SALEM, Ore. – When Oregon Governor John Kitzhaber unveils his budget proposal November 30, it will include something of a gamble. Advisors say the Democrat's spending plan will include cost-cutting to the state's public pension system. Getting those changes through the legislature — and the courts — will be no easy task. But the cost of the pension system has gone up substantially.
Christy Perry has been superintendent of the Dallas, Oregon, school district for the past eight years. In seven of those years, she's had to oversee cuts. Dallas has lopped days off the school calendar and cut music classes in elementary schools.
"We've also increased class size, we've taken out library media positions," Perry says. "We've done everything we can to reduce positions and costs outside of the classroom."
You can see the effect of those cuts here in Mr. Ritter's literature class at Dallas High School. Students sit elbow-to-elbow as they discuss a Henrik Ibsen play. But soon after these seniors graduate next spring, the district's financial outlook will get even more challenging. That's because the amount of money that Dallas Schools has to pay into the state's pension program for public employees is set to jump. More than a quarter of the district’s personnel costs will go right out the door in the form of a check to the Oregon Public Employees Retirement System, or PERS.
Perry says it's hard to swallow.
"It's significant in a district that's already faced reductions year after year after year."
It's a similar story for many other school districts and local governments across Oregon, along with state agencies. So what happened? Remember that stock market downturn back in 2008?
"That's the worst loss we've ever experienced in our 65 year history," says Paul Cleary, the head of PERS. He says when the markets tumbled, the investment fund that pays out retirement benefits took a huge hit. And so Cleary says the government agencies that pay into that fund now have to make up the gap.
"We basically went from collecting about one billion dollars a year; in the next biennium we'll be collecting about two billion dollars a year from employers."
So you can see why school districts and other local governments are feeling the pinch. And you can also see why Governor Kitzhaber, who prides himself on big idea policies, might want to take on the challenge of making PERS more affordable.
Policy advisor Duke Shepard says the governor has a multi-part plan.
"The big piece is adjusting the COLA."
A COLA – or Cost of Living Adjustment — is issued each year based on inflation, but it's capped at two percent. Shepard says that cap would go down, but only for some retirees.
"What the governor is proposing is simply applying that COLA only to, right now, probably the first $24,000 of retirement earnings," Shepard explains.
Rising pension costs are hitting Oregon's local governments and school districts hard. Photo by Chris Lehman
So, about half of PERS retirees wouldn't see any changes. Shepard says the proposal maintains the spirit of the pension system.
"Every PERS retiree still gets a COLA. That's number one. That contract is kept. That promise is kept. But the huge COLA's that get applied to your higher end retirees, that money would stay and get to go into public services."
No one disputes the idea that capping a Cost of Living Adjustment would save money. But public sector unions question whether it's legal.
"The courts were very clear that you can't go back and do anything to people who have already retired," says Don Loving from the Oregon chapter of the American Federation of State, County and Municipal Employees. "They're on a path and you can't throw them off that path, so to speak."
Several states have tried a similar Cost Of Living reduction, with mixed results. A court in Olympia this month overturned a legislatively-approved freeze to annual benefits increases that are enjoyed by the vast majority of Washington public retirees.
The idea of pushing through a PERS bill that would spark a legal battle doesn't sit well with Dallas Schools Superintendent Christy Perry.
"Even worse than doing nothing is to do proposals that go forward that give you hope that something will change, and then they go through the court system and they're overturned."
Governor Kitzhaber’s policy advisor is confident the COLA proposal would stand up to legal challenges. But the idea has to pass in the Oregon legislature first. And that’s no sure bet, given the opposition to the plan from public employee unions. The last time Oregon lawmakers took up public pensions was 2003, and public sector unions weren’t shy about showing their opposition to lawmakers who supported those changes.
On the Web:
Oregon Public Employees Retirement System