000*30 yrs)*1.5% = $22,500 or 45% of final average salary.

[ii] Retirement age for non-police and fire Tier 1 employees is 58, Tier 2 is 60 and OPSRP is 65