The History of PERS: Under Pressure 1997-2007

Continuing with the History of PERS as a predicate to consideration of how we might address this most “Wicked Problem” in 2017.

By the end of 2007, PERS was 112 percent funded.
This was indeed cause for celebration

PERS 1997-2007: The change years

As the 20th century came to a close, a whirlwind of activity swept across the country. With technology changing at break-neck speed, both new and experienced investors rushed in to take advantage of the accompanying robust stock market. The first DVDs were launched, World Wide Web usage expanded from 100,000 websites in 1996 to nearly 1.5 million sites within two years; eBay, an online auction house, made online shopping mainstream; and dotcom businesses sprouted throughout cyberspace as businesses and entrepreneurs clamored to enter the world of e-commerce.

By the early 2000s, the dotcom bubble burst, stocks took a beating, and newfound wealth became as quickly lost as it had been found. This downward trend continued, and by PERS’ 60th birthday in 2008, the United States had the highest deficit in its history, the country had been attacked by terrorists, and was in a war in Iraq. The stock market had suffered devastating losses and both the financial and auto industries were in serious jeopardy in 2008. In short, shortly after the sixth decade came to a close, the country’s financial and domestic security were both sitting on shifting sands vulnerable to swift, unpredictable winds.

PERS overview

Like the country itself, PERS experienced both the best of times and the worst of times during these years. Stock market booms and downturns, concerns over technological inadequacies, lawsuits, and public perceptions that PERS was unsustainable necessitated both radical changes and time-intensive, costly projects.

During this period, the agency had four executive directors, numerous changes in executive positions, and an entirely new Board. It experienced a record number of retirees, due to both investment returns and the baby boomer population reaching retirement age. RIMS, the computer system that had once been viewed as the agency’s salvation, was antiquated and a new system had to be designed. The agency adopted a new mission statement, underwent restructuring, and expanded its workforce by nearly 30 percent.

The single most significant event in 2003 was PERS Reform Legislation.

Major events

New trusts added to PERS’ administrative responsibilities

The 1997 Oregon Legislature added two trusts for PERS to administer—the deferred compensation trust and the Benefit Equalization Fund.

Record gains and losses keep PERS spinning

As PERS began its sixth decade, the stock market was strong. With the Internet providing investors an easy access to buying and selling stocks, people were almost frenetically looking for the next company that would double or triple within a few months. Even people who had never invested in stocks before entered the arena and watched the Dow Jones Industrial Average (DJIA) as closely as they watched the sports page. From 1996 to 1999, the DJIA nearly doubled in value.

Many PERS members opted to put some of their money (members were allowed to invest 25, 50, or 75 percent of their contributions) in the variable account and were rewarded with uncommonly high return rates. PERS investments also grew with unprecedented speed, and the Board allocated earnings to member accounts accordingly.

However, as the new millennium came, the stock market proved volatile, and the media began reporting how overvalued many stocks had become. Between the unpredictability of the market and fears about how low the market might go, many people who had just gotten into the market began selling off their shares. By 2002 the DJIA gave back most of the late-90s gain, and the markets continued to be volatile.

The public began to be concerned with PERS’ unfunded liability, and PERS became a major political issue. (See The call for PERS Reform below.)

PERS is required by statute to give members the highest benefit calculation, and Money Match frequently proved to be the highest method for many Tier One members. However, while members may have earned high returns on their variable accounts, employer funds were invested much more cautiously, and employer accounts had simply not kept up.

The notable gains in members’ variable accounts proved detrimental to employers. PERS is required by statute to give members the highest benefit calculation, and Money Match frequently proved to be the highest method for many Tier One members. However, while members may have earned high returns on their variable accounts, employer funds were invested much more cautiously, and employer accounts had simply not kept up with their employees’ earnings. Thus, the pension system faced a higher unfunded actuarial liability (UAL), employers faced higher rates, and the public became increasingly resentful over the high benefits some retirees were receiving.

While the market picked up somewhat in 2003, it remained almost flat through 2004 and 2005. PERS investment returns rebounded in 2003 and continued to be strong through 2007.

By the end of 2007, PERS was 112 percent funded. This was indeed cause for celebration, especially when PLANSPONSOR magazine, a trade journal focused on retirement issues, named PERS the winner of its Plan Sponsor of the Year award. In 2007, the magazine termed Oregon PERS “the best funded pension system in the country.”

As reported in the Statesman Journal February 8, 2007, “The state pension system was honored for its strong investment returns and reforms that closed most of PERS’ $17 billion funding gap since the spring of 2003. ‘PERS’ made tough decisions and confronted the issues head on,’ said Nevin Adams, the magazine’s editor-in- chief.”

