Category: Transportation

TriMet’s New Electric Buses Will Be Less Reliable, More Costly

By John A. Charles, Jr.

The TriMet board recently voted to replace the agency’s entire bus fleet with battery-electric buses by 2040. Since each electric bus is more than twice as expensive as a standard diesel bus, this decision will cost taxpayers more than $550 million in excess costs.

The electric premium might be worth it if there were significant benefits to switching fuels, but there aren’t. In fact, battery-powered buses are far less reliable than diesel or natural gas buses. According to a recent study by the Federal Transit Administration, battery electric buses in Seattle only traveled 2,771 miles on average between breakdowns; for diesel buses, it was 17,332.

Since moving passengers is TriMet’s primary job, this alone should have disqualified battery buses from consideration.

The primary motivation for TriMet seems to be reducing so-called “greenhouse gases,” but battery-powered buses offer no real air quality benefit. The buses must be charged from the utility grid, which is powered mostly by coal and natural gas. Even large wind farms are backed up every minute of the day by other sources such as gas and hydro dams. Using battery-electric buses simply changes where greenhouse gases are emitted, which is meaningless.

A better alternative would be renewable natural gas, derived from processing food waste or methane emissions from landfills. For this reason the Los Angeles County Metropolitan Transit Authority concluded in 2016 that it would switch its entire fleet to renewable natural gas buses because it would provide “approximately 39% greater reductions in GHG emissions at half the cost” when compared to electric buses.

Finally, TriMet has no way to pay for the electric bus conversion. The staff recommended buying the first 80 electric buses with combinations of federal grants and money from the new statewide employee tax, followed by a hoped-for legislative bailout sometime after 2022. That’s not a plan, it’s a fantasy.

TriMet has already been awarded ten battery electric buses through grants from the federal government. A more prudent option going forward would be to buy ten buses using other fuels—such as compressed natural gas and renewable natural gas—and then test them all head-to-head to measure reliability, emissions, noise, and passenger comfort.

This was a rash decision. The TriMet Board should admit that it made a mistake, and spend the next two years analyzing alternative fuels. If taxpayers are going to be forced to pay an extra half-billion dollars for new buses, there should at least be a good reason.

John A. Charles, Jr. is President and CEO of Cascade Policy Institute, Oregon’s free market public policy research organization. A version of this article appeared in The Portland Tribune on November 13, 2018.

Click here for PDF version:

18-21-TriMet’s_New_Electric_Buses_Will_Be_Less_Reliable_More_CostlyPDF

Read Blog Detail

Metro Should Let Transit Customers Drive Transportation Innovation

By Justus Armstrong

ABC’s Shark Tank may be coming to the Portland region—not in the form of a reality TV special, but as a taxpayer-funded project that positions the Metro regional government to act as a venture capital firm. Rather than investing in the success of growing businesses, however, the Sharks at Metro plan to fund temporary pilot projects that test new transportation technology.

Metro proposes that its Partnerships and Innovative Learning Opportunities in Transportation (PILOT) program—a component of the Emerging Technology Strategy—would help meet its “guided innovation” goals, but the shortsighted approach of this program ignores a vital question: Are risky technological investments the best use of taxpayer funding?

In a presentation at a Metro work session in July, Senior Technology Strategist Eliot Rose suggested the PILOT program would “guide innovation in transportation technology toward creating a more equitable and livable region.” Embedded in the presentation were numerous contradictions, beginning with the oxymoron of “guided innovation.” In Metro’s case, guided innovation more than likely means “hindered innovation,” with PILOT funding being a carrot-and-stick method of ensuring that emerging technologies take the direction technocrats deem appropriate, not the direction consumers are demanding.

By allocating government funding to the transportation projects of its choice, Metro risks preventing better ideas from emerging and hampering the innovation necessary for real progress to take place. As Metro strategist Rose noted, ridesharing, bikesharing, and other technologies PILOT wishes to foster have already been expanding in Portland. This technological progress has taken place with private investment, yet Rose still concludes that public money is needed for it to continue.

During the July work session, Metro staff claimed that the government “needs to intervene to bring technology to people and communities that the market doesn’t serve.” This assumption presents another contradiction: If an investment isn’t cost-effective for a private actor, what makes it a cost-effective investment to Metro? And how can successful projects be expected to continue without public funding, if the projects’ functions wouldn’t otherwise be demanded by the market?

Furthermore, Metro’s plan risks sinking taxpayer money into potentially unsuccessful projects. The $165,000 Forth-Hacienda project was presented by Metro as an example of a successful pilot project—not because the project itself was successful, but because its failure offered a great learning experience. The desire to better understand new technologies is not without merit, but the experimental nature of such pilot projects hardly makes them a good fit for taxpayer funding.

For all the project’s flaws, discussion about Metro’s Emerging Technology Strategy has included some promising aspects. For instance, during the work session, Metro Councilor Shirley Craddick brought up the idea of transitioning some of TriMet’s responsibilities to ridesharing networks. Considering more innovative modes for public transportation would be a step in the right direction and likely would improve cost-effectiveness, quality, and ridership of transit while meeting the needs of the populations Metro seeks to assist.

