12/1/09 Newsletter Update from Oregon Senator Doug Whitsett

OREGON STATE EMPLOYEE COMPENSATION

          Oregon public employees are being paid more to work fewer hours according to calculations by the Oregon Department of Administrative Services.

Oregon has tens of thousands of state employees. Over the past several months, the news media has stated that these “dedicated” Oregon public servants are experiencing budgetary cuts that will result in lower pay and reduced hours. They suggest that the budgetary cuts must in turn reduce services to the public. As a member of both the Ways and Means Committee and the Emergency Board, I have first hand information regarding the cost of employee salaries and benefits. That knowledge leads me to question the accuracy of some of the news releases.

For that reason, I requested the Senate Republican staff to ask the Department of Administrative Services (DAS) to determine and compare the average compensation paid to state employees, as well as the average time off from work, between 2008 and 2009. The short answer from DAS is that the average Oregon state employee received both an $897 increase in compensation and several more days off in 2009 than they did in 2008.

According to the DAS figures, in 2008 the average state employee was paid $47,724 in salary and $20,407 in benefits for a total compensation of $68,131. In 2009 the average state employee will be paid $48,459 in salary and $20,569 in benefits for a total of $69,028. The $897 increase in average compensation is after an average of $2,682 was subtracted for mandatory time off without pay called furlough days.

The bottom line is that the Oregon taxpayer will pay more for receiving less service because the average Oregon state employee will earn more for working several days less in 2009 than they did in 2008.

During labor negotiations it was determined that more money could be “saved” by actually closing agencies during furlough days rather than staggering the employees hours to enable the agencies to remain open to serve the public.

 For instance, Friday November 27^th was a furlough day when state agencies were closed. Perhaps not coincidentally, that gave state employees a four day Thanksgiving weekend and also prevented the public from accessing state services for four consecutive days. Some personnel such as Department of Correction officers, Oregon State Police officers, and emergency staff for the Department of Human Services will be working on furlough days to provide critical services, but their offices will not be open during these state mandatory days off.

According to the Legislative Fiscal Office, Oregon has more than 50,000 full time equivalent (FTE) employees. An FTE is one full time position employed for 24 months. Oregon has added more than 1,700 new state employees since the Legislature adjourned June 30, 2009.

By definition in state law, state employees do not include employees of special districts, cities, counties, school districts, education service districts, community colleges, universities, and those who work for the Legislature, Governor, Secretary of State, Treasurer or other statewide elected officials, those who work for non-government organizations with state taxpayer funding, or of course, any federal  employees. Well more than 170,000 people actually work for the various state government entities in Oregon.

Other courses of action were available to reduce employee payroll costs without reducing services.

For instance, state employees do not contribute toward their health insurance premiums. In contrast, according to the Oregon Educators Benefit Board, the average Oregon K-12 teacher pays about $187 per month toward their health insurance premiums. If Oregon state employees would agree to a similar health insurance premium contribution the savings to taxpayers would exceed $225 million per budget cycle.

Altering vacation time, sick leave, personal days, family leave and other work time benefits could reduce the number of employees required. Many state employees actually work less than 200 days per year when all these work leave benefits are combined. This requires as many as 20% more state employees to keep the positions staffed to serve the public.

Altering the Public Employee Retirement System employer contribution is another available venue for savings. The current system is one of the most generous and costly benefits in the nation.

DAS is the agency most responsible for the Oregon employee payroll. That agency’s comparisons clearly show that the average Oregon state employee has not experienced the reduction in pay, the reduction in benefits, or the increased workload currently being experienced by many employees in the private sector.

In contrast, they are earning more for working fewer hours.

 OREGON PUBLIC EMPLOYMENT RETIREMENT FUND

The Oregon Public employee Retirement System is once again in deep financial trouble. The PERS reforms established in 2003 by Governor Kulongoski and the Oregon Legislature have proven woefully inadequate.

PERS obligates Oregon taxpayers to provide funding for the retirement benefits promised to more than 320,000 public employees. They include about 110,000 employees that are already retired, more than 40,000 inactive employees that are owed a pension but are not yet old enough to retire, at least 170,000 employees that are currently working for all Oregon government entities as well as the Oregon education enterprise.

The total cost of funding these public employee retirement benefits is currently calculated at about $65 billion. The PERS accounts currently have about $50 billion in assets, leaving a $15 billion unfunded taxpayer obligation.

In my opinion the retirement benefit system has at least two fatal flaws that make the current deficit virtually inevitable.

First, only about one third of the funding is actually derived from employer and employee contributions to the funds. The other two thirds of the funding are assumed to be provided by PERS fund investment earnings.

