BY JACOB SZETO
PORTLAND – Buried in the back of TriMet’s latest approved budget summary is a one-page document entitled “Financial Forecast Summary,” which portrays a stable financial future but fails to tell the whole story.

The forecast depicts a growing future for TriMet. Revenues climb 58 percent in 10 years, while expenditures grow by a lesser 50 percent. All the while, TriMet will be mostly running budget surpluses, adding to its coffers an average of $12 million a year.

Markedly missing from the forecast are payments to TriMet’s retiree healthcare system. These payments are short on average by $45 million a year, resulting in an accumulation of an additional $427 million in off-account debt by the end of the 10-year forecast.

Due to a lack of accounting and budgeting rules, these payments, which represent the payments needed to stay current on the agency’s past and current expenses, do not have to be budgeted. Instead, they are kept off the books and relegated to the “notes” section of the annual report, providing an option to avoid paying today’s bills.

The “notes” section provides a disclosure of what TriMet owes and a window into the consequences of not budgeting and paying for its current costs. As of 2009, TriMet has accumulated $632 million of unfunded healthcare liabilities. These liabilities increase by $45 million every year and represent a $45 million budget shortfall.

TriMet’s pension system follows a similar, although less abusive story. The financial forecast shows TriMet will continue underfunding its pension system for 8 out of 9 years when compared to its annual required contribution. Consistent underfunding has led to a total accumulation of $275 million in unfunded liabilities as of 2009, a 225 percent increase from 2001. The forecasted decade will add another $35 million.

Combining past and future shortfalls for both the retiree healthcare and pension systems, TriMet will have accumulated almost $1.4 billion in debts that are held off-account by 2019.

These delayed payments for current and past expenses will have to be paid someday and inevitably will fall on the backs of future taxpayers, essentially transferring the cost of today’s services to tomorrow’s taxpayers because they can.

In the same budget document, TriMet acknowledges the need to incorporate the costs of retiree healthcare and pension systems into its budget, stating, “Over time, TriMet will need to increase annual pension fund contributions in order to achieve 75% or higher funding….TriMet needs to take steps to partially fund a retiree-medical trust….”

But even though TriMet has acknowledged these facts, it has yet to make plans for them, much less follow through on any. It could have to do with the fact that not funding them allows TriMet to spend approximately $50 million more than it has on a yearly basis. To do otherwise would require additional budget cuts of the same magnitude.

If TriMet budgeted for these costs, it would run out of cash reserves (restricted and unrestricted) by 2011. This means that if TriMet were to pay the true cost of its current services, its forecasted expenditures would have to be reduced by just under $270 million for the next decade.

The costs of the retiree healthcare and pension systems are a direct result of labor contracts with unions. TriMet is in the midst of renegotiating its contract with Amalgamated Transit Union, of which all details have been blocked from the public view by TriMet and the Multnomah County District Attorney. Read more about the DA and TriMet blocking contract details.

TriMet’s budget is subject to the scrutiny of the Tax Supervising Conservation Commission (TSCC) on Wednesday at 8:00 am. After the TSCC meeting TriMet’s budget will be subject to another round of public scrutiny at the TriMet board meeting at 9:00 am at the same location.

See TriMet Financial Forecast

See Adjusted Forecast to see TriMet’s financial future, including its estimate including all projected costs.

Part One of Two

By JACOB SZETO

SALEM – New information has shown that Oregon’s state and local governments owe an additional $3 billion in benefits to their retirees.

Other Post-Employment Benefits (OPEB) debt has reached at least $3 billion statewide but will not be found on government balance sheets. The annual cost for OPEB is $300 million, of which only half is paid, resulting in budget deficits near $150 million every year.

OPEB are public employee retiree benefits other than pensions and can include benefits such as life insurance, stipends and healthcare. In Oregon, like most other states, retiree healthcare makes up the bulk of OPEB obligations. Often, these benefits are very generous because the real costs have been pushed to the future and ignored on government financial statements and budgets.

Until recently, it would have been impossible to know about these expenses and debts, but new accounting rules have shed light on the extent of OPEB. These new accounting standards have shown that governments have been running budget deficits for decades, accumulating massive amounts of debt that still remain off the books today.

Founder and CEO of the Institute for Truth in Accounting Sheila Weinberg questions why it took so long for these standards to come about and why they still don’t require the liabilities to be included on balance sheets: “They knew they should have been a liability on their balance sheets. Why did they not demand that these liabilities be revealed?”

Oregon Politico collected information from 100 of the largest counties, cities, school districts, and other government entities to capture a snapshot of the approximately 1,725 Oregon local governments and their OPEB liabilities and costs.

