(Note: Includes a compilation of a few past Facebook posts.)
Earlier today the Governor signed SB 1049 into law. Among other, less-objectionable provisions, the law makes sharp and painful cuts to many retirees' individual accounts. The purpose of the diversions is to help pay down PERS liabilities, which is meant to relieve some fiscal pressure on state and local government employers:
"The combined savings from the measure are expected to reduce system-wide employer contribution rates ... Savings generated during the 2019-21 biennium will be used to offset future employer contribution rates." (Subcommittee recommendation document)
Basically: state and local governments have liabilities. In order to find more money for services, the point of the bill is to reduce those liabilities so revenues can be spent elsewhere.
Here's where things start falling apart.
We always hear dire warnings about the Unfunded Actuarial Liabilities number (UAL). It's over $26.6 billion. Boy, that sounds like a pretty big number. But does it mean that we owe that much money today? No, it's measured over a 20-year horizon, which means that is a gap that has to be filled over the next 20 years (now 22 years with the signing of SB 1049). Here's the other thing: that number moves up and down according to how we think our investments (the Oregon Public Employees Retirement Fund, or OPERF) are going to do over that period of time. (More on that specifically later.) The market looks like it's doing well?... UAL goes down. Looks like it's not going to do well?... UAL goes up. Over decades.
But liabilities are a tool that many governments and individuals use all the time! I have an "unfunded actuarial liability" on my mortgage. I'm hopeful that I'll pull in a paycheck on the regular over the next 23 years... but nothing's for certain. If a personal finance analyst came to me and said, "Gee, your employment options are looking dim; I'm guessing you'll be out of work soon," my UAL would go up. If they said, "Dang, you're doing so well, I'm guessing you can count on an ever-increasing salary right up to retirement," then my UAL goes down. The State and local governments finance things in much the same way, through bonds.
Here's a view of pension liabilities (state + local) set against a view of fixed income liabilities (state + local) that Oregon governments current owe to various investors who buy bonds and other instruments:
Well, well... It looks like there are other liabilities out there as well. Fiscally prudent at the time, sure... but now they're a drag on our budgets. Should we ask those investors to take a haircut alongside our PERS retirees?
No! We should not do that, but let's walk through the absurdity and unfairness of why not.
Remember the example of the mortgage? When I got one, the bank (which invested in me) was very interested in my credit score. It's a number that the financial industry attaches to us that tells investors (people looking to make a loan to you) the likelihood that you are going to repay the loan. A high number means you're very likely to repay. A low number means you're less likely to repay.
Governments have the same thing... they're called "credit ratings." And instead of numbers, they get a kind of letter grade. AAA is the best, and CCC is considered absolutely dismal. And like personal credit scores, these ratings tell financial markets how likely that government -- whether it's a state, city, county, school district, etc -- is to repay its bonds. (That is, money that those governments borrow from Wall Street investors in order to build things.)
Now, the primary way that investors know that they will get repaid is through the Oregon Constitution's "contracts clause":
"Section 21. ... No ex-post facto law, or law impairing the obligation of contracts shall ever be passed..."
All states have some version of this. This ensures that a future Legislature isn't able to just pass a law that says "Ah, we decide not to pay you back after all, despite what our contract says."
If a Legislature were ever to try and break the Contracts Clause like this, their credit rating would drop precipitously, because those Wall Street investors would say, "We can't trust this state to maintain its obligations to us fancy-pants bankers."
Here's where pensions come in to play... The pension system represents a contract between employees and their employer too, and is similarly protected under a state's Contracts Clause. But here's the unfair part: When states break their *pension* contracts, they generally get an *upgrade* in their credit rating!
Look what Standard & Poor's (a credit rating agency) told the State of Kentucky just a few months ago when criticizing its budget:
“If the state fails to redeem its longer pension amortization schedule through a practical reduction in liabilities, (my emphasis) its credit trajectory could slip.”
Which is a little like a mobster telling a shopowner that if they fail to make payments to the local business protection syndicate, their storefront could catch fire.
So the same provision in the constitution means one thing for Wall Street investors (better financial standing when enforced), but something completely different for workers (worse financial standing when enforced)! Or, visualized:
In brief: The Financial sector has created a mechanism that punishes or rewards government based not on whether they respect or circumvent their agreements, but whether they are respected or circumvented for the right kinds of people.
Where some people claim it gets a little muddy is when the PERS "reforms" are only prospective in nature... That is to say, anything earned to date is protected, but employees will see future earnings subject to pension cuts. Some people (not me) would suggest that such changes do not technically break a contract because that money hasn't been earned yet. (It's a whole other post about why that's wrong!)
But did you know that not all of the money the State owes to investors is contractually promised? The State of Oregon currently has $240 million outstanding in what's called "Appropriation Credits," which means debt that is not backed by a contractual "full faith and credit" pledge. And before Measure 72 took effect in 2011, the State had billions of dollars in these types of obligations. But it was never proposed that those investors took a haircut alongside workers when the issue of PERS "reforms" came up.
The State of Oregon has a lot of outstanding obligations -- mostly to out of state Wall Street investors -- in both contractual and non-contractual agreements. And through all of this talk about controlling our liabilities, the divisions in what the Legislature chooses to address vs not address has not been based on the legal structure around those obligations... but whether the people who are expecting those payments are out of state investors or our own public servants.
I'm not saying that the State should tank its credit rating by stiffing those investors. I'm suggesting that the State should aggressively seek to fulfill all of its obligations -- those to our own workers at least as strongly as those to Wall Street.
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