Author: Cascade Policy Institute

End PERS—For a Day!

By Steve Buckstein

Most Oregonians know that our state’s Public Employees Retirement System (PERS) is some $25 billion to $50 billion under water. Promises made to past and present government workers, primarily those hired before 1996, were simply way too generous for taxpayers and entities like school districts to afford.

A misreading of the so-called Contracts Clause in the U.S. Constitution by the Oregon Supreme Court has meant that once a government employee was hired in the state, the terms of his or her employment could not be altered, even for work done in the future.

One remedy for this situation might be to fire all public employees for a day, thus canceling their PERS contracts, and then hire them back the next day under new, less generous terms. If you think that’s a non-starter, something similar actually happened in Oregon before.

In 1953 the Oregon legislature passed a law ending the PERS system—for one day—so that the new system could include public employees in the (then) relatively young federal Social Security program. That one-day change was for the benefit of the workers. But it just might be a precedent to do something similar today for the benefit of taxpayers and public agencies. Let’s see who picks up this controversial ball and runs with it.

Steve Buckstein is Senior Policy Analyst and Founder of Cascade Policy Institute, Oregon’s free market public policy research organization.

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TriMet Shows Pension Reform Is Possible

By Scott Shepard and John A. Charles, Jr.

The Oregon legislature recently adjourned its 2018 session and once again took no action to reduce the long-term financial obligations of the Oregon Public Employee Retirement System. Conventional wisdom in Salem is that significant pension reform is impossible, so we should just quietly accept our fate that the PERS crisis will lead to layoffs at public schools and other service providers.

The conventional wisdom is wrong.

The Portland regional transit district, TriMet, is not part of PERS and has been slowly reforming its pension program since 2002. As a result, 100 percent of all new employees are now in 401(k)-style pensions that have no long-term liabilities for employers. These are referred to as “defined-contribution” pensions in which monthly payments are made by management into personal accounts owned by employees. Once those payments are made, the employer has no further financial obligations.

This stands in contrast to “defined-benefit” programs like PERS in which employees are promised various levels of retirement payments calculated through arcane formulas that leave management clueless about the major level of funding obligation they’ve agreed to.

The advantages for taxpayers of moving public employees into defined-contribution pensions is now evident in the actuarial projections done for TriMet. According to the most recent valuation, estimated annual benefit payments for TriMet defined-benefit pensions will peak in 2034 at $74.6 million, then drop to $24 million in 2060 and $6 million by 2072. They will hit zero by the turn of the century.

This was not something that TriMet did casually. Management was forced into it because of decisions made in the 1990s that caused long-term retiree obligations to explode. The TriMet Board realized that changes were necessary and voted to move all new, non-union hires into defined-contribution pensions after 2002.

Resistance from the bargaining unit kept TriMet from moving its new unionized workers to defined-contribution plans for another decade, by which time a citizens’ committee had issued a report declaring TriMet “on the brink” of disaster. During a protracted negotiation with the union in 2012, TriMet CFO Beth deHamel testified at a binding arbitration hearing that unless changes were made, “TriMet could be forced to default on its pension obligations or its other financial obligations in the future.”

Union leadership eventually agreed to move all new members to defined-contribution pensions by 2013. As a result, the number of active employees still accruing defined-benefit pension benefits fell from 1,580 to 1,460 during 2016. Last year, the unionized workers’ defined-benefit account reached nearly 80 percent funding; and the long-term, unfunded pension liability dropped by nearly $50 million.

The defined-contribution plan to which TriMet moved new workers has been recognized as one of the best in the country. It features low costs, high returns, and a guaranteed employer contribution that is paid irrespective of employee matching contributions.

TriMet’s pension reform offers a valuable guide to the Oregon legislature on how to contain and reverse the spiraling PERS disaster. The unfunded liabilities for PERS have grown from $16 billion to more than $25 billion in less than ten years.

Some reduction in PERS benefits will have to happen, and all parties will benefit from an orderly transition while there is still time. The state should emulate TriMet by moving its employees from defined-benefit to defined-contribution plans as soon as possible.  However, the legislature will be obliged to make bigger changes than would have been required years ago. It will have to move all current workers, whenever they were hired, to defined-contribution plans for all work performed after the date of the effective legislation.