Reporting and Budgeting Requirements

Previous to new reporting requirements, governments had been using a pay-as-you-go system. They only reported their current direct premium payments on their financial statements. The Government Accounting Standards Board (GASB) determined that the pay-as-you-go system needed to be replaced because it failed to “recognize the cost of benefits in periods when the related services are received.”

OPEB benefits are earned during employment but not paid until after employment. In the absence of standards, governments had been treating these future promises as nonexistent in their financial reports.

With the implementation of GASB 45, government managers are no longer allowed to completely ignore the OPEB balance. This new standard requires governments to report the details of what they owe in footnotes. The cost of OPEB must now be included on the income statement, but the accumulated debt from past employee services are still left off the books, which creates an appearance of less debt. For instance, if the Portland Public School District were to include their OPEB debt on their balance sheets, total debt would increase 30 percent from $584 million to $761 million.

GASB only sets standards for audited government financial reports; they do not set the standards for budgets. OPEB continues to be budgeted as it has in the past. Only the direct payments for OPEB are accounted for, not the entire cost. Because the cost of OPEB is almost always more than the direct OPEB payments themselves, current costs for employee compensation are pushed into the future.

Years of failing to budget for the full cost of OPEB have led to an accumulation of at least $3 billion of debt. Gresham-Barlow School District board member Dan Chriestenson, speaking on his own behalf, calls the accumulation of debt a “ticking time bomb that is going to affect all of us.”

Debts and Deficits

If the true cost of OPEB were to be included in budgets, most government budgets in Oregon no longer would balance. Only 13 percent of Oregon governments currently reporting OPEB make contributions and payments equal to their OPEB cost, or annual required contribution (ARC).

In 2009, total OPEB ARCs were equal to $300 million, but Oregon governments only made $154 million in contributions, only half of the total requirements. This resulted in budget deficits of $146 million last year alone.

If the $146 million were to be budgeted, it could be set aside in trust accounts to be drawn upon when costs incurred now come due in the future. This is similar to how the Oregon Public Employee Retirement System (PERS) is funded. The sharp distinction between PERS and OPEB is that PERS is legally mandated to be funded, while OPEB is not.

Of the $3 billion of OPEB benefits accrued by public employees for services already rendered, 93 percent or $2.8 billion is unfunded.

The Gresham-Barlow School District is one of only 12 contributing their entire ARC or to have accumulated any assets in a trust fund. Although their OPEB is only four percent funded, it is a distinction from a majority of Oregon governments who have not funded at all. As Chriestenson puts it, “Many entities are literally not addressing this in any meaningful way… To me the responsible thing is to fully fund the required contribution on an annual basis instead of throwing the debt to unknown people at an unknown time.”

Of all the Oregon governments, TriMet is the leader in OPEB debt with an accumulated $632 million, or 21 percent of the total statewide OPEB liability. Of this half a billion dollars, not a single dollar is funded. TriMet’s OPEB debt is so large it is 484 percent of its annual covered payroll. This measure eclipsed any other government examined for this article; no other government exceeded 115 percent, and the statewide average OPEB percentage of payroll was a mere 15 percent in comparison.

TriMet’s OPEB cost for 2009 was $55 million. TriMet only paid $13 million, leaving a $42 million deficit, a cost for current services pushed to future taxpayers.

The unusually large debt of TriMet can be attributed to the failure of management to set aside money for the cost of generous benefits for unionized employees. In accordance with TriMet’s collective bargaining agreement, TriMet covers 100 percent of medical, dental and vision insurance premiums for retirees and their spouses.

In contrast, Clackamas County, with a similar covered payroll size, has $51 million of OPEB debt, representing 45 percent of their covered payroll, and an annual OPEB cost of $6.4 million. This shows that OPEB cost is mostly a function of contract negotiations with employees, and TriMet unionized employees enjoy generous fringe benefits.

Calls to TriMet for comment were not returned.

The second largest single debt in Oregon was the State government Public Employee Benefits Board system (PEBB) with an accumulated $323 million of OPEB debt, representing 15 percent of their covered payroll, and 11 percent of the statewide OPEB debt. The State’s OPEB cost in 2009 was $36 million, of which only $16 million was paid, leaving a deficit of $20 million.

Although new reporting requirements have revealed the extent of OPEB liabilities and costs, government managers have always known that they were not accounting and budgeting for the true balances and costs. Today they continue to ignore the true costs of retiree benefits and have demonstrated that they are willing to borrow from the future to pay for the present.

Sheila Weinberg agrees: “We would not be on the hook for these liabilities now, if governments would have been required to include them in the balanced budget requirement and fund them as they promised them.”

