Oregon public pension time bomb could be nuclear
Anybody who's been paying attention knows that public employee pensions threaten state and local governments across the country. The rap on Oregon's situation is that it isn't as bad as most other places, but a new study questions that perception. Hannah Hoffman, a reporter at the Salem Statesman-Journal, wrote it up here yesterday, with a followup blog post here. Both well worth reading if you care about your tax bill. Some highlights:
The researchers determined that Oregon would need to raise about $3 billion more in taxes and fees every year for the next 30 years in order to fully pay off its PERS obligations, which include payments to retired employees, promised pensions to working employees and any payments it would expect to make to future employees.They found that Oregon needed the second-most additional revenue on a per-household basis of any state in the country, at about $2,140 for each of Oregon’s 1.5 million households....
The study assumes low investment returns during the next three decades. The shortfall is calculated using a 4 percent return on investments, half the rate of return PERS assumes, which is set at 8 percent.
That halved investment rate places a much higher burden on the state to raise revenue....
Larrabee said the study’s accounting model and the PERS board’s model are "radically divergent," especially in their investment rate predictions. Eight percent and 4 percent are worlds apart in the financial realm, and while Larrabee said there has been discussion of dropping the PERS rate, it would be closer to something like 7.5 percent.
Do you think the Goldschmidt people running the state pension investments are going to make a 7.5% a year return for the next 20 or 30 years? It would be nice, but it doesn't sound realistic.
| Posted at 12:42 PM | Permalink |
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Comments (15)
I'm sure they're planning on it just defaulting. Deliberate debt swamping has to be making somebody wealthy.
Posted by Mr. Grumpy | October 25, 2012 12:59 PM
Is the pension payout a function of the salary payout, and can it be adjusted by paying less and/or fewer? So are we really doomed, or just foolishly generous.
Posted by niceoldguy | October 25, 2012 1:27 PM
"raise about $3 billion more in taxes and fees every year for the next 30 years"
What drives you nutz is the gov and the legislature know there is a big problem. They'll take and sneak out $1B last session for PERS, then probably most of the stimulus and tobacco fund settlement went into the gen fund for PERS.
However, we just keep going on like nothing is happening and no need to wake the beast that is the pub employees union.
The other alternative is to just take all $30B at once, of course, that's 4 years worth of gen funds.
Posted by Steve | October 25, 2012 1:37 PM
Oregon PERS's investment fees are the 4th highest among the states - twice the average.
http://mdpolicy.org/docLib/20120803_MarylandPolicyReport201204.pdf
Posted by uomatters | October 25, 2012 1:43 PM
However, he (Mr. Larrabee) acknowledged that “both calculations have usefulness” and said there is value in considering the worst possible outcome for PERS investments.
I am not a financial planner but I seriously doubt a 4% annual return is the worst possible outcome for our PERS investments. PERS managers are going far out on the risk curve to achieve the sub 8% returns they are achieving right now. If the PERS private equity gambles don't pay off then 4% annual will be a dream.
Posted by will | October 25, 2012 1:45 PM
7.5% over several decades is, based on history, not an unreasonable assumption.
Posted by Allan L. | October 25, 2012 2:45 PM
"7.5% over several decades is, based on history, not an unreasonable assumption."
Besides the stock market which returns that for brief periods, RE investments before the bubble burst and T-Bills in 1981, you have something that makes that look consistently reasonable?
Posted by Steve | October 25, 2012 2:58 PM
Estimating returns in the 8 percent range going forward is totally unrealistic for portfolios that have large bond allocations, as do most pension funds. Bond yields have been pretty much in secular decline since 1980 but have hit rock bottom in the last year or so. The way it works is falling yields correspond to higher bond prices, driving up total bond returns. With benchmark interest rates now at or near zero, and the US dollar already elevated by the slow motion Euro meltodwn. there is no room left for bond yields to fall any further. 8 percent (or 7.5 percent) ain't going to happen and it doesn't take an actuarial genius to figure that out.
Posted by Newleaf | October 25, 2012 3:17 PM
"Besides the stock market which returns that for brief periods, RE investments before the bubble burst and T-Bills in 1981, you have something that makes that look consistently reasonable?"
How about the average performance of the US stock market?
1928-2011 Arithmatic Average 11.20%
Geometric Average. 9.23%
1962-2011 Arithmatic Average 10.60%
Geometric Average. 9.20%
Source: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
The catch is that while long-term returns are positive the market is volatile; one year out of four is a year of "negative growth". And PERS has to pay out every year, not just when returns are good.
Posted by K2 | October 25, 2012 3:22 PM
And by the silly but still in force laws of math, it takes more than a 1percent gain to offset a 1percent loss. Which is just one of the reasons privatizing Social Security is such a nifty idea.
Posted by niceoldguy | October 25, 2012 3:37 PM
PERS is a slow motion train wreck. We all can see the few bicycles and baby carriages that have already been hit. And we can see ahead the Suburbans filled with soccer teams about to be hit. And we refuse to do anything to mitigate the future impact. And half a mile away the school bus filled with more kids will be wiped out. Ah, but that is half a mile away. No worries yet, mate!
It is a known eventuality, so we can't really call it "an accident", can we? But yet, that is what we are doing, ignoring it until it gets much much worse. Ten years ago Ron Saxton tried to make it more visible and rally support around meaningful change. Greg MacPherson tried to do something but was squashed like a bug by the unions. Gov Kulo's minimal reforms that would have made some difference were overturned by the SC.
I say let them try and find the money from us turnips in 10-20 yrs. I'll have moved to a state that managed their affairs better. Capital is movable, and so are people. Why do you think so many Tier1 retires already moved out of Oregon?
Posted by Harry | October 25, 2012 3:42 PM
I don't agree that privatizing Social Security is a nifty idea, but I think turning PERS into a defined contribution rather than defined benefit plan is one of the many changes the program needs. The extremely bad news about PERS has been flat ignored for the last two years. Ted Sickinger at the Oregonian has written reams on this. Where is the ruckus over the very recent 5 percent jump in agency budgets going to it? And another 5 to come next year. More than 25% of every agency budget will go to PERS. Where are those protests on the steps in Salem? It's a real cricket chirping moment.
Posted by sally | October 25, 2012 3:50 PM
"Gov Kulo's minimal reforms that would have made some difference were overturned by the SC."
Who are also beneficiaries of it.
Posted by sally | October 25, 2012 3:52 PM
"They found that Oregon needed the second-most additional revenue on a per-household basis of any state in the country, at about $2,140 for each of Oregon’s 1.5 million households"
I'll enjoy watching that from Idaho.
Posted by Snards | October 25, 2012 4:47 PM
And all the return assumptions and historical performance calculations are based on nominal, not inflation-adjusted, returns.
If you add in the cost-of-living adjustments that every recipient is entitled to, then gross returns have to exceed the rate of inflation ON TOP OF their 8 percent assumption.
Posted by Mister Tee | October 26, 2012 5:55 AM