For years, the officials at Oregon’s Public Employees Retirement System (PERS) have marketed their retirement plan as one of the best in the country. Oregon’s governors, legislators, judges, and even the attorney general’s office have kept everyone from looking too deeply into their sacred plan. Fifty years of rule and benefit enhancements by a self-governed plan have produced one of the most expensive, complex and questionable pension plans in existence.

As members prepare for retirement, getting straightforward answers to simple questions from PERS is difficult at best. Rank and file members such as teachers and police officers do not receive clear, concise, consistent, accurate, or timely information regarding their life savings. Deciphering any one of the 14 retirement options available can be overwhelming. Trying to calculate retirement benefits using the myriad retirement formulas requires advanced mathematic skills and cannot be relied upon. Members are urged not to examine their options and are encouraged to stay within the plan even as their life savings erode due to mismanagement.

One of the first questions that every member asks is, “If PERS manages our life savings so well, then how can we be billions in the hole?”

No matter how the fund performs, if benefits are continually raised without a means for paying for them, the plan will implode. Think of Whimpy from the old Popeye cartoon: “I’ll gladly pay you Tuesday for a hamburger today.” Some politicians and union leaders have successfully duped PERS members and the public with this old trick, knowing they wouldn’t have to deliver on their promises until they were long gone. They were elected, dues were collected, and members were forgotten.

During the past legislative session lawmakers were often overwhelmed by the complexities of PERS, and they were misled by lobbyists and special interest groups. They were denied critical information and were unable to make unbiased, informed decisions. Worst yet, they were simply pressured into voting along party lines.

Contrary to popular opinion, the bear market from 2000 to 2002 did not bring PERS down. Nor did the reforms from 2003 fix PERS. The $5.5 billion in debt issued over the last couple of years to pay off employers’ PERS liabilities has yet to be repaid, but rather the debt has been passed on to our children and their children. How will the PERS board handle the additional $2.7 billion in Unfunded Accrued Liability? Can we trust PERS math? The misinformation machine built for PERS continues to keep 300,000 members pitted against the 3.3 million Oregonians who aren’t members. Both groups are kept in the dark.

The Retirement Information Management System (RIMS) is the information technology that PERS has relied on since the mid-1980s, which according to PERS, “…employs outdated and highly inflexible technology.” The following is from the PERS Members Handbook:

RIMS has proven unable to cope with the expansion and substantial revisions to PERS in the last 15 years. As a result, approximately 35 to 40 percent of the agency’s processes must be done manually. This invites higher error rates, generates higher costs, degrades productivity, and lowers the quality of service provided to members and employers. As the RIMS system ages, the agency has found it particularly difficult to adapt to program changes required of PERS due to legislative action or new Board policies. Nor is it easy to produce information from RIMS to aid decision makers at any level who might be considering additional changes or issues affecting PERS. Though all of the effects noted above adversely affect PERS’ stakeholders across the board, there is no evidence that RIMS’ problems in any way threaten the financial viability of PERS.

PERS has been granted a monopoly on Oregon’s public employees’ retirement savings. In the last three years alone, the PERS board has taken an additional $30 million of PERS members’ and taxpayers’ money to shore up RIMS. If PERS were held to the standards of private pension plans, all Oregonians could have saved this huge expenditure and more. How? Competition. By utilizing successful, experienced institutional money managers that manage and administer public employees’ pension plans for other states, employers’ rates would drop dramatically. Returns would be competitive, members would be able to control the amount of risk they are subjected to, and they could gain much needed access to information to make informed decisions.

The strong returns reported by the Oregon Investment Council (OIC) are the most common argument for keeping members in PERS. The OIC is a small group of individuals hand selected by the governor to oversee approximately $55 billion in public retirement funds. One of the main problems, besides conflict of interest concerns, is the difficulty members have in accessing accurate or timely information regarding the amount of risk associated with their life savings.

For example, Tier One members, those hired prior to January 1996, have two investment options. A Regular Account with a guaranteed assumed rate currently set at 8 percent and a Variable Account that fluctuates in value based on the investment returns. According to an actuarial study presented in front of Judge Brewer in Multnomah County Court in late February/early March 2004 for the period of 1978 to 2002, the PERS board credited a compound 11.95 percent to Tier One members’ accounts. The problem? The fund only earned a compound 11.59 percent. At first glance, the roughly one-third point difference does not seem significant; however, over a period of 25 years the difference is substantial considering the market does not move in a straight line. When the actuary was asked why the board would have done this, he replied, “They didn’t know what they were doing.”