Part 2 of this article series will discuss the advantages of funding OPEB liabilities and cost control measures.

Below is a list of OPEB details for 100 of Oregon’s largest governments.

Alphabetical Order

By government type

Ranked by OPEB annual required contribution

Ranked by OPEB unfunded liabilities

Ranked by OPEB percentage funded

Ranked by OPEB percentage of covered payroll

Ranked by covered payroll

For more information please contact [email protected]

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BY JACOB SZETO

PORTLAND- In his 2010 State of the City Address on Friday, Portland Mayor Sam Adams focused on jobs and sustainability as both his short- and long-term goals for Portland.

“This year, of all my many years of public service, has been unique for its singularity; for the first time, almost everyone shares the primary concerns about jobs,” said Adams.

Adams’s plan centers on fashioning Portland as a “sustainability hub” to create jobs, with initiatives such as the Clean Energy Work program that will weatherize homes (creating an estimated 10,000 jobs) and the streetcar expansion (creating an anticipated 1,300 jobs). The streetcar will use a Federal Transportation Agency grant of $75 million for the expansion to the east side. Adams said, “Portland was once a streetcar city, and it shall return to a streetcar city.”

Adams also announced a pair of city loan and investment programs. A $33 million Sustainable Development Fund, using federal stimulus dollars, will offer financing for “clean tech.” And the Portland Small Business Seed Fund will invest in startups in which private capital is unwilling to invest. Adams challenged banks to match the $500,000 that the city has made available for this purpose.

He stressed the need for Portland to reduce its dependence on fossil fuels and acknowledged the higher costs of relying on other energy sources. “The so-called right thing to do tends to resonate with those who have the luxury to afford the alternative, that tends to be more expensive,” he said. Adams then outlined “On-the-go Financing,” a plan that would allow Portlanders to take out loans for home energy efficiency projects and pay them back with the savings on their utility bills.

Continuing his focus on sustainability, Adams took the opportunity to tout the Oregon Sustainability Center, a $120-million-dollar publicly financed building planned for the Portland State University. This plan has yet to be fully financed, even after the Mayor’s two trips to Washington, D.C. in search of federal funds.

At the end of the speech Mayor Adams took questions. The first question was asked by John Horvick, second vice president and chair of the research board for Portland City Club. Horvick asked about the City of Portland’s pension contribution rates to the Public Employee Retirement System (PERS) going up by three to six percent and what Portland is going to do about it. Adams answered that more upfront investment should be made, not enough is invested in public employees, and healthcare savings should be channeled into the PERS.

Mary Volm, a former transportation bureau spokeswoman, supporter of the first recall effort of Adams, and now candidate for Dan Saltzman’s city council seat, asked how the city’s Major League Soccer plan to tear down PGE Park is sustainable for the city and beneficial for families that enjoy baseball. Adams answered the question by stating that the city is recycling the PGE Park, not tearing it down.

He went on to say that the financing of the MLS deal protects the city’s general fund, a statement that has been made repeatedly by the city council. However, according to Jack Bogdanski’s blog, this is simply not true. The interim financing for the deal uses a line of credit that “pledges available general funds” for backing the credit, which could remain outstanding for five years before it is replaced with bonds.

Adams’s final tough question was about his sex scandal with a teenager, and if he would support the recall effort to give voters a chance to choose if he should remain mayor. Adams seemed prepared for this question and said that the scandal has not affected his focus on his job. He then thanked his staff for all their hard work on policy issues and invited applause for them.

BY JACOB SZETO

TIGARD- In a 4-1 vote the Public Employee Retirement System (PERS) board changed how employer contribution rates will adjust for the next scheduled change in July 2011.

To fund public employee pensions, employers (schools, state agencies and local governments) are required to contribute to a trust fund that is used to pay for future and current pension obligations. Contribution levels are determined by how well funded the trust is and are a function of payroll. This is done to make sure there will be enough money to pay for benefits.

Before the rule change, if the fund is less than 100 percent funded but more than 80 percent, contribution rates increase by three percent of covered payroll. If the fund is less than 80 percent funded, rates increase by six percent of covered payroll. This method of rate increase is known as the “double rate collar.” These adjustments happen every two years, with the next adjustment scheduled for July 2011.

Mercer, PERS actuary, estimates the funded status of PERS to be 75 percent without side accounts (pension obligation bonds). The funding level is a reflection of huge losses during the financial crisis. In total, obligations exceed the money to pay for them by $14 billion.

At a 75-percent-funded level, the double collar rate of 6 percent will be in effect for the next adjustment. This is likely a sure thing. According to Mercer, “Improvement will be insufficient to avoid a ‘double rate collar’ increase for most employers.”