The sooner this is done, the less painful later steps will be. As former TriMet General Manager Neil McFarlane noted recently, solving a pension crisis “doesn’t get any easier with passing time.

John A. Charles, Jr. is President and CEO of Cascade Policy Institute, Oregon’s free market public policy research organization. Scott Shepard is a lawyer who recently authored a new case study of TriMet’s pension reform for Cascade Policy Institute. The study, “Following in TriMet’s Tracks: Defined-Contribution Pensions a Necessary First Step to Oregon’s Fiscal Health,” is available here. A version of this article originally appeared in The Portland Tribune.

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In 9 Years, WES Hasn’t Decreased Westside Congestion

By John A. Charles, Jr.

February marked the nine-year anniversary of the Westside Express Service (WES), the commuter rail line that runs from Wilsonville to Beaverton. Sadly, there was little to celebrate.

A central problem is that WES never had a clear mission. At various times the train was promoted as: (1) a congestion relief tool for Highway 217; (2) a catalyst for so-called “Transit-Oriented Development;” or (3) a way of providing “another option” for travelers. None of these arguments has panned out.

During legislative hearings in Salem, representatives from Washington County claimed WES would take 5,000 motor vehicles per day off of nearby highways. But WES is not capable of that because it only runs eight times (each direction) in the morning, and eight times in the afternoon. Unlike traditional commuter trains pulling eight or nine passenger cars, WES travels only in one- or two-car configurations.

During its best hours of performance, the total number of passengers is less than 0.5% the number of motorists traveling on Highway 217/I-5 at those hours, so there has been no congestion relief.

Prior to WES, two TriMet bus lines provided more than 4,000 boardings per day in parallel routes. Commuter rail has replaced inexpensive bus service with a massively subsidized train. Taxpayers would be better served if we canceled WES and moved commuter rail customers back to buses.

John A. Charles, Jr. is President and CEO of Cascade Policy Institute, Oregon’s free market public policy research organization.

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WES at 9: Time to Admit the Mistake

By John A. Charles, Jr.

February marked the nine-year anniversary of the Westside Express Service (WES), the 14.7-mile commuter rail line that runs from Wilsonville to Beaverton. Sadly, there was little to celebrate.

In the first few years of operation, ridership grew and it was at least plausible that WES eventually could become a productive transit line. However, average daily ridership peaked in 2014 at 1,964 daily boardings, then dropped in each successive year. During fiscal year 2018, WES ridership has averaged only 1,668 daily boardings.

A central problem is that WES never had a clear mission; it was always a project in search of a purpose. At various times the train was promoted as: (1) a congestion relief tool for Highway 217; (2) a catalyst for so-called “Transit-Oriented Development;” or (3) a way of providing “another option” for travelers. None of these arguments make sense.

During legislative hearings in Salem, representatives from Washington County claimed that WES would take 5,000 motor vehicles per day off of nearby highways. But WES is not even capable of doing that because it only runs eight times (each direction) in the morning, and eight more times in the afternoon. Unlike traditional commuter trains pulling eight or nine passenger cars, WES travels only in one-car or two-car configurations. The train stations themselves are so short that even if TriMet started running eight-car trains, most passengers would have no way to get on or off.

During its best hours of performance, the total number of passengers traveling on WES is less than 0.5% the number of motorists traveling on Highway 217/I-5 at those same hours, so there has been no congestion relief.

Moreover, WES crosses more than 18 east-west suburban arterials four times each hour. On busy commuter routes, such as Highway 10 or Scholls Ferry Road, each train crossing delays dozens of vehicles for 40 seconds or more. Since the train itself typically only carries 50-60 passengers per run, this means that WES actually has made Washington County congestion worse than it was before the train opened.

WES has not been a catalyst for “transit-oriented development” and never will be because the train stations are a nuisance, not an amenity. The noise associated with train arrivals was always underestimated and is not likely to induce new residential construction.