Perhaps a more effective Emerging Technology Strategy could focus solely on ways to improve existing public transportation through new technology, rather than interfering with private transportation markets through subsidies and attempts to shape private development. Instead of subsidizing companies with PILOT funding, Metro could offer open-ended transportation vouchers directly to transit users, especially transit-dependent and underserved populations.

Transit vouchers could be spent on a variety of transportation options, including TriMet and the newer technologies the PILOT program intends to target, such as rideshare, bikeshare, and electric vehicle and autonomous vehicle rentals. Putting the money directly into the hands of transit users could drive innovation through consumer sovereignty on the demand side, encouraging competition and making companies work to meet transit users’ needs instead of Metro’s project specifications.

With its PILOT program, Metro seeks to encourage innovation while managing risk; but any risk associated with developing new technologies should be borne by the companies driving the innovation, not by the public. If Metro moves forward with the PILOT program, it will only hinder its own goals. Instead of shaping existing markets in the private sector, Metro should focus on applying technological improvements to public transportation options.

Moreover, Metro should reform the regulatory framework and barriers to entry that may be preventing the emerging transportation technology market from functioning at its best. After all, the expansion of Uber and Lyft in Portland didn’t take place because Portland subsidized these companies. It happened because Portland stopped banning them. Metro councilors and staff can’t foresee the direction that new technologies will take, so they can’t know enough in advance to guide the direction of innovation or adequately manage its risks. The best they can do is get out of the way.

Justus Armstrong is a Research Associate at Cascade Policy Institute, Oregon’s free market public policy research organization.

Click here for PDF version:

18-20-Metro_Should_Let_Transit_Customers_Drive_Transportation_InnovationPDF

Read Blog Detail

High Costs and Low Ridership Are Nothing New for Southwest Corridor Project

By Rachel Dawson

Decreasing ridership paired with increasing costs makes for a bad business decision for TriMet’s proposed Southwest Corridor plan. The TriMet proposal would add an additional light rail line stretching from downtown Portland to Bridgeport Village in Tigard. The project’s draft environmental impact statement predicts what TriMet thinks will happen, without taking into consideration what has occurred with past projects.

The plan estimates that rides on every current light rail line will more than double, and the total weekday rides will nearly triple by the year 2035. However, in recent years light rail rides have been decreasing or plateauing across the board.

But overpredicting ridership isn’t anything new: Every single past TriMet light rail plan overestimated the number of rides it would have.

Additionally, the capital costs of light rail projects historically have been underestimated, meaning projects have proven to be more expensive than what TriMet had predicted. This has already become evident with the Southwest Corridor plan: In 2016 the capital costs were predicted to be $1.8 billion dollars, which increased to $2.8 billion in 2018.

Increasing prices plus decreasing ridership sounds more like a recipe for economic disaster than a successful project. You have the opportunity to voice your opinion at the southwest corridor public hearing on Thursday, July 19 at the Tigard City Hall.

Rachel Dawson is a Research Associate at Cascade Policy Institute, Oregon’s free market public policy research organization.

Click here for the PDF version:

7-18-18-High_Costs_and_Low_Ridership_Are_Nothing_New_for_Southwest_Corridor_ProjectPDF

Read Blog Detail

New Transportation Tax Is on the Wrong Side of History

By John A. Charles, Jr.

Oregon employers began receiving notices this week regarding the new statewide transit tax that goes into effect on July 1. The law requires all employers to withhold, report, and remit one-tenth of one percent of wages paid to their employees to the Oregon Department of Revenue. The money will go into a Statewide Transportation Improvement Fund to subsidize public transit agencies.

The new tax is being imposed at exactly the wrong time in history. Transit ridership is declining across the country, and it’s not because transit agencies lack money. The problem is that their service models are obsolete.

The ride-hailing revolution brought about by Uber, Lyft, Sidecar, and other start-ups has raised the expectations of customers. People now want on-demand, door-to-door service that they can order through their phones. The coming revolution in driverless cars will only accelerate that change.

The traditional service offered by legacy transit agencies—fixed-route, limited-schedule service on slow buses—just isn’t good enough anymore.

Subsidizing transit with one more tax will simply delay the inevitable. The legislature should repeal this tax as soon as possible.

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

Click here for the PDF version:

5-23-18-New_Transportation_Tax

Read Blog Detail

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.

Click here for the PDF version:

18-08-TriMet_Shows_Pension_Reform_Is_Possible

Read Blog Detail

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.

Click here for the PDF version:

3-28-18-WES_Hasn’t_Decreased_Westside_CongestionPDF

Read Blog Detail

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.

Click here for the PDF version:

18-07-WES_at_9_Time_to_Admit_the_Mistake

Read Blog Detail

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.

Click here for the PDF version:

3-21-18-TriMet_Shows_Public_Pension_Reform_Is_PossiblePDF

Read Blog Detail

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:

Following_in_TriMet’s_Tracks_Feb2018

Read Blog Detail

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.

CLICK HERE FOR THE FULL REPORT

Read Blog Detail