Oregon's $22 billion pension hole: How did we get here?

[TexasTowelie]

The most frequently asked questions about the financial fiasco in Oregon's public pension system are: What happened? Why did it happen? Who created this mess?

Public employee unions like to blame the Wall Street bankers who helped trigger the 2008 global financial crisis. The resulting stock market meltdown cleaved 27 percent off the value of the pension fund's investments, and its funded status tumbled from nearly 100 percent to about 70 percent.

Their other go-to scapegoat is public employers, because they've failed to make adequate contributions to fund the benefits they've promised employees.

At the other end of the spectrum are the critics who blame the Public Employees Retirement System's overly generous and unsustainable benefit levels. They see featherbedding by politicians looking to benefit constituents and themselves, self-dealing by public employees in charge of the pension board, irrationally exuberant economic assumptions...

Read more: https://www.oregonlive.com/politics/index.ssf/2018/08/oregons_22_billion_pension_hol.html

[Yupster]

1. The biggest problem is the assumption

Plans are assuming rates of return up to 9 % per year.

Then they put in rules like 60 % of the money has to be invested in bonds. Then you have an interest rate environment like we've had the last few year where a 30 year bond is paying 4 % interest and you see how crazy a 9 % expected return is.

The DJIA first went over 1,000 in 1976. It finished 1981 at 875.

In the year 2000 the market hit 10,700. It finished 2009 at 10,400.


It's just notreasonable to expect big returns from the stock market. Sometimes it does great, but it also has long periods of stagnation, and it also has the occasional huge drop. For a pension fund it's even worse when you have to take money out during those drops or stgnant periods. It's silly blaming stock mrtket drops for the shortfall. For whatever reason, those drops are going to happen and need to be planned for in your calculations.

[TexasTowelie]

2. To compound the misery there are a few states that have realized that their assumed rate of return

on the stock market is too high and they are adjusting that to a lower rate. However, it also means that the employees become responsible for contributing an increased amount from their paychecks. Instead of having an issue that is deferred to future, it becomes an issue that has a current economic impact.

[Abnredleg]

4. We've Averaged 8% over the past 30 Years

but that was with a portfolio that was 80% stock (Index funds - no individual stocks) but now we're close to retirement so I rebalanced to 55% stock/45% bonds. My return will drop but now I'm more concerned about the preservation of my funds. I would like to think this is due to my investing skills but it was pure luck. Both my wife and I reached our peak earnings during Obama's stock market boom and were able to build our retirement nest egg. If this was 2008 we would be screwed.

I'm also fortunate to be in the North Carolina State Retirement System, which is 90% funded and is one of best five retirement systems in the country. Their return assumption rate is 7.2%, which they lowered from 7.2% in 2016, and the employer contribution rate increase was phased in over three years. There's no way you can have a conservative investing strategy and get a 9% rate of return.

[3Hotdogs]

3. Magnifiy that with the same Social Security problem --- inadequate contributions.

[Thunderbeast]

5. The long-term issues HAVE been addressed

In the late 90s Oregon PERS was re-structured for new employees with a leaner retirement package with more risk assumed by the employee/retiree.

The major problem comes from an agreement penned in the seventies. In an environment where typical raises were 8-10 percent to keep pace with inflation, the employee union settled for raises for half as much. In exchange, the generous pension plan was crafted to defer benefits.

In the ensuing years, rising costs and a successful effort to limit property taxes starved state and local government. The fiscal "emergency" left inadequate funding to create reserves to fund the "bubble" of tier one retirees that now are stressing the budgets of all public agencies. With no sales tax, revenues are dependent on unstable income taxes that rise and fall with the economy.

Attempts to break the contract have been rejected by the courts. This strategy is a dead end, but is the favorite policy proposal for the Republican nominee for governor.

Tier one retirees will be an obligation for the next 20-30 years. The state needs to address how to fund this obligation AND maintain quality schools and services. Tax increases will be necessary, including potentially a sales or gross receipts tax.