An average return of about 10% on the PERS fund investments is required to provide the required income to meet the funds’ obligations. During the past ten years that return on investments has only averaged 4.5 %. The $15 billion deficit is the result of the failure to meet investment return expectations.

Second, more than two thirds of PERS recipients are on a mostly defined benefit retirement plan. Their retirement income is guaranteed including an annual 2% cost of living increase. These defined benefit plans guarantee an eight percent annual return on investment to the participants regardless of economic market conditions and actual fund investment earnings.

The PERS accounts were nearly 100% funded in 2007 following about five years of abnormally high investment earnings. I met with PERS director Paul Cleary on more than one occasion to discuss my belief that the retirement funds should be invested more conservatively. Specifically, I expressed my concerns about PERS funds being invested in highly leveraged real estate investment trusts, derivative funds, and other investments that I perceived as being too high risk.

I met with former State Treasurer Randal Edward’s staff to ask the same questions after I learned in early 2007 that more than $50 trillion was invested world wide in highly leveraged derivative investments called credit debt swaps. Those investments were supposedly insured against default. Unfortunately, those issuing the insurance had neither adequate reserves nor adequate collateral to stand the losses when default did occur.

 I was repeatedly assured that both the Oregon Investment Council, and the state Treasurer’s staff, was made up of professional investors that know what they are doing and that the overall portfolio of investments was secure. My repeated suggestions that the five year investment bubble could not be maintained and that much of the taxpayer investments in the PERS accounts should be reinvested into more stable equities were not acted upon.

Starting in 2008 the PERS accounts lost more than $21 billion during the ensuing market crash. The PERS accounts bottoming out in March of 2009 at about $42 billion.

The improving investment climate through the end of September has allowed about $8 billion of those losses to be recovered. After paying current retirement obligations and costs, the PERS accounts are now about $15 billion short of being fully funded.

PERS actuaries now calculate that the taxpayer contribution will need to be increased by 6% in 2011, and another 6% in 2013 just to maintain the status quo. They believe that the taxpayer contribution to PERS will need to average at least 25% of payroll for the next ten years to put the retirement fund back on sound footing. Their calculations require that the PERS accounts average at least 8% annual return on investment. The taxpayer contributions will need to be much higher if the accounts earn less than the predicted 8% average return.

Unfortunately, that is not the entire story.

          The State, and many other government and education entities, has established what are called PERS side accounts. They issued pension obligation bonds at reasonably low interest rates, and invested the borrowed money into higher risk ventures that paid higher returns.

The idea was to use the profit generated between the earnings on the higher risk investments, and the cost of paying the debt service on the lower interest pension obligation bonds, to pay down the cost of PERS employer contributions.

The investment earnings are often not enough to pay the pension obligation bond payments following the huge loss in equity in the market crash.

Even worse, many of these pension obligation bonds are structured so that the annual debt service payments increase as the bonds mature. These pension obligation bonds are much like a home equity loan with an adjustable payment that increases over the term of the mortgage in anticipation of higher family earnings. Many of the pension obligation bonds that were issued in 2006 and 2007 near the top of the market expansion are now “under water” and must be bailed out with additional taxpayer dollars/

Finally, the public employment retirement system was designed for the employees and the employers to share in the cost. Public employees were to pay six percent of their wages into their retirement account, while the public employer paid the rest of the obligation with taxpayer dollars. As the result of collective bargaining between labor and government management, about 70% of Oregon’s public employers, including the state, now pay the six percent employee contribution with tax dollars. When we combine this “6% pickup” with the predicted 24% employer contribution in 2013 the total taxpayer cost will be at least 30% of payroll assuming we experience a good investment climate. A prolonged recession will certainly require even higher PERS tax dollar contributions.

The taxpayers’ $15 billion unfunded PERS obligation does not include the cost of either the debt service cost of pension obligation bonds or the 6% pickup.

Former Secretary of State Phil Keisling has written an excellent 50 page report attempting to describe the very complicated taxpayer liabilities to our public employee retirement system. The Report is titled “PERS in Crisis: The Sequel”. It is readily available on Google by typing in the title. Although I highly recommend that you read his report, be advised that it is not for the faint of heart.

I am still attempting to determine the total unfunded taxpayer liability to PERS. I can say with confidence that, as it currently stands, the Oregon taxpayer unfunded PERS obligation exceeds $20 billion. That unfunded obligation to Oregon public employees is more than $5,000 for each resident of Oregon.

Best regards,

Doug

Please remember that if we do not stand up for rural Oregon, no one will!

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