Gov. Kate Brown rolled out a financially and politically ambitious proposal Friday to rein in increasing public pension costs for schools over the next 15 years by diverting various state revenue streams and requiring public employees to contribute to their pension benefits.
The proposal is an effort to ensure that any new corporate tax money lawmakers dedicate to schools will actually make it into the classroom and not be swallowed up by the pension system to backfill its growing deficit. It could also serve as a backup plan in case lawmakers can’t pass a new tax plan.
Elements of Brown’s plan have circulated for some time but until Friday, she hadn’t offered much specificity. That changed Friday morning when she unveiled a detailed set of options for lawmakers to consider.
In prepared remarks that she plans to deliver to lawmakers Friday afternoon, Brown said Oregon is sitting on a similar precipice as it did 12 years ago, before the great recession — only now the pension fund’s financial condition is far worse. In 2007, she noted, the pension fund was fully funded, but the subsequent recession ripped a huge hole in the system from which it has yet to recover. The unfunded liability in the system today is about $27 billion, even after 10 years of economic expansion and a string of strong returns in the pension fund’s investments.
“We are at the height of our economic growth and we know another recession is coming at some point,” she said. “Except this time, our system is not adequately funded. We are ill-prepared for the next inevitable economic downturn, which will put both public sector budgets and retirement security of employees in serious jeopardy,” she said.
“I am open to changes,” she said of her new plan, “but I am not open to inaction.”
Brown’s proposal only aims to protect one group of employers – school districts – though employee cost-sharing would presumably be implemented for all active PERS members. That could help state agencies, municipalities and other government employers around the state that are struggling with pension cost increases.
The economics of the plan are based on a variety of assumptions, including the ongoing ability of pension fund managers to generate strong investment returns on tax money diverted to help schools. Some of those revenue streams are volatile, and there is no guarantee they will generate the expected dollars. Meanwhile, it is sure to set off a political firestorm in the Legislature, with both business groups and public employees already objecting to elements of the plan on Friday morning.
“We are shocked to hear of Gov. Kate Brown’s proposal to cut salaries for educators,” the Oregon Education Association said in a statement. “At a time when lawmakers are finally making real strides toward investing in our schools, Governor Brown has decided to ask educators take a personal financial loss. This is an unbelievable betrayal of the values all Oregonians hold.”
A summary of the Brown’s plan drafted by Nik Blosser, her chief of staff, noted that hers was the only proposal on the table that could stabilize pension costs for all K-12 school districts, providing some certainty on ensuring the use of future tax proceeds dedicated to schools.
The governor’s plan calls on lawmakers to create a dedicated account at the Public Employees Retirement System that would be invested alongside regular pension assets and drawn down gradually to offset schools’ increasing pension costs. She wants to seed a School District Offset Account with $800 million in one-time revenues, and Blosser’s presentation outlined a number of options to generate that money:
· Retain a portion of the personal kicker tax rebates that taxpayers are forecast to receive when they file their 2020 taxes. The governor’s preferred option is grant the first $100 in kicker rebates to each eligible taxpayer and send the rest to the offset account. That could raise an estimated $400 million to $500 million and would require a supermajority vote in the Legislature.
· Transfer nearly $500 million of the $2 billion capital surplus at SAIF Corp, a state-owned workers’ compensation insurance company, to the school fund. This could be accomplished with a simple majority vote of the Legislature.
· Also transfer to the school fund $100 million in general/lottery funds that the governor included in her proposed budget plus an estimated $83.3 million in tax revenues from the repatriation of corporate profits stimulated by federal tax reforms passed in 2017.
· Place a temporary surcharge on all state fees and licenses.
On top of those one-time revenues, the governor is proposing to dedicate $1.6 billion in future state revenue over the next 15 years to the fund. Those include tax dollars that lawmakers already agreed to divert to help schools in 2018. But the governor wants to extend the period they would be dedicated to the school district account from six to 15 years. They include:
· Interest on unclaimed property held by the Department of State Lands and state debt collections exceeding historical averages. The governor’s office estimates that could raise $185 million over 15 years.
· “Above trend” capital gains and estate tax revenues. The portion of those taxes exceeding a rolling historical average would be diverted to the School District Offset Account for 15 years. The governor’s office said that could raise $1.4 billion for the fund, the largest source of funds in the plan.
One key plank of the governor’s proposal — and likely the most controversial with teachers — is to reduce school districts’ pension obligations by instituting new pension contributions from employees. The governor’s plan calls for educators who are active Tier 1 and 2 members of PERS – those hired before August 28, 2003 and still working – to contribute 3 percent of their pay, after exempting the first $20,000 of salary.
Those hired after that date, called Tier 3 or OPSRP members, would contribute 1.5 percent of their pay after exempting the first $20,000 in salary. Those changes could cut schools’ pension contributions by about $100 million per biennium starting in the two-year budget cycle that begins in July 2021, and increase gradually from there.
The governor’s plan is far more expansive than the school district PERS plan she successfully pushed for the Legislature to pass last year. Her new plan diverts revenue streams to the school fund for a longer period and is particularly dependent on future capital gains tax revenues, which are historically volatile and make up nearly 40 percent of the forecast receipts in the plan. The $1.3 billion estimate from capital gains is based on an analysis of historical trends by the Office of Economic Analysis, but the actual results would depend on future performance of financial markets and whether Brown can convince lawmakers to divert those tax revenues for 15 years.
Based on cash flow projections from the governor’s office, however, a combination of those revenue streams could be sufficient to reduce some of the $375 million in pension cost increases schools will absorb during the coming two years budget cycle and hold them steady thereafter.
Some elements of the plan, including sweeping part of SAIF’s surplus, are anathema to some members of the business community, who say they depend on low worker’s compensation rates that SAIF’s strong surplus enables.
The Oregon PERS Coalition of public employees also questioned the plan’s legality.
“The proposal described today is a non-starter and lawmakers should reject it right out of the gate,” said a statement from the group. “It would be an immediate salary cut to the tens of thousands of teachers and public employees who educate our children, protect our safety and serve our communities. This convoluted, confusing and ill-conceived proposal also raises serious constitutional and legal issues that would send the state into court for another lengthy and expensive lawsuit.”