The History of PERS: 1980 – 1995

Continuing the presentation of the “Oregon Public Employee Retirement System History: The First 60 Years,” necessary to understanding why PERS is such a wicked problem for Oregon today and in the years to come.

The 1980s: years of scrutiny

As the PERS fund grew and large numbers of PERS members approached
retirement age, PERS came under close scrutiny by both the public and private sectors. The generous spirit of the 60s and 70s was eroded by concern that taxes were too high. PERS became the target of various private groups on a mission to “cut the fat” from government spending.

Simultaneously, a considerable number of PERS members were discovering that they had not clearly understood the long-term results of decisions they had made years before and were seeking legislation that would allow them to change some of their decisions. Changes sought included prior service credit regulations, “buy back” of funds withdrawn, and qualification of certain employees as police and firefighters.

Jerry Liebertz says of this period of PERS history, “People did things to harm themselves financially, and it was coming back to haunt them. There was a big push to undo some of the damage they had done.”

During this decade, judges became members, and there were substantial additions and changes to health insurance. The Board increased to nine members.

The 1981 legislature passed a number of bills that improved the benefits for PERS members, including a switch to a full-formula method of computing benefits, a lowering of the full-benefit retirement age, and a two-year increase in benefits for retirees. But it was PERS investments, not benefits, that aroused the most interest.

Several PERS investments became highly controversial, and everyone of voting age seemed to have an opinion about how to invest PERS funds. What many people failed to take into account was that the fund belonged not to the state, not to the taxpayers, but to PERS members. OIC’s requirement was to invest the funds in accordance with the prudent person rule.

However, in a time of recession, the fund was seen as a way to save Oregon from financial problems. Some groups wanted the funds to be invested in Oregon businesses or Oregon real estate developments. When the OIC decided to participate in a New York investment firm’s purchase of Fred Meyer, Inc., however, it stimulated enough conflict to result in litigation. Never had the OIC invested so much money at once, and never before were so many people concerned with one of its investments.

A Portland union, a group of retail chains, small businesses, and individual retirees joined together and filed a suit claiming the investment caused a conflict of interest because the state, through the investment, owned a controlling interest. The suit was settled out of court, with the state agreeing that no employee, member, or representative of the state, the OIC, or PERS “will attempt to take part in the control of the business or the competitive affairs of Fred Meyer.”

Meanwhile, concern over PERS investments in South Africa began to grow.
Proponents defended such investments, saying they were sound under the prudent person rule. Others felt PERS should not invest in countries practicing apartheid. After years of heated debates, the Oregon Anti-Apartheid Act of 1987 was passed, and PERS began divestiture.

By the early 1980s, a rapidly increasing number of retirees, coupled with changes in the benefit plan, had increased the agency’s workload by 400 percent. The agency’s computer system was the primitive punch-card variety; benefit estimates had to be calculated by hand; correspondence was months behind; initial retirement checks were sometimes several months late; and complaints were pouring into the governor’s office. Budget constraints, however, did not permit an equivalent increase in staff.

Both members and staff were dissatisfied. It was apparent that the existing computer system could not be modified to meet the agency’s needs. An entirely new set of tools was needed. So, during a six-year period, the agency developed and installed the Retirement Information Management System (RIMS). The agency acted as its own contractor, and installed the system using inhouse and contracted staff and a third-party system monitor. Amazingly, RIMS not only came in on time and at its projected cost of $8.2 million, it actually performed better than expected. It was paid for from the return on investments, so no tax money was required.

PERS continued to thrive despite the scrutiny and the need for the adjustments brought on by legislation and technology. PERS stepped up its efforts to serve and inform its members. By the end of the decade, RIMS was fully operational, full-scale member counseling was underway, and circuit riders traveled throughout the state to keep members informed about the system. An informative video was produced, and desktop publishing made it easier to produce publications to help keep members aware of PERS benefits.

The 1990s: into the next century

The decade of the 1990s could be known as the decade of bills and ballot boxes. During no decade in its history to date, except perhaps for its earliest years, was PERS subject to more intense scrutiny than during the 1990s. Legislation, ballot measures, task force studies, and litigations kept PERS very much in the public eye.
The 90s were also years of rapid technological changes, which brought a new set of challenges to how PERS conducted daily business.

Public scrutiny

PERS benefits and their related costs have always been an issue of concern to social or tax activists as well as PERS members. That interest reached new heights in 1994 with analysis of PERS by three task forces.

The Governor’s Task Force on Employee Benefits convened on April 1, 1994. The task force reviewed more than just PERS, looking at all state employee benefits such as retirement, insurance, and paid time off. The purpose was to see if the total compensation of state employees was in line with the market. The task force concluded that total compensation was nearly equal, with benefits somewhat higher and salaries somewhat lower than those of equivalent private-sector worker.

