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ow is it possible to make any bad situation and make it terribly worse? Easy: get legislators involved. How can you make a terrible situation even worse still? Also easy: add government accounting to it.

Regrettably, this is precisely what happened to PERSthe Public Employee Retirement Systemor at least thats what happened here in Oregon. While all 50 states have a PERS system, I wont attempt to dissect their troubles but I highly suspect they went through a similar deevolution. How else do you get a nationwide crisis that is so bad that even a left-leaning organization like the Pew Center calls it a national disaster in the making?

But this article isnt really about the numbers. Everyone (for once) agrees PERS is in bad shape. How bad is disputed. On the left, groups like the Pew Center estimates there is a nationwide gap between states obligations and whats actually in their bank to the tune of $1.38 trillion. A more reliable gauge comes from ALEC, because they dont rely on the governments numbers. According to Jonathan Williams, the Director of the Tax & Fiscal Policy Task Force for the American Legislative Exchange Council (www.alec. og), the real gap is well over $10 trillion. Instead of focusing on the numbers, this article is about process: how did we get here? Daniel Re, an attorney, who has been following PERS for more than 10 years, gave a presentation at an AFP seminar in early January. As he spoke, it became exceptionally clear to me how and why PERS began to fall apart, and so

I invited him to be on the January 19th I Spy Radio Show. Re has an excellent chronological outline of how PERS began its death spiral. If youd like a copy, weve put it up on www.ispyradio. com, where you can also listen to the Jan. 19th show. In what follows, the events pertaining to Oregons PERS come from Res presentation; the commentary is my own. PERS got its start in Oregon in March 1945, passed by a Republican governor (Earl Snell), a Republican Senate (with 25 Republicans and 5 Democrats), and a Republican House (50 Republicans to 10 Democrats). At the time, World War II was winding down. The War years were a turbulent time on so many levels but, regrettably, there was a conuence of bad socio-economic decisions being made. For example, the IRS began much of the corruption of our

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present-day health care market in 1943. At the time, companies were short of workers due to the War effort. Under normal circumstances, a company short on workers would simply increase their wages to attract new workers but there were wage and price controls in effect during the war that prevented them from doing so. According to R. M. Sade in his fascinating 2008 article, Foundational Ethics of the Health Care System: The Moral and Practical Superiority of Free Market Reforms (Journal of Medicine & Philosophy), companies began to offer a package of benets, including health insurance, as a means to attract new workers. In 1943, the IRS gave these incentives tax-deductible status for employers and furthermore decided not to tax the benets as income for employees. Health insurance thus became a huge tax dodge for both employers and employees (Sade, p. 481). I mention this because when PERS was established in 1945, it wasnt as if there werent retirement funds. People did largely it on their own accordand paid for it with their own money. I suspect a look at War and immediate post-War socio-economic decisions would make for a fascinating investigation. In any event, when PERS got its start, it provided a retirement benet equal to 50% of the employees nal average salary (FAS) during 5 of the last 10 years. A full career was considered 30 years of service for general employees and 25 years for re and police.

The most pertinent point here is that when it was created, neither legislators nor judges could join PERS. Judges had already been granted their own separate retirement system in 1943. This prevented any conict of interests. That all changed in 1971. From 1945 to 1970, PERS remained unchanged. But then in 1971, the attorney general at the timeLee Johnson, a Republican, who had served two terms in the legislature before running for attorney generalruled that legislators could join PERS. This went against a 1963 ruling by Mr. Johnsons immediate predecessor, Robert Thornton, a Democrat, who had previously served one term in the legislature before going on to serve as Oregons second-longest serving attorney general. Why Johnson ruled legislators could join PERS while his predecessor did not is unclear because the 1963 ruling has gone missing. Despite numerous efforts by Re and others to locate it, the ruling is nowhere to be found. If you imagine that putting the legislators in the dual role of decision maker and beneciary of PERS is akin to handing the hen house keys to the proverbial fox, you would be right. The very rst year, 1971, the legislature increased the employer contribution from 20% to 25% of nal average salary. Two years later, in 1973, they increased it up to 30%. They increased it again in 1981 to 50%. Just 10 years after being given the keys, the PERS

