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PERS ruling pushes state to the edge of financial disaster

Oregon has a mere two years to avert fiscal disaster — and its leaders must acknowledge both the depth of the problem and the need to act before it’s too late.

A disappointing Oregon Supreme Court decision on April 30 wiped out billions of dollars in savings that would have been realized in coming decades from reforms to the state’s Public Employees Retirement System. The court ruled that the largest of those changes, approved by the Legislature in 2013, failed the constitutional test. The impact of that decision will begin to be felt in 2017 when the Legislature will have to come up with an estimated additional $870 million to cover rising PERS costs in the 2017-19 biennium.

The PERS debacle presents difficulties enough, but it’s not the only thing shoving Oregon toward its own fiscal cliff. In 2017, the additional money Oregon has been receiving from the federal government for health care also will be phased out. Back in 2012, the feds promised $1.9 billion over five years in support of Oregon’s effort to transform health care for its Medicaid population.

The state is making progress in slowing the growth in health care spending, but that doesn’t erase the fact that several hundred million more dollars must be carved from the state’s 2017-19 budget. Between health care and PERS, the gap could exceed $1 billion — and that doesn’t consider all the other increasing costs for education and essential services.

In the days following the court’s PERS ruling, we haven’t seen a sense of urgency among Oregon’s political leaders for dealing with the consequences. The governor and the Legislature must consider all options, large and small, for reducing spending and increasing revenues. It’s true that PERS rates for the 2015-17 biennium already have been set and are unaffected by the court’s decision, but it would be incredibly shortsighted for the 2015 Legislature to ignore what lies ahead in 2017.

Given the magnitude of the impending budget gap, Gov. Kate Brown, in particular, must sound the alarm. She needs to convene a bipartisan group to begin studying potential steps that can be taken to limit the damage to education, health care and other state services come 2017.

This is Brown’s opportunity to demonstrate her leadership mettle.

By contrast, if the 2017 Legislature convenes in less than two years without a great deal of bipartisan groundwork having been completed on these looming fiscal questions, Oregon will be headed for deep trouble.

Ideas already are being floated to solve the PERS problem. 

Should the legislature override the state’s kicker law this year and bank $350 million or so, rather than return it to taxpayers? The kicker aside, how much money can the state potentially carry forward in reserves from this biennium to the next?

Those are short-term considerations, but eventually, Oregon must confront difficult longer-term questions that arise from its mandate to support a very expensive retirement system. What services is it willing to sacrifice in order to preserve the ones that citizens care about the most? Are there savings to be realized in the state prison system, for example, that can be applied to K-12 education or community colleges? State parks? Human services?

Another crucial conversation involves any minor tweaking that can be done to PERS, even if it saves only a few million dollars a year. Oregon Treasurer Ted Wheeler has proposed an Investment Modernization Act that would, among other things, reduce outsourcing of PERS investment decisions and eventually save the state as much as $80 million per year. The Legislature can no longer afford to let ideas such as this languish.

Right now, however, it’s not the specific proposals that matter most. What’s needed immediately is a recognition that the court’s recent decision, when combined with other fiscal factors, is reason to be worried today.