Employer rates

A large increase in employer rates was triggered primarily by House Bill 3349 and the impact of high earnings distribution. As reported in the agency’s 1999 Comprehensive Annual Financial Report, “In response, the Board reviewed numerous concepts and created new administrative rules that will help stabilize employer rates while preserving the Board’s fiduciary commitment to the beneficiaries of the trust.”

As a result, fiscal year 2000-2001 included a session of the Oregon Legislature, which passed Senate Bill 134 that had a provision that allowed local governments to join the existing state/community college actuarial pool. Those who joined the pool could expect significantly less rate volatility.

This did offer some relief, but the issue was far from resolved and continued to be of concern to employers. Healthy investment returns somewhat eased concerns over these rates in the mid-2000s, but because the value of PERS’ assets are linked with employer rates, any change in PERS financial status always brings the issue of employer rates back into the public eye. SB 134 also allowed members to elect a double lump-sum payout at retirement, effective January 1, 2003.

The call for PERS Reform

According to an Associated Press article published July 26, 2002, “Shortfalls in private companies’ pension plans soared to $111 billion last year, the highest level ever reported by the Pension Benefit Guaranty Corp.” While PBGC spokesman Jeffrey Speicher down played this in the article, pointing out that most were still at least 80 percent funded, pensions were on people’s minds.

In Oregon, PERS became a hot topic both because of its unfunded liability— estimated to be $8.5 billion in late July 2002 — and because of high employer rates. Both Democrat Ted Kulongoski and Republican Kevin Mannix, the state’s two gubernatorial candidates, made PERS reform part of their platforms.

The media reported on PERS with increasing regularity, and when Ted Kulongoski was elected governor, one of his first steps was to reform PERS. In his inaugural speech in January 2003, Kulongoski said, “The debate we’re having over PERS is creating real uncertainty for our public employees. I know that. I also know that PERS – as it is currently structured – is creating financial uncertainty, bordering on crisis, for Oregon. We need to go back to the drawing board and come up with a retirement system that is fair, sustainable, and affordable. This is a test of leadership for both the legislature and me. It is also a test of leadership for those who speak on behalf of public employees. We are duty-bound to get this job done.”

An opinion piece by SEIU Local 503 Executive Director Leslie Frane that ran in the March 7, 2003 edition of the Portland Tribune stated the general public’s opinion about PERS succinctly,

“PERS has been blamed for everything from shortened school years to rising crime. Public sector retirees have been cast as wealthy freeloaders instead of hardworking people who protect and teach our children, keep our communities safe, and provide health care to elderly and disabled Oregonians.”

Tensions between public employees in the PERS system and the private sector became increasingly hostile, fueled by reports the plan had hit record shortfalls.

Two task forces studied PERS structure and liabilities and offered suggestions to reform the system. In 2003, Governor Ted Kulongoski signed several bills that reformed PERS.

2003 Reform legislation –
The following bills were part of PERS Reform:

House Bill 2001
Tier One regular accounts would be credited with 8 percent earnings (no more, no less) until the Tier One assumed rate deficit has been eliminated and the Tier One reserve account is fully funded in each of the last three years.

House Bill 2003
A number of changes occurred with the passage of this bill, including:

 Earnings may not be credited to Tier One regular accounts in any year in which there is a deficit, and no earnings may be credited that would result in a deficit.

 For Tier One members who retire under Money Match on or after April 1, 2000, and before April 1, 2004, PERS will adjust the annual cost-of-living allowance (COLA) as through 11.33 percent (instead of 20 percent) was credited for 1999. Members receive the fixed allowance (with no additional COLA) until the revised allowance (with COLA) provides a higher benefit.

  Member contributions are redirected into the Individual Account Program (IAP).

House Bill 2004
PERS must use new actuarial equivalency factor tables beginning July 1, 2003.
House Bill 2020
Established a successor retirement plan, the Oregon Public Service Retirement Plan (OPSRP).

Public employee challenges to reform legislation

Challenges to reform legislation were immediate. They were consolidated into a case commonly referred to as the Strunk case, which reached the Oregon Supreme Court.

The Oregon Supreme Court held that PERS could not suspend COLAs to certain retired members and that the annual crediting at the assumed rate for Tier One member regular accounts could not be eliminated.

The Oregon Supreme Court held that PERS could not suspend COLAs to certain retired members and that the annual crediting at the assumed rate for Tier One member regular accounts could not be eliminated.

Employer litigation

Prior to PERS Reform, PERS employers took legal action against PERS, requesting the courts review employer contribution rates for both 1998 and 2000.

Several different suits against PERS were consolidated into what became commonly referred to as City of Eugene v State of Oregon, Public Employees Retirement Board. Judge Lipscomb resided over the case, and his decision became known as the Lipscomb decision. Lipscomb ruled that the PERS Board’s settlement agreement in the City of Eugene case had resolved the issue.