benet went from half paid by the employer (i.e., taxpayers) and half by the employee to 85% paid by the taxpayer and just 15% by the employee. But thats not the end. Back in 1979, the legislature passed the PERS pick up law. According to Re, this was a short-term budget x and was due to sunset two years later. This allowed the employer (taxpayer) to pick up the employees PERS payment. Not all employing departments opted to do this. But, if you cant guess, the legislators specically allowed their own PERS contribution to be picked up. And if you also cant guess, two years later in 1981 when the PERS pick up law was to expire, they instead made it permanent. This has had a huge impact on Oregons budget. Res research shows that in 2010, 70% of PERS employees were getting their contribution picked up and that the pickup for the 20112013 biennium cost taxpayers $750 million. By now, the fox had a basketful of eggs and was handing them out. Actually, hed been handing out eggs for years because back in 1975 the legislature passed a law to allow legislators to join PERS retroactively. That same year, they voted themselves a guaranteed minimum return. (Prior to that, payments had been at the whim of market forces, like any other retirement or investment account.) Then in 1983, their basket still full, the legislature moved judges from their own independent retirement system onto PERS.

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In doing so, the legislature virtually guaranteed that they removed all opposition, ensuring anyone who ruled on PERS would have a built-in conict of interest. Granted, individual judges of high principle could still stop PERS matters that came before them but, in so doing, it would be appealed up the chain. Its possible to nd one judge, less so a majority of a panel of judges whose 20+ years of PERS is in imminent jeopardy by their own ruling. The only thing that stood or still stands in their way was and is the voter. In 1994 the people of Oregon passed Ballot Measure 8 to rein in PERS. Measure 8 eliminated the PERS pick up, the guaranteed minimum, and using unpaid sick leave as part of the nal average salary calculation (which I havent even touched on). But, perhaps not surprisingly at this point, Ballot Measure 8 was ruled unconstitutional in a trial where, according to Re, nearly everyone in the trial from plaintiffs to the Attorney General to the peoples attorneys to the judges were all PERS members. I wish I had good news but, like I said at the start of this article, this terrible situation is made even worse because of adding government accounting to it. PERS doesnt use GAAP (Generally Accepted Accounting Principles) that all businesses use. It uses GASB Government Accounting Standards Board). This allows PERS to say its funded when, according to GAAP and common sense, its not.

When most people hear that the PERS obligation is fully funded they assume we have that money sitting in a bank. That would be true under GAAP. Not so under GASB. Instead, in short, GASB allows you to claim projected future earnings as funding. Your PERS account running short? Simply change your projections. Instead of an 8% return on your bank account, project that youll get a 10% return and, just like that, your PERS obligation is once again on target. Clearly, PERS is well past the apex in its plunge off the cliff. There are solutions being oated to x PERS that I dont have space for here but which we discussed during our radio interview with Re and Williams. However, it seems to me that one easy x to start us on the road to recovery is accurate informationand which just might get through the legislature. Pass a law that requests projects to be calculated using both GASB, which is currently used, and GAAP. Let the voter and the employerthe taxpayersee, side by side, how things would look if a business ran the numbers. We hear elected ofcials say they want accurate information. Lets see if they mean it.

area or anywhere via www.kykn. com and on KAJO (1270-AM) in Grants Pass on Sundays, 78:00 p.m. or anywhere via www.kajo. com. Podcasts are also available after the show airs via www. ispyradio.com. He can be reached at mark@ispyradio.com.)

Mark Anderson is co-owner of GRIP Productions, an MBA, a Doctorate of Business Administration candidate, and the host of the I Spy Radio Show, which is heard Saturdays, 11-noon, on KYKN (1430-AM) in the greater Salem