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Own property here in town? Go get your property tax bill. It came in the mail last week.
Got it? Good. Now, look for a line that says PORTLAND FIRE/POLICE PENSION. There’s a number there, and it’s probably pretty big, maybe 10% of your total bill. It’s likely much larger than the library tax and maybe even the payments on Portland Public Schools bonds.
What you’re looking at is a relic. It’s the cost of paying pensions to police and firefighters, although not through a modern pension system in which workers, employers or both pay into a fund that a group of smart people invest for decades, earning returns that pay for retirement.
No, this is a pay-as-you-go system, created by voters in 1948, which sends your tax dollars straight to thousands of retirees who left the police force and the firehouse years, maybe decades, ago. Your kids, if you have them, will be paying for people who are on the job now. Worst of all, the liability grows every year, meaning bigger payments are coming, at least for a while. (Renters aren’t off the hook, by the way, because landlords tend to pass on property taxes to tenants as higher rent.)
Pay-as-you-go pensions like this used to be very common, but everyone besides Portland reformed, joined the modern world of pensions, and moved on. Puerto Rico backslid into pay-as-you-go in 2017, when its pension funds ran out of money, joining us in the Dark Ages.
The fact that pay-as-you-go persists in Portland stunned Kevin Machiz when he moved here in 2019. Machiz is a chartered financial analyst and, to a finance guy like him, discovering a pay-as-you-go pension system that’s still in action is like a car nut seeing a Model T bouncing down Burnside during the morning commute.
“Aghast is the right word to describe it,” Machiz says.
He’s on a mission to get things changed because he doesn’t want his 3-year-old daughter—should she be lucky enough to afford a house in Portland—to be paying for retirees who are on the job today.
To be sure, the pension system made major changes in 2006, when it moved new police and fire personnel into the Oregon Public Employees Retirement System, where investment returns (often) help defray pension costs. Anyone who joined fire and police after Jan. 1, 2007, gets PERS. The problem is that there are still 629 workers on the job earning benefits and 1,955 pre-2007 retirees collecting them. The pension system estimates it will be paying those retirees until about 2080 (if, say, a 21-year-old cop who joined the force in December 2006 lives to be 95).
Machiz, 34, has testified before the City Council, the Fire and Police Disability and Retirement board, and the PERS board. He even went before the Charter Commission, hoping to get it to change the fire and police pension system when it got rid of another fossil: the commission-style government that’s being replaced effective Jan. 1, 2025.
Machiz estimates the future liability for pre-2007 cops and firefighters to be about $8 billion, or $3 million per member. In the current fiscal year, pension payments will cost $210 million, according to the city’s budget, a whopping 30% of the $696 million the city expects to raise from property taxes. The pre-2007 chunk is projected to grow until about 2036, when the last of those employees retire and stop accruing benefits. But the payments persist for years at lower levels as beneficiaries age (see chart, below).
Machiz faces high hurdles in his reform bid. His plan is to raise taxes now so we don’t have to pay as much as we go later. But governance of the pension fund is enshrined in the city charter. Only voters can change that, and higher levies are unlikely to be popular in a city where many people already feel like taxes are high and services are poor.
Sam Hutchison, director of the city’s Fire and Police Disability and Retirement Bureau, says he understands Machiz’s frustration. He would love to have every firefighter and police officer out of the pay-as-you-go program and in PERS. But city officials couldn’t get that done in 2005, and it’s likely impossible today.
“We don’t disagree with his premise,” Hutchison says. “He could convince our board, but he has to convince the council.”
Without change, Machiz fears the worst. The past few years have been rough for downtown real estate, a considerable source of property taxes. If the market value of a building falls far enough, something called “compression” can happen. Oregon law limits the amount of property tax that can be levied to $10 per $1,000 of market value for general government items and $5 for education. Lose enough market value on a building, and the county loses revenue.
When compression occurs, entities that are supported by property taxes have to do more with less. But the police and fire pension never gets compressed. It gets all the money it requires, every year, by law. As property values fall, like they are downtown, the retirees squeeze out other entities that rely on property taxes.
“We have to get what we need to pay on this plan,” Hutchison says.