As for the hope that WES would provide “another transit option,” there were already two TriMet bus lines providing over 4,000 boardings per day in parallel routes prior to the opening of WES. Commuter rail simply replaced inexpensive bus service with a massively subsidized train.

Several key statistics summarize the problems with the train:

  • WES was originally projected to cost $65 million and open in 2000. It actually cost $161.2 million and opened in 2009.
  • TriMet projected an average daily ridership of 2,500 weekday boardings in the first year; actual weekday ridership was 1,156. It grew over time to 1,964 in 2014, but dropped to 1,771 in 2016 and 1,668 in 2018. Since each rider typically boards twice daily, only about 850 people actually use WES regularly.
  • The WES operating cost/ride is roughly five times the cost of average TriMet bus service.

Ridership and Cost Trends for WES

2009-2018

(inflation adjusted, 2015 $)

2009 2010 2011 2012 2014 2016 2018 % Change since 2014
   
Avg. daily boardings 1,156 1,313 1,571 1,700 1,964 1,810 1,668 -15%
Operating cost per ride $27.41 $24.46 $20.43 $18.39 $15.85 $13.55 $16.73 +6%
Cost/

train-mile   

$54.70 $54.12 $53.30 $53.79 $51.12 $53.82 $60.56 +18%
Cost/

train hour

$1,180 $1,166 $1,171 $1,180 $1,109 $1,178 $1,307 +18%
Average subsidy/ride $26.18 $23.00 $19.01 $17.64 $14.36 $12.07 $15.30 +7%

In June 2016 TriMet staff persuaded the Board to approve the purchase of two used rail cars to expand the WES fleet. The estimated cost for the purchase was $1.5 million, plus $500,000 more for retrofitting.

TriMet claimed that this purchase was necessary to satisfy the “expected demands for growing WES service.” That demand was a fantasy.

WES is destined to be a one-hit wonder―an expensive monument to the egos of TriMet leaders and Westside politicians. Taxpayers would be better served if we simply canceled WES, repaid grant funds to the federal government, and moved the few commuter rail customers back to buses.

John A. Charles, Jr. is President and CEO of Cascade Policy Institute, Oregon’s free market public policy research organization.

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TriMet Shows Public Pension Reform Is Possible

By John A. Charles, Jr.

The Oregon legislature recently adjourned and once again took no action to reduce the unfunded liabilities of the Oregon Public Employee Retirement System (PERS). The reason is that most legislators think PERS reform is impossible. 

That belief is wrong. 

TriMet is not part of PERS and has been slowly reforming its pension program since 2002. As a result, 100% of all new employees are now in 401(k)-style pensions that have no long-term liabilities for employers. These are referred to as “defined-contribution” (DC) pensions in which monthly payments are made by management into retirement accounts owned by employees. Once those payments are made, the employer has no further financial obligations. 

This stands in contrast to “defined benefit” (DB) programs like PERS in which employees are promised high levels of retirement payments regardless of how investment funds are performing. 

The success of the TriMet reforms can be seen in its latest pension fund valuation, which shows that annual benefit payments for pensions will peak in 2034 at $75 million, then drop to zero by about 2085.           

TriMet’s pension reform offers a guide to the legislature on how to reverse the spiraling PERS disaster, where unfunded liabilities have grown to $25 billion. The state should move all employees to defined-contribution plans as soon as possible. 

This essay summarizes a new Cascade study of TriMet’s successful pension reform program. “Following in TriMet’s Tracks: Defined-Contribution Plans a Necessary First Step to Oregon’s Fiscal Health” can be found here.

John A. Charles, Jr. is President and CEO of Cascade Policy Institute, Oregon’s free market public policy research organization.

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Study: School Trust income would go up by 600% if lands were sold

FOR IMMEDIATE RELEASE

Media Contact:
John A. Charles, Jr.
503-242-0900
john@cascadepolicy.org

PORTLAND, Ore. – Cascade Policy Institute released a study today showing that revenue generated for schools by the Oregon Common School Trust Lands (CSTL) likely would go up by 600% if the lands were sold and the net income added to the existing Common School Fund.

The study, A Proposal to Generate Adequate Returns from Common School Trust Lands, also showed that Oregon is only making $4.25/acre from its CSTL portfolio, the lowest among nine Western states. The state of Washington is earning the most, at $37/acre.