Under the rule changes, the existing three percent contribution increase would remain the same for a funded status below 100 percent but above 80 percent. But if the funded status were to drop below 80 percent, the rate increase wouldn’t automatically jump another three percent as it did under the old rules. Instead, it will increase linearly at 0.3 percent for every one percent under the 80 percent threshold, up to 70 percent.

For example, under the new rules and the trust funding at 75 percent, the rate would increase 4.5 percent instead of six percent, three percent for being below the 100 percent threshold, plus 0.3 percent for every percentage point under 80 percent.

The rate setting rule change is a relief to employers. A projection made by PERS estimates $273 million of what otherwise would be committed to the rate increase now can go to other spending.

Tom Grimsley, vice chairman and teacher for the Bethel School district, was the one dissenting vote. He proposed an alternative change to rate setting rules. His alternative was to reduce the double rate collar to a ceiling from six to five percent, citing that 81 percent of the Bethel School District budget already went to staffing costs and a one percent decrease in the rate would leave more available money for the children.

When asked about lowering the collar rate and creating a larger inequity, Grimsley said, “Pushing it off for two to four years, am I ok with that, what’s the alternative, the alternative is sacrificing the current generation of kids to an inadequate education…by lowering from six to five it spreads the payoff about four years.”

Several board members clarified that their fiduciary responsibility was to the pension fund and not to schools, thus negating any consideration of how employers spent their budget.

These rate increases are in addition to the current rates already being paid. Currently, average base rates are 13.4 percent. These base rates do not include the offsetting effects of side accounts or the debt service on the side accounts. Debt service is the payments that must be made to pay off the bonds that were taken out earlier in the decade.

These bonds were taken out by various employers to take advantage of the low interest rates and were invested in the market to get higher returns. The net returns between the cost of the bonds and the rate of return have been used to reduce the employer contribution rates. This strategy has mostly worked; but due to the poor performance of the economy, the reduction of the offsetting effects effectively will increase the rates.

For state agencies, this will result in a rate increase of an additional 3.1 percent. Some employers have not been so lucky, and their bonds are now under water, resulting in a negative offset. In other words, they pay more for the bonds than the interest they are earning from the bond proceeds.

The change in the rate setting rules mostly will have no effect on the future funding status of the trust. But this does not change projections that under the current assumption of eight percent returns on investments over the next decade, the funded status will essentially plateau at 80 percent, with base rates reaching 24 percent. Assuming current payroll increases of 4.8 percent a year (average of the last 15 years), over $3.5 billion a year would be going to the pension fund by 2022.

Using a more optimistic assumption of 10.5 percent returns for the next decade, funded status could reach 100 percent, with base rates peaking at 20 percent in 2014 and coming down to 14 percent by 2022. In 2022, with the same payroll increase assumption as above, taxpayers would be paying $2 billion a year to the pension fund.

But if less than optimistic assumptions are used, funded status is in dire jeopardy. At a 4.5 percent investment return for the next decade, about the same return the trust has had over the last decade, funded status is projected to decrease to approximately 60 percent, and base rates would reach 35 percent and continue to rise. That’s $5.2 billion a year of taxes going to the pension fund by 2022.

If returns dip even further to 3.5 percent, funded status will be approximately 55 percent, raising base rates to about 37 percent and costing taxpayers almost $5.6 billion.

BY SARAH ROSS

SALEM- Senate Republicans are calling for an override of Governor Ted Kulongoski’s veto of Senate Bill 897.

This bill, introduced last March, passed almost unanimously in both the Senate and the House and was subsequently vetoed by Gov. Kulongoski in August. It covers a range of Public Employees Retirement System (PERS) protections, including the ability to purchase more health insurance benefits among other things.

The most influential aspect of the bill is the demand for the state’s data calculations for retirement benefits to be verified and locked in so that when an employee signs on to the plan, it cannot change.

“It’s time to stop letting bureaucrats dump liability for their mistakes onto the back of citizens,” said Senate Minority Leader Ted Ferrioli (R-John Day). “Under a policy advanced by the current administration and defended by Governor Ted Kulongoski’s veto, if bureaucrats screw up, retirees lose. If they complain, the government says, ‘You trusted us? Too bad.’”

Gov. Kulongoski’s office has said that he stands by the reasons laid out in his veto letter to the body in August. He cited the pending legal decisions currently in the courts as a reason to hold off on any legislation until these proceedings have been finalized. He also stated that SB 897 was a one sided fix to the problem because it allowed for retirees to collect after being underpaid but not reimburse the state when they’re overpaid.