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PERS future writ in shifting sands

Overhauling the retirement plan has gotten rapid results, personal and financial, but it will be years before the dust settles

When legislators and Gov. Ted Kulongoski overhauled Oregon's public pension system this year, changing everything from retirement benefits to the agency's board, some of the effects were immediate.

A record 12,000 government workers retired. School districts, state agencies and local governments saw their annual pension costs slashed by hundreds of millions of dollars.

But it could be several years before anyone knows what the changes in the Public Employees Retirement System will mean in the long run -- and whether they will even stick. The agency says it will take at least three years to implement them. Public employees have appealed most of the changes to the Oregon Supreme Court, which could take more than a year to make a decision.

Lawmakers said revamping PERS was necessary to cut taxpayers' rising costs -- government employers' rates had been set to go up 35 percent this year -- and to reduce the 300,000-member system's long-term shortfall.

It has done that. Instead of increasing, employer rates fell slightly. The shortfall, projected to hit $17 billion, has been cut by more than half.

At the same time, the changes have roiled government workers and their employers. Many school districts and state and local governments, for instance, are scrambling to provide seamless services after the wave of retirements, which surpassed the two previous years combined.

"I think it was probably the most earthshaking change in the system's history," said former Sen. Tony Corcoran, D-Cottage Grove, who helped lead the overhaul.

The question is whether the Supreme Court will let it stand. Public employee unions, whose challenge went directly to the high court, contend that legislators violated workers' contract rights. The changes breached the promises made to workers when they were hired, the unions say, noting that some mid-career employees could lose as much as a third of the pension benefit they had been told they could expect.

Employers can't plan too specifically for a union victory.

"We are verbally telling the employers that if some or all of the changes are overturned, it will cause a rise in their rates," said Dale Orr, who heads PERS' fiscal services division. "Beyond that, we can't tell them any numbers."

Stock market gains aren't enough

PERS, faced with a growing gap between its projected assets and obligations during the next 26 years, told employers last year that it planned to increase their rates in 2003 to help cover the $17 billion shortfall.

Computer models showed stock market gains alone would not solve the problem. Kulongoski and many legislators worried that putting the burden on the backs of agencies -- which on average spend more than 15 percent of their payroll on PERS -- would drive up the system's costs to unsustainable levels.

Kulongoski and Democrats in the evenly split Senate, who would have to support any changes, withstood union protests and decided to support an overhaul.

The changes included prohibiting PERS from crediting earnings to the regular accounts of members hired before 1996 unless the shortfall was erased; changing the 8 percent growth guarantee from annual to a lifetime average for those accounts; suspending cost-of-living increases for more than 20,000 retirees from the past four years; and updating life expectancy tables to calculate benefits, resulting in smaller monthly checks because people tend to live longer now.

When legislators finished, they had trimmed more than $8 billion from the shortfall.

A rising stock market, meanwhile, further reduced the shortfall. By the start of this month, the assets of the Public Employees Retirement Fund had grown to nearly $42 billion -- more than three times the size of the state's two-year general fund budget.

Changes force retirements The PERS changes presented thousands of longtime public employees with a choice: Retire earlier than they had planned or have their future pension benefits reduced. And they had to decide quickly; many of the biggest changes took effect July 1, several months after most were enacted.

About 4,000 PERS members retire in a typical year. By the end of June, 8,624 had chosen to leave -- more than in any previous year.

Union officials say some public employees are making poor decisions, under pressure, about whether to retire. The reasons, they say, include complicated changes, early effective dates and PERS' struggles to quickly get benefit estimates and other information to the flood of retirees.

The upheaval also has left some workers wondering whether PERS is financially sound, union officials say, opening the door to salesmen trying to get them to invest their retirement money elsewhere.

"For the first time, the Legislature has shattered the confidence that our members have in PERS," said Mary Botkin of the American Federation of State, County and Municipal Employees, which has about 20,000 members in Oregon. "The vultures are taking advantage of that fear."

The rash of retirements was a financial boon to employers. Their costs dropped because the retirees could be replaced by lower-paid workers. Even agencies that hired back retirees saved money. They don't pay PERS contributions for them, and the retirees don't get vacation, holiday or sick pay.

Government officials say the savings came with a cost: Decades of valuable experience and institutional memory paraded out the door, and government service might become less attractive to high-caliber workers.

School districts lost more than 4,700 employees. About 3,000 workers left state government. Because many retired hurriedly to beat the new laws, they didn't have time to train their replacements, said Cindy Becker, assistant director of the state's Department of Administrative Services.

"It used to be someone would say, 'I'm retiring in 12 months,' or 'I'm retiring in 14 months,' " Becker said. "Now, it's 'I'm retiring in two weeks,' so we don't have any time to plan."

PERS adds staff to cope While the changes remain in effect, many employers are forging ahead, figuring the savings into their budgets. But some are hedging their bets, setting aside their PERS savings until the court rules.

PERS doesn't have that luxury. The 57-year-old agency is racing to catch up with the changes. It has added a third more staff, leased more office space and worked to start a new computer setup.

"A lot of money is being wasted because PERS has to make the changes," said Jack Sollis of Oregon PERS Retirees Inc., "and then they're just going to have to change them back."

Workers, too, continue to wrestle with retirement decisions, trying to figure out how much the changes will affect their pensions. Another wave of retirements is expected before April, when some of the changes take effect.

They won't get a ruling in time to help them decide. The Supreme Court won't hear arguments until after that date. Some attorneys say the complexity of the issue -- the court also is considering an appeal involving the way PERS distributed 1999 earnings to members' accounts -- could mean the justices won't make a decision until 2005.

Corcoran, the former senator, said tossing out big parts of this year's legislation wouldn't end the PERS tug of war. He noted that Republican legislators pushed for even bigger changes, including starting from scratch with a new system.

Corcoran, who resigned from the Senate this fall to take a state government appointment, said the Legislature did the right thing.

"The patient was very ill and needed emergency surgery," Corcoran said, "and we're still waiting to hear what the courts will say about its condition."

Dave Hogan: 503-221-8531;  davehogan@news.oregonian.com