Management of Oregon’s 1.5 million acre portfolio of CSTL has long been a contentious issue. In 1992 Oregon Attorney General Charles S. Crookham issued an opinion clarifying that CSTL must be managed primarily for revenue maximization. Advocacy groups representing non-school interests have worked to subvert that directive ever since.

Environmental groups have repeatedly lobbied and litigated to eliminate revenue generation from the Trust Lands, claiming that commodity production is an outdated concept. They finally succeeded during the three-year period of 2013-15, when Oregon’s Trust Land portfolio actually lost $360,000/year in net operating income. Those losses had to be paid for by Oregon public school students.

The Oregon Land Board voted in 2015 to sell most of the Elliott State Forest in order to remedy this problem. However, the Board reversed itself in 2017, and Governor Kate Brown subsequently sought bonding authority from the Legislature to allow her to borrow $101 million (requiring $199 million in debt service) in order to “buy out” a portion of the Elliott so that it no longer would be subject to the Constitutional mandate to earn money for schools.

Those bonds have not yet been sold, and the Elliott is expected to incur more losses during 2018.

Last year Cascade Policy Institute commissioned economist Eric Fruits, Ph.D. to do a comparative analysis of nine Western states with large CSTL portfolios to determine under what circumstances it might make sense for states to sell these lands and invest the net proceeds into stocks, bonds, and other financial instruments. Dr. Fruits concluded that six states (including Oregon) likely would be better off selling CSTL assets; two states would be better off maintaining ownership; and one state likely would benefit from divestment, but more information is needed.

Cascade President John A. Charles, Jr. stated, “The Oregon Land Board has a fiduciary obligation to manage CSTL assets for the benefit of schools. Losing money every year violates that obligation. The Trust Lands have a market value of over $700 million, and students would be best served if the Land Board simply sold its real property portfolio and turned the proceeds over to the Oregon Investment Council, which has earned an average of 8.2% annually from the Common School Fund since 2010. In fact, there is no management option that would earn more money for students than selling these lands.”

The full report, A Proposal to Generate Adequate Returns from Common School Trust Lands, can be downloaded here.

Founded in 1991, Cascade Policy Institute is Oregon’s premier policy research center. Cascade’s mission is to explore and promote public policy alternatives that foster individual liberty, personal responsibility, and economic opportunity. For more information, visit cascadepolicy.org.

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Oregon Small Businesses Deserve the Tax Break They Expected

By Steve Buckstein

While most Americans are reaping the benefits of the recent federal income tax cut, the Oregon legislature has just passed SB 1528 on a partisan vote that could deny several hundred thousand Oregon small businesses an equivalent state income tax cut they should expect.

Proponents of the bill argue that some of these businesses already got a state income tax break in 2013 and therefore shouldn’t benefit any further. But fewer than ten percent of the businesses the bill will hurt got that break. More than 90 percent won’t get any state break if Governor Kate Brown signs the bill.

Oregon is a small business state. Many are family businesses that depend on their business income to support their households.

Governor Brown says of the bill, “We’re looking at the implications for Oregon’s small businesses and Oregon’s economy.” She has until mid-April to sign it into law. Small business groups like NFIB are urging her to veto it.

If she does sign the bill, opponents might gather signatures referring it to voters in November. And hundreds of thousands of those voters will be the very people the bill impacts.

Oregon doesn’t need more tax revenue from small businesses to balance its budget, and giving them a tax break should be good for our economy. If you agree, call the Governor at 503-378-4582 and ask her to veto SB 1528.

Steve Buckstein is Senior Policy Analyst and Founder of Cascade Policy Institute, Oregon’s free market public policy research organization.

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Time to Decentralize Oregon’s Education Reform Efforts

By Kathryn Hickok and Steve Buckstein

Three years ago, Oregon state government killed off what should have been the last of three big education reform efforts since 1991. Each promised to solve the unsolvable: how a one-size-fits-all public K-12 school system could educate all Oregon students and launch them onto a lifelong path of educational and career success. The fatal flaw in these reform efforts was that they relied on centralizing control over education policy.