The Governor’s Task Force on Retirement Funding was more narrowly focused. It reviewed the system’s level of funding to ensure it was no lower or higher than necessary to pay for retirement benefits. The task force concluded that funding was right on target.

The House Interim Task Force on PERS took a very broad look at the system, with an emphasis on the cost of the system to taxpayers. Probably the most significant result of the task force’s work was the creation of a second tier of PERS membership by the 1995 Oregon Legislature.

Partly because of the tremendous demand for data by the various task forces, PERS commissioned a comparative study of benefits and funding by The Wyatt Co., an actuarial and consulting firm. The study compared Oregon PERS with the systems of five other western states and 40 private firms. The study found that PERS compared favorably with most other systems, but was not the highest ranked of the systems studied.

In addition to the effort required by PERS staff to meet the data demands of these task forces, three other issues demanded substantial amounts of staff time and resources: State taxation of PERS benefits, a concerted effort to reduce PERS benefits, and compliance with Internal Revenue Code regulations on retirement benefits.

Federal regulations

The issue of compliance with federal regulations stemmed from a restriction on benefits contained in Internal Revenue Code Section 415. Largely because of differences between Oregon statute and the IRS in the way final average salary was calculated, some PERS retirees exceeded the Section 415 limit.

This issue was largely resolved when President Clinton signed the Small Business Job Protection Act of 1996, popularly referred to as the “minimum-wage bill.” This bill repealed a section of IRC 415 for governmental plans, stating that a pension may not exceed 100 percent of a participant’s average taxable compensation for the highest three consecutive years. PERS’ Executive Director Fred McDonnal and others had lobbied members of Congress to make a change because IRC 415 was originally intended for private pension plans, not plans covering governmental employees.

Ballot measures


The fact that any PERS retirees exceeded IRC 415 limits, however, regardless of the reason, added credibility to a popular resentment of PERS benefits. During the middle of the decade, a growing anti-tax sentiment found expression not only in a ballot measure designed to roll back property taxes, but also in ballot measures designed to reduce PERS benefits.
 
The first of these measures was Ballot Measure 8, which voters narrowly approved in November 1994. This measure eliminated the 6 percent pick-up by employers of the employee contribution to PERS; eliminated the use of accumulated, unused sick leave to increase retirement benefits; and eliminated the guaranteed rate of return on PERS investments. The measure also prohibited any public body from contracting for a salary increase to compensate for the six percent employee contribution.

Although the measure was immediately challenged in court, the number of applications for retirement increased substantially. Many people who were close to retirement feared losing the value of their accumulated sick leave, so retired earlier than they had planned.

On June 21, 1996, the Oregon Supreme Court filed a ruling which overturned all three parts of the measure. In doing so, the court upheld the rulings of several lower courts, all of which had concluded that some or all of Measure 8 violated the contracts clause of the U.S. Constitution.

Another initiative petition targeting PERS benefits qualified for the ballot in November 1996. Ballot Measure 45 would have done the following: (1) raised the age for full retirement benefits to Social Security age for all public employees except police officers and firefighters, (2) eliminated any guaranteed level of benefits that exceeded 75 percent of final salary, (3) eliminated any guaranteed level of interest on retirement accounts, and (4) prevented employers from providing medical or hospital benefits for retirees except for disability. This measure was defeated.

State taxation of PERS benefits

In 1989 the U.S. Supreme Court ruled in a Michigan case that federal, state, and local retirement benefits had to receive equal treatment. This ruling conflicted with Oregon statute, which exempted PERS benefits from state income tax.

After several unsuccessful attempts to resolve this issue, the 1991 Oregon Legislature passed a law which subjected PERS benefits to state income tax, but also provided a small increase in benefits based on years of service. This law was challenged in court, and in 1992 the Oregon Supreme Court ruled that taxing the benefits prior to September 1991 was a breach of contract, but that the state could do that if it also provided a “remedy.” In the meantime, state income taxes were being collected on PERS benefits.

The 1995 Oregon Legislature passed House Bill 3349 in response to the court’s decision. This bill was also challenged, but the Oregon Supreme Court ruled in August 1996 that HB 3349 was an acceptable remedy for its earlier decision. HB 3349 provided a maximum benefit increase of 9.89 percent as compensation for taxes paid. In February 1997 PERS increased monthly benefits to eligible retires, and in September 1997 PERS mailed approximately $380 million in retroactive payments to cover the period between October 1991 and February 1997.

Although these legislative and judicial actions appear to have resolved the taxation issue, pending lawsuits by federal retirees created additional complications.

Technology

Technology exploded during the later part of the 90s. Cell phones, computer technology, DVDs, and the World Wide Web made communication easier than ever, and with that ease came a demand for the businesses and organizations to provide information faster and with more accuracy.

