Legislature passes PERS cost containment that will save schools hundreds of millions of dollars
International Association of Fire Fighters members stood in the House gallery when Senate Bill 1049 came up for a vote and remained standing while the House stood in recess and members reconsidered their votes. The bill reduces Public Employees Retirement System benefits as part of a cost containment package to stabilize the system. (Photo by Jake Arnold, OSBA)
After what initially appeared to be a failure, the Legislature has taken another swing at pension reform.
Senate Bill 1049, which passed the House on Thursday, will lower average statewide public employer rates an estimated 5.4 percentage points starting in 2021-23. It lengthens the payback on Public Employees Retirement System debt and lowers some pension benefits.
The bill failed the first vote 29-31, but House Speaker Tina Kotek didn’t close the vote. After a recess, two representatives changed their votes to give it the necessary 31. No Republicans voted yes.
SB 1049 passed the Senate last week on a bipartisan vote. Gov. Kate Brown is expected to sign the bill into law.
“I know a lot of my good friends in labor are really angry with me for doing this, but I swore an oath to serve the state of Oregon,” said Rep. Paul Holvey while introducing the bill.
Holvey said the bill was imperfect but without support for tax increases to pay down PERS debt the state didn’t have many options to stem the impending pension crisis.
OSBA has testified in support of the bill, which has drawn praise from public employers and business groups.
The House debate Thursday was shorter than the emotional Senate debate last week. Only a few opposing representatives made statements, saying they supported promises made to state workers.
All sides agree PERS’ growing bite out of public services, including education, must be curbed. School districts’ average PERS cost for 2019-21 is expected to be roughly double what it was in 2015, with base rates approaching 30% of payroll.
Senate Bill 1049 derives nearly three-quarters of its cost savings from adding two years to the payback period for some of the debt. It holds rates below current projections for the next decade, but public employers will pay out more over the long run.
The longer debt payback made some legislators uncomfortable, but most of the debate focused on the decreases to employee benefits. Public employee unions, including teachers, have protested the bulk of the PERS pain falling mostly on newer hires.
The Oregon Supreme Court ruled the Legislature cannot reduce benefits already accrued, protecting the generous pensions of employees hired before 2003 reforms, but it could change benefits going forward. Public employee unions have vowed to fight the latest changes, which worried legislators who saw PERS reforms undone in 2015.
SB 1049 redirects a portion of employees’ contributions to the Individual Account Program, which is like a 401(k), to pay off PERS debt. Employers pay the contribution. Tier 1 and 2 employees, who have richer pension benefits, would redirect 2.5% of their pay, while Oregon Public Service Retirement Plan members would redirect 0.75%. The change would not lower employees’ pay, but it would decrease the size of their eventual retirement accounts.
The law picks up a little more savings by capping the final average salary for pension calculations at $195,000 and allowing retirees to work after retirement.
The bill also directs $100 million and future sports betting revenue to set up a state matching fund for side accounts that help lower employers’ rates.
Together, the bill’s provisions would reduce employer contributions by $1.2 billion to $1.8 billion a biennium, according to the Legislative Fiscal Office.
The bill leaves no one happy, though. Republicans would like to see more cost containment. Democrats would like to see the payment burden more evenly distributed, but fiscal responsibility was part of the bargaining for other legislation they supported, including the Student Success Act to infuse $1 billion a year in new tax money into education.
“Senate Bill 1049 does not entirely solve the problem, and there will be more challenges ahead,” Holvey said.
PERS Senior Policy Director Marjorie Taylor said estimates showing rates falling around 2031 rely on the fund meeting performance projections that it missed last year. A long-overdue economic downturn could worsen the problem, she said.
Much of the more than $26 billion in debt is owed to Tier 1 and Tier 2, untouchable by the Legislature, according to Taylor.
The only other way to bring the cost curve down is to put billions of dollars into the system, either by pulling it way from other government services or with new taxes.
“PERS is not bargained; PERS is legislated,” said Tim Nesbitt, PERS Solutions for Public Services interim executive director. “It is something only the Legislature can fix.”
Nesbitt, who had testified in favor of the bill, works with business leaders who have considered putting a PERS cost containment measure on the ballot. He said they would have to assess other developments to decide whether they would still go forward.
He said it was important that people recognize that there is a connection between the cost of benefits and the level of staffing possible. Nesbitt estimated the bill would save schools about $200 million a year, money that can be used to hire teachers. He praised the cost sharing and saw the necessity of the debt payback plan.
“I always thought we would have to do something like that to not overburden one cohort of kids in our classrooms with a disproportionate amount of fiscal austerity,” he said.
- Jake Arnold, OSBA