PERS reallocated 1999 earnings to Tier One member regular accounts, employer accounts, and the benefits in force reserve at 11.33 percent instead of 20 percent, and new mortality tables were implemented.

Additionally, PERS would redirect member contributions to the IAP, and PERS would use new actuarial equivalency factor tables beginning July 1, 2003.

The Strunk decision voided HB 2003, which stated that earnings would not be credited to Tier One regular accounts in any year in which there was a deficit and no earning would be credited that would result in a deficit.

Strunk and Eugene Project

The results of both the Strunk and Eugene cases had an impact on benefits, and a special section at PERS was set up to recalculate benefits.

Retirement spikes

All the uncertainty that came with PERS Reform and the subsequent legislation caused huge retirement spikes, the likes of which PERS had never experienced before. Retirements climbed past 10,000 by the middle of 2003, more than double what the previous record had been for an entire year. To help retirees, PERS began holding after-hour sessions in which PERS staff helped members fill out retirement forms. Sometimes lines backed up outside the building, with media on scene to report the mass exodus on the evening news.

The public began to worry about having enough teachers in the schools and adequate coverage of public agencies to meet consumer needs. PERS was seen as the culprit for staffing-related problems. The newspapers ran frequent articles fueling this with stories of teachers who weren’t ready to retire and regretted leaving their positions but fearing that if they didn’t, they would lose huge chunks of their retirement benefits.

PERS staff expands to meet demands of retirement spikes and PERS reform

Combined with lawsuits, the creation of a new computer system, and instituting a new plan, PERS was non-stop activity. New employees had to be hired to meet the exploding workload demand, and PERS had to rent space in a separate building to accommodate the new staff.

Employees worked at a frenetic pace, but no matter how many overtime hours were devoted to creating the new plan, new computer system, and meeting the needs of members who wanted to retire, for the next several years, staff could barely keep up with all the changes and challenges.


PERS’ efforts to catch up with technology were challenging. The agency began a major reengineering effort in 1999 to create a new information system that would be completed by 2005. However, the 2001 legislature showed its reservations about the plan by voting only $1 to fund the new system.

Consequently, PERS searched for an outside consultant to prepare a plan to create the new computer system. This passed the legislature in the following session, and work began on Oregon Retirement Information Online Network (ORION), a new system expected to be completed in 2010.

By the end of its sixth decade, PERS had instituted new technology for employers to report their employees’ earnings and demographic records. This was a major undertaking and PERS began a significant communication effort with employers that included employer education workshops and seminars, a new website specifically for employers, e-mail communications, and other outreach efforts.

In 2002, legislation directed PERS to cease individual retirement counseling sessions for members. To ensure that members had the information they needed to make sound retirement decisions, PERS:

— made five videos to explain retirement considerations;

–  created a new call center, complete with a new phone system, to respond to member inquiries;

— used video conferencing; and

–  revamped its website to keep members informed of any changes to the system.

Additionally, during retirement spikes the agency also held Turn-In-Forms Sessions during evening hours in which staff helped ensure retirement forms were filled out correctly.

By 2007, retirement counselors also began holding Retirement Application Assistance Sessions in which members within one year of retirement could meet one-on-one with a retirement counselor to ensure retirement applications were filled out correctly.

Oregon Savings Growth Plan

OSGP, an optional deferred comp plan for all state and some local governments, benefitted from stock market increases during these 10 years. As of June 30, 1997, the fair value of investments was $388.7. As of June 30, 2007, the fair value of investments was $910.9.

Plan changes

HB 2020: The Oregon Public Service Retirement Plan (OPSRP)OPSRP is a hybrid (defined contribution/defined benefit) pension plan with two components: the Pension Program (defined benefit) and the Individual Account Program (defined contribution).

Beginning January 1, 2004, member contributions (including Tier One and Tier Two contributions) were placed in the Individual Account Program (IAP). PERS members retained their existing Tier One and Tier Two accounts, but those accounts would not receive any additional contributions. Tier One accounts would continue to earn the assumed rate annually (8 percent) and Tier Two accounts would continue to be credited with earnings or losses.

Pension Program

This portion of OPSRP would provide a life pension funded by employer contributions.

Depending on whether a member is a general service or police and fire member, benefits would be calculated with specific formulas for members who attain normal retirement age.

Individual Account Program (IAP)

OPSRP, Tier One, and Tier Two members contribute 6 percent of salary to the IAP, and employers may agree to pay the 6 percent contribution.

Accounts are credited with earnings or losses annually. Administrative costs of the plan are charged to these accounts.

Board changes

The Board composition changed twice during PERS’ sixth decade. It was increased to 12 members in 2001, then reduced to five members in 2003.