While PERS had been using RIMS, its computer system, for less than 20 years, it could no longer keep up with increased customer demands. Between hundreds of hours of programming necessary to deal with the tax remedy, an increased number of retirements due to a 21 percent distribution to member accounts in 1997, and the coming of age of baby boomers, PERS staff were facing backlogs in some areas, and the agency grew increasingly concerned about meeting members’ needs. It was not practical to double or triple the workforce to meet demands and so the agency turned to technology to mitigate the situation. As fiscal year 1997 drew to a close, a reengineering project was underway.

In the midst of all the studies, reengineering, and scrutiny, PERS also faced what was commonly known as the Y2K situation, a computer challenge few had anticipated.

When computer programs were initially designed, the practice of representing years with two digits was standard practice. However, when the year changed to “00,” computers would not know how to interpret this. Did it mean 1900 or 2000?

Recognizing that long-working systems could break down, some doomsayers predicted dire consequences—worldwide power failures, a total breakdown of the transportation infrastructure, banking catastrophes—others were sure the problems would be manageable. Regardless, companies and organizations around the world began to upgrade their computer systems. PERS, too, took a pro-active stance and hired contractors to upgrade our system to prevent possible interruption to service and distribution of benefits. At PERS, as in most of the rest of the world, January 1, 2000, came and went without a computer catastrophe.

Retirement spike


PERS saw an unprecedented number of retirements beginning in 1997, primarily due to gains in the stock market, which were reflected in earnings credited to member accounts. In 1998, approximately 8,200 PERS members retired, more than twice the previous year.

The two main reasons for the retirement spike were account earnings and an increase in the number of people of retirement age.

Employees were allowed to direct as much as 75 percent of their retirement fund into U.S. stocks in what was called the variable account. At retirement, the
employer matched that total. This created an ideal financial situation for many retirees. Employers were not so happy with the situation since they were only allowed to invest in more conservative accounts, which generally earned less than the variable accounts. To make up for the difference, their rates were likely to increase. Employers also lost valuable staff members. Oregon school districts were hit particularly hard and the media was full of reports of teacher shortfalls. This reflected poorly on PERS.


Other events

A number of additional events of interest occurred in the 90s.

 The 1997 Oregon Legislature passed a bill that allowed PERS to spell “employees” with two e’s at the end of the word rather that the single “e” it had used since its inception. (Note: only one e was used initially because at the time PERS was created, the state mandated that if there were alternate spellings for words, the shorter spelling must be used to save printing costs.)

 The 1997 Oregon Legislature created two new trusts for PERS to administer: The Deferred Compensation Trust was created to provide trust protection for the State’s Internal Revenue Code (IRD) 457 program, and the Benefit Equalization Fund was created to serve as a vehicle for employers to meet contractual obligations to members for pension benefits that exceed IRC 415 limits and not eligible for payment under the PERS plan.

  PERS moved into its own building in June 1997, which, it was anticipated, would save the system about $6 million in the following 20 years. The building was built in Tigard, right off the interstate highway, to ensure easy access to members.

 Executive Director Fred McDonnal, who had served the agency for 15 years, retired December 1999. He had been the executive director since 1993.

 To help ease high employer rates among local government agencies, the Board began considering a rule that would pool local government rates the way rates were already pooled for school districts and state agencies.

As the 90s came to a close, PERS was still very much in the public light. The system would soon have a new executive director, employers were very concerned about escalating employer rates, the public felt PERS was eating up too many tax dollars, the wave of baby boomers had begun to wash up on the PERS shore, and the system desperately needed to improve its technology. However, the system was still strong, well funded, and well-respected in public pension plan circles.

A look into PERS’ future

As PERS began its second 50 years, it also began preparations to manage a rapidly increasing workload. The baby boomers—people born between 1946-1964—in PERS’ member population were steadily nearing retirement. In 1997, nearly 54,000 active PERS members were within 10 years of eligible retirement age. As a result, PERS’ workload was expected to double by 2005 and nearly triple by 2010.

This demographic wave would affect every aspect of the agency’s work. To address it, the agency embarked on a plan to address as much of the workload increase as possible through improvements in technology and in work methods. Studies conducted in 1996 and 1997 assessed specific technology needs and work process improvements.

Based on the study results, PERS began plans to make major changes in these areas within the next few years, expecting the changes to likely include improved ways of doing business over the phone and across the Internet and faster access to information for agency employees, members, and employers.

PERS has enjoyed a reputation for outstanding customer service. The agency’s current management was committed to taking the steps necessary to maintain this status throughout the retirement of the baby boomers and beyond, and by doing so continue to achieve PERS’ mission “to provide the highest quality services so that each member has the opportunity for a successful retirement.”

The House Interim Task Force on PERS took a very broad look at the system, with an emphasis on the cost of the system to taxpayers. Probably the most significant result of the task force’s work was the creation of a second tier of PERS membership by the 1995 Oregon Legislature.