Now, the Oregon legislature is embarking on what may turn into a fourth “impossible mission” to achieve student success in our public school system. Members of the Joint Committee on Student Success will travel around the state asking everyone they meet what constitutes success in their communities. They then will return to the State Capitol and recommend that every school do “what works” somewhere—most likely at a higher cost to taxpayers than they are paying today.

But rather than wait years to judge this latest reform effort a failure, why not try another path: the school choice path? School choice allows students and their families to choose where and how to get the educational opportunities that are right for them. School choice recognizes that children learn in different ways and at different paces and puts parents, not bureaucrats, in the driver’s seat of their kids’ education. That truly would be a revolutionary movement in the direction of student success.

Kathryn Hickok is Publications Director and Director of the Children’s Scholarship Fund-Oregon program at Cascade Policy Institute, Oregon’s free market public policy research organization. Steve Buckstein is Cascade’s Senior Policy Analyst and Founder.

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TriMet Shows That Public Pension Reform Is Possible

By Scott Shepard and John A. Charles, Jr.

The Oregon Legislature is currently meeting, and the conventional wisdom is that reform of Oregon’s overly generous Public Employee Retirement System (PERS) is impossible. According to Governor Kate Brown, we signed contracts with public employee unions, a deal is a deal, and we should just quietly accept our fate that the massive cost of PERS will lead to layoffs and service cuts at schools and other service providers.

There is another way.

The Portland regional transit district, TriMet, is not part of PERS and has been slowly reforming its pension program since 2002. As a result, 100% of all new employees are now in 401(k)-style pensions that have no long-term liabilities for employers. These are referred to as “defined-contribution” (DC) pensions in which monthly payments are made by management into personal accounts owned by employees. Once those payments are made, the employer has no further financial obligations. The eventual pension payouts will be a function of the market performance of whatever investments are chosen by individual employees.

This stands in contrast to “defined benefit” (DB) programs like PERS in which employees are promised various levels of retirement payments calculated through arcane formulas that leave management mostly clueless about the level of funding obligation they’ve agreed to. In many cases, those liabilities turn out to be much larger than expected.

The advantages for taxpayers of moving public employees into DC pensions is now evident in the actuarial valuations done for TriMet. According to the most recent valuation, projected annual benefit payments for TriMet DB pensions will peak in 2034 at $74.6 million, and then steadily decline to $6 million in 2072. They will hit zero by the turn of the century.

This was not something that TriMet did casually. Management was forced into it because of decisions made a decade earlier that caused long-term retiree obligations to explode. TriMet Board members are appointed by the governor. In the early 1990s, Governor Barbara Roberts and TriMet General Manager Tom Walsh wanted public approval of a massive expansion of TriMet’s light rail empire and the tax funding to pay for it. They feared that controversy about a union contract could endanger public support.

In their efforts to avoid strife, in 1994 they granted expensive concessions to the Amalgamated Transit Union Local 757 (“the ATU”) on behalf of its represented employees. Loren L. Wyss, the long-serving president of TriMet, objected and his battle with Walsh became public. In back-channel communications with Gov. Roberts, Walsh made it clear that either he or Wyss needed to go. In August 1994, Wyss met with Gov. Roberts, where he submitted his resignation.

As later explained in The Oregonian,

“…the contract just approved by Tri-Met union employees will protect all its members from additional contributions to their pensions for 10 years. It will also guarantee 3 percent minimum wage increases in the future…every single dollar of health, welfare, dental and vision plans will be paid for by the public employer; [and] the retirement age will decline to 58 within 10 years….”

The die was set for cost escalation. In the decade from 1994 to 2004, salaries and wages increased 72 percent; annual pension costs went up 160 percent; and the cost of health care benefits rose 116 percent. These increases plus stagnant revenues in the latter half of the period resulted in a tripling of unfunded pension liabilities, from $38 million in 1993 to $112.4 million in 2002.

Fred Hansen followed Tom Walsh as General Manger; and he moved new, non-union hires into DC pensions after 2002. This was a first step towards fiscal sanity. Resistance from the ATU kept TriMet from moving its new unionized workers to DC plans for another decade, by which time a citizens’ committee of Portlanders had issued a report declaring TriMet “on the brink” of disaster.