During the 1990s everybody wanted to be in the stock market and the PERS board encouraged its members to do so. The board had given its members discretion to contribute 25, 50 or 75 percent of their monthly contributions into the Variable Account. The same actuary was asked to compare the risk of the Regular Account to the Variable Account. He concluded the Variable Account was two-and-a-half times riskier than the Regular Account for less than a one percentage point improvement in returns. The actuary said the Variable Account was a “terrible deal” for members.

Had members or employers been privy to the above information, members’ account balances would not have lost money and they could have avoided being subjected to so much risk. In addition, employers’ rates would have been held within acceptable levels without taking much needed funds away from education, social services and healthcare.

Lacking transparency or accountability, PERS has continued to run rampant. The newest retirement plan as a result of the so-called 2003 reforms is the Individual Account Program (IAP). Oregonians have again been misled with another time bomb. The PERS board and some members of the legislature were quick to dub the IAP a 401(k)-style plan. Unfortunately, the IAP is no 401(k). It is expensive and highly restrictive. Members have no investment options and have been denied the right to control the amount of risk they are subjected to.

PERS issued up to 170,000 erroneous IAP member statements last year claiming members received up to three times the actual return performance. PERS Executive Director Paul Cleary and Deputy Director Steve Delaney were both caught misinforming the Senate Rules Committee chaired by Sen. Kate Brown. When asked if PERS was taking the interest and earnings during a 30-45 day float period (the time between when money is contributed from a member’s paycheck to the time it is invested in their IAP), both directors initially insisted that was not PERS practice. But under questioning later they confessed to PERS keeping nearly $700,000 of members’ money for the first half of the year alone. When further pressed, both directors changed their story again regarding the discrepancy between actual returns versus stated returns.

The chart below is based on an actual member’s IAP statement from PERS:

The force to keep this information behind the curtain is overwhelming. Members are scared and concerned about severe retaliation if they break rank. Only after testimony at one of Sen. Brown’s Senate Rule Committee hearings did word leak from a lobbyist (name withheld for fear of career-ending punishment) who participates in the IAP. This lobbyist confessed to being instructed to block any efforts to improve PERS. Why come forward now? “We checked the math on our IAP statements. It is misleading and absolutely wrong.”

To date, members have not been informed regarding these discrepancies nor have they received corrected statements. In addition, at no point did Sen. Brown stand up for members, taxpayers, schools, social services, or healthcare by questioning the two PERS directors regarding these discrepancies even after they had been caught attempting to mislead her Senate Rules Committee. Neither PERS nor its directors have yet to receive even a slap on their collective wrists for misleading a senate committee and PERS members who entrust them with their life savings.

These and many other inconsistencies at PERS cannot and should not continue. The PERS system should be efficient, transparent, accountable, competitive, and cost effective for all involved. Senate and House bills proposed during the past legislative session would have improved the system had it not been for Gov. Kulongoski’s firm stance against fixing PERS with more than a fresh coat of paint. Left unchecked, PERS costs will expand exponentially while simultaneously draining our schools, social services and healthcare systems. After three years of research and extensive study into public employee retirement plans across the country, it is clear that we can fix PERS without dismantling the entire system or breaking promises for benefits earned.

Back room deals and closed-door meetings must end. Members and the public must say “no more” to special interest groups and lobbyists for organized labor who prohibit members and the general public from seeing the real PERS. The governor must stand up for members as well as education, social services and healthcare. We cannot afford to continue to burden our children and our children’s children with a retirement plan filled with loopholes and abusive practices for the well-connected. PERS members must be given the information necessary to protect their life savings from a board that has a free hand to subjectively change rules at will without any ramifications or repercussions for their actions.

If you care about Oregon, about schools, about social services, about health care, or just about your own pension, then get informed. Get involved. Insist PERS be competitive, transparent and held accountable.

Jesse Villarreal Jr. is the founder of PERS Help, a nonprofit organization that has spent years researching and studying the PERS system and other retirement systems across the country and providing free access to information for Oregon PERS members. He can be reached at jesse@pershelp.com.

BrainstormNW - May 2006