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In November, Portland-area voters will probably face a slew of ballot measures seeking big handouts for local government:up to $50 million to improve Portland parks; $90 million to expand the Oregon Convention Center; and around $100 million to build new facilities at Portland Community College campuses. What hasn't been reported, however, is that Portland voters will be asked for something larger and more controversial than all of those items combined. They'll be asked for $825 million to bail out the police and firefighters pension fund.
Though the decision is not yet official, it's been all but made in a series of behind-the-scenes meetings between lawyers, financial analysts, pension fund trustees and city officials in the last two months. "It's a top priority," says Mayor Vera Katz. "I would bet it will be on the ballot," adds pension fund administrator Ed Freeman. Although they hold millions of taxpayer dollars, public pension funds typically draw little attention from even the most ardent government critics, let alone the general public. The city's scheme, however, is sure to spark controversy. For starters, the sheer amount is staggering. It's the most the city has ever borrowed at once, and the city is looking to hike property taxes for 40 years to pay off the $825 million debt and interest. That translates to a total of $1,500 for every $150,000 home in the city. "This one is so big there has to be a campaign to oppose it," shouts anti-tax activist Don McIntire. The plan is also risky. GOP gubernatorial candidate Bill Sizemore call its a "legalized gambling scheme" because the city will be borrowing $825 million, investing the money and betting that the earnings will outpace interest on the debt. In effect, the city will be taking out a loan to play the stock market--and if the economy goes down the toilet, so will the taxpayers' money. Finally, the city's plan will shine a spotlight on the local cops' and firefighters' extraordinary pension fund, which threatens to siphon money from basic city services, is haunted by hints of cronyism and is enormously resistant to reform. Considering the stakes, the $825 million scheme--dubbed the "big bang" by one local finance guru--is unfolding with little fanfare. "The whole thing seems to be occurring with virtually no public input or mention of some pretty important policy issues," says Courtney Wilton of the Multnomah County Tax Supervising and Conservation Commission. On the second Tuesday of every month, a group of nine men and two women meets early in the morning at a squat Harrison Square office building nine blocks from City Hall. In some ways the distance seems much greater: Pension administrator Freeman says neither city commissioners nor reporters have been inside Suite 450, where the Fire and Police Disability and Retirement Fund trustees meet. If they did stop by, they'd see how the 11 unsalaried pension trustees sit around an octagonal table and decide to spend a $56 million annual budget. Eight of the trustees are cops and firefighters. The other three are City Treasurer David Smith, City Auditor Barbara Clark and the mayor's representative, Paul Elsner. Together, they dole out retirement and injury benefits to nearly 3,000 active and retired cops and firefighters. The result of their labor? "There is no better pension and disability system for the firefighters...in the United States," boasted former firefighters union president Randy Leonard in a message to his members last year. What makes the pension fund so good? First, voters decided in a 1989 referendum that the pension's retirement benefits must be "equal to or better" than what other cops and firefighters in Oregon get. Thanks to the formulas approved by voters, Portland cops and firefighters can retire at age 50 and receive up to 84 percent of the highest base salary they attained in their last three years of work. All the while, cops and firefighters contribute not a cent from their own pay to the pension fund--it comes entirely from Portland property taxes. When it comes to disability claims, the pension fund is more generous than other systems for public employees in Oregon. Injury claims for other public employees are governed by the workers compensation system. Under workers comp, claims are investigated and approved or denied by independent claims adjusters. For Portland cops and firefighters, injury awards