During a protracted negotiation with the union in 2012, TriMet CFO Beth deHamel testified at a binding arbitration hearing,

“TriMet’s union defined benefit plan would be placed on critical status and under federal oversight if it were a private pension plan subject to ERISA.” She also stated that unless something was done to shore up the plan, “TriMet could be forced to default on its pension obligations or its other financial obligations in the future.”

Union leadership eventually agreed to move all new members to DC pensions by 2013, while protecting existing members from reform. As a result of this delay, the union workers’ DB fund remained only 59 percent funded in 2013.

Nevertheless, the trends were now moving in the right direction. The number of active employees still accruing DB pension benefits fell from 1,580 to 1,460 from 2016 to 2017 alone. In 2017 the unionized workers’ DB account reached nearly 80 percent funding, with unfunded liability falling by nearly $50 million in a single year.

Neil McFarlane was TriMet General Manager during that era. He commented recently, “The shift [to DC pensions] has been a success. TriMet is paying more than the required annual contribution every year right now” because the system is closed. “We will be fully funded within the next few years: five to ten for the union plan, fewer for the non-union.”

The DC plan to which TriMet moved new workers has been recognized as one of the best in the country. It features low costs, high returns, and a guaranteed employer contribution that is paid irrespective of employee matching contributions. As a DC plan it does not create open-ended, unpredictable public liabilities to be paid by generations as yet unborn.

TriMet has not fully banished the ghosts of unsustainable employee-benefit promises past. It still faces a massive and escalating unfunded liability driven by health care costs, known in accounting jargon as “other post-employment benefits,” or OPEB. The health care benefits that TriMet granted away in the 1994 contract debacle have been described as “universal health care into the afterlife.”

The description is only a minor exaggeration, as the plan offered TriMet’s unionized employees health care without premiums and with mere $5 co-pays, and benefits that ran not only throughout retirement, but to the employees’ spouses and dependents for fully 16 years after the employees’ deaths. Total unfunded liability for OPEBs reached an astonishing $769 million dollars in 2016.

Compare: State Paralysis on PERS 

TriMet’s pension reform efforts offer a valuable guide to the Oregon legislature on how to contain and reverse the spiraling PERS disaster. The unfunded liabilities for PERS have grown from $16 billion to more than $25 billion in less than ten years, even with the far-too-optimistic 7.2 percent assumed-savings rate (i.e., discount rate) in place. Were the rate adjusted down to its actuarially appropriate level, PERS’ unfunded liability would explode to $50 billion or more at a stroke.

Even at the current recognized rate, funding status has fallen below 70 percent, even while mandatory payments to PERS by government employers have passed 26 percent of payroll.

Municipalities are laying off workers, depleting public services, and raising fees in order to fund the present level of recognized PERS unfunded liabilities. Some reduction in pension benefits will have to happen, one way or another. All parties will benefit from an orderly effort to reform benefits while there is still time. 

The Way Forward

The state should follow the tracks laid by TriMet by moving its employees from DB to DC plans as soon as possible. As TriMet has demonstrated, this move will begin to stanch the fiscal wounds that have been inflicted by a generation of recklessly overgenerous pension benefit promises.

Unfortunately for everyone, PERS reform has been hamstrung for more than 20 years by a wayward state Supreme Court, which has thwarted previous attempts at thoughtful change with erroneous interpretations of the federal Contract Clause. The legislature will be obliged to make bigger changes than would have been required years ago. It will have to move all current workers, whenever they were hired, to DC plans for all work performed after the date of the effective legislation.

While this reform will be significant, it also will be deeply equitable. Right now, older workers are receiving higher benefits for each hour worked than ever will be available to younger workers. This isn’t fair, and it may violate civil rights laws: Younger workers are more diverse than their older peers, which means that benefit reductions that affect only new workers have a disparate impact on women and minorities.

The reform will also pass constitutional muster. As the Oregon Supreme Court finally recognized in its Moro decision, correcting its long-held error, the legislature may change any benefits for work not yet performed, even for current employees.

