Want to make a mild-mannered Portland bureaucrat sound
like Bill Sizemore?
It takes just four letters: PERS.
City finance guru Ken Rust has spent the past year
looking at how the state Public Employees Retirement
System manages its money. What he's found looks like
"either massive negligence and incompetence--or fraud,"
he says. "And I don't think it's fraud."
Rust and his colleague, Steve Manton, have been carefully
scrutinizing the state agency, which handles retirement
benefits for state, local and school-district employees.
Based on their findings, Portland is poised to join
a group of other cities in unleashing a lawsuit whose
overarching theme will be that the $30 billion retirement
system is sticking it to taxpayers. They aren't sure
whether it will be filed by the end of the year or even
in which court--all they know is, it's going to be a
doozy.
"Every time you turn around," Manton says, "there's
something screwy in the system."
Portland's struggle with the 54-year-old agency began
heating up about a year ago. Just like other local governments,
the city pays into PERS each year to provide retirement
benefits to its employees. Public employees kick in,
too. The money is invested, then doled out to retired
employees based on years of service and their former
salary.
The city's contribution fluctuates slightly from year
to year, depending on how fast overall retirement costs
are expected to grow. Last year, the city was shocked
by what amounted to a $257 million bill from PERS. The
huge tab was to cover what's called "unfunded liability,"
the gap between what future payouts are expected to
cost and the amount of money the city has already contributed
to the system.
To start chipping away at that sum, the city's yearly
PERS costs went from 9.3 percent of payroll to 17.4
percent--a first-year budget hit of $16 million, projecting
out for decades. In all, it's enough money to renovate
Civic Stadium not once but eight times.
Portland wasn't alone. Little Gresham got a bill for
$6.6 million, about $330 for each of its 20,000 inhabitants.
That's not how the system was supposed to work. Huge
unfunded liabilities do not simply appear overnight.
"They discovered a massive problem," says Rust. "They'd
been underbilling us for years."
The most graphic example of what city officials describe
as PERS's incompetence relates to Fire District 10,
which once served a large portion of the unincorporated
midcounty area outside Portland's city limits. In 1985,
the city annexed a big chunk of the district's territory
and took on 220 of its firefighters as city employees.
Other portions of the district's territory were taken
over by Gresham, Fairview, Troutdale and Wood Village.
Included in the city's $257 million bill from PERS
was $40 million for all past, unfunded benefits for
the District 10 firefighters.
Rust and Manton have two questions: Why was the city
asked to foot the total bill and why did it take more
than a decade to arrive? "PERS never charged anybody
for 13 years," says Manton. "Then out of the blue it
says, 'Oh boy, we forgot to send a bill!'"
Fred McDonnal, who retires as executive director of
PERS on Dec. 1, takes a defiant tone.
"That's baloney," he says. "I'm not going to tell you
that we weren't late in getting that sifted out and
getting that bill to them, but they knew when they [took
over the employees] that they had an unfunded liability."
In reality, the $40 million tab must be split among
all the cities now occupying the fire district's old
territory, not just Portland, and they're all balking.
"So far PERS has been unable to prove or satisfy us
that there is any unfunded liability," says Gresham
finance director Terry McCall.
Portland officials say PERS also committed an error
in rigging the system so that the higher the stock market
goes, the more it costs Portland taxpayers. Here's how
that works:
Employees have the option to direct 75 percent of the
money they put into PERS into the stock market. When
employees retire, their employers must match these contributions
as well as any stock earnings.
PERS, however, failed to give local government employers
the option to similarly invest their contributions.
As a result, employee earnings from the burgeoning market
have outpaced public employer contributions, forcing
cities and counties to dip into their budgets to come
up with the match.
Was the policy in error? "That's right, it was," says
McDonnal, "but it will be corrected." But cities will
not be reimbursed for the money they lost because of
PERS's mistake, McDonnal adds, saying, "Every dollar
that comes into this system by law is for the exclusive
benefit of the [public employee] members."
Many local officials, however, see an even bigger problem
with PERS. The agency, they say, is governed by a board
that has little interest in protecting taxpayer interests.
They note that eight of the systems's 11 board members
have PERS retirement accounts themselves, meaning that
they have a personal stake in maximizing benefits. "We've
discovered a new way to hemorrhage financially," says
Rust, "and that's through a pension system that's run
by its beneficiaries."
Prompted by the issues raised by Rust and Manton, the
Portland City Council authorized a resolution late last
month to join a consortium of other cities and counties,
including Eugene, Lane County and Roseburg in a lawsuit
against PERS. "If we are successful in our suit, we
may be able to reduce the size of this liability and
minimize future increases to the city's [costs]," city
finance director Tim Grewe wrote in a recent letter
to the council.
The city's share of legal costs in the suit could run
as high as $115,000, officials estimate. Jerry Lidz
of the Eugene firm Harrang Long Gary and Rudnick says
the plaintiffs hope to file by the end of the year.
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Willamette Week | originally
published November 23,
1999