The Oregon Legislature can and must follow TriMet’s example. The sooner this is done, the less drastic any later steps will be. According to TriMet General Manager McFarlane, solving a pension crisis “doesn’t get any easier with passing time.”

John A. Charles, Jr. is President and CEO of Cascade Policy Institute, Oregon’s free-market research center. Scott Shepard is a lawyer and was a visiting law professor at Willamette University during 2016. This essay is a summary of a case study of TriMet’s pension reform written by Mr. Shepard for Cascade Policy Institute. The full report is available here. This essay was originally published in the February 2018 edition of the newsletter “Oregon Transformation: Ideas for Growth and Change,” a project of Third Century Solutions.

Click here for the full report, Following in TriMet’s Tracks: Defined-Contribution Plans a Necessary First Step to Oregon’s Fiscal Health:

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Following in TriMet’s Tracks: Defined-Contribution Pensions a Necessary First Step to Oregon’s Fiscal Health

By Scott Shepard

Scott Shepard is a lawyer and was a visiting law professor at Willamette University in Salem, Oregon during 2016. He is the author of “A Lost Generation but Renewed Hope: Oregon’s Pension Crisis and the Road to Reform,” an academic study on Oregon state pensions published August 1, 2017 by the Mercatus Center at George Mason University. He is an Academic Advisor to Cascade Policy Institute, Oregon’s free-market public policy research center.

Introduction 

As recently as 2012, TriMet faced a pension funding disaster. Indefensibly overgenerous pension benefits granted in the early 1990s threatened to bankrupt the public transit system and to cripple the Portland metro area. While TriMet still has difficult reform ahead of it (regarding its other post-employment benefits promises), it has achieved pension fund stability by replacing its unsustainable defined-benefit pension promises with a well-designed, defined-contribution retirement plan.

“Defined-contribution” (DC) pensions are retirement benefit plans in which monthly payments are made by management into personal accounts owned by employees. Once those payments are made, the employer has no further financial obligations. The eventual pension payouts will be a function of the market performance of whatever investments are chosen by individual employees.

This stands in contrast to “defined-benefit” (DB) programs like Oregon’s Public Employees Retirement System (PERS). Under DB programs, employees are promised various levels of retirement payments calculated through arcane formulas that leave management mostly uninformed as to the level of funding obligation to which they have agreed. In many cases, those liabilities turn out to be much larger than expected. 

TriMet has brought its pension funding liabilities under control by moving its employees from defined-benefit plans to defined-contribution plans: first its management employees hired after 2002, then its unionized employees hired after 2012. The shift followed the lead of most private sector businesses, the federal government, and an increasing number of states. As a result of the change, TriMet’s pension obligations are moving steadily and reliably toward full funding within the near to medium term. This glide path to full funding is allowing the organization to focus on other vital personnel issues such as managing the cost of other post-employment benefits (“OPEBs,” which are primarily health care benefits for unionized workers) for current workers and retirees.

Oregon and its municipalities can only envy TriMet in this regard. The defined-benefit PERS funding costs continue to spiral out of control. These unbridled expenses are crushing local governments and school districts, forcing layoffs, hiring and wage freezes, bigger class sizes, reduced government services, and increased taxes. The failure to reform harms younger and more diverse workers at the expense of their older colleagues, and private-industry workers in favor of their government-employee neighbors. Taxpayers have said “enough,” voting 60-40 in 2016 against significant state tax hikes that inevitably would have been dedicated to helping to fund the PERS shortfall.

One necessary step toward addressing this problem is for the state of Oregon to follow in TriMet’s tracks, moving PERS workers from DB to DC plans. TriMet started down this road fully 15 years ago, while the state has dithered. Oregon must play catch-up by moving all PERS-covered workers to DC plans for work to be performed after the changeover.

This move by itself likely will not be enough to solve Oregon’s public pension crisis. The state has already promised more than it can reasonably pay. But moving to DC plans for all work not yet performed is a necessary first step. And the faster the legislature acts, the less severe—and the less upsetting to retirees and current and future employees—will be the other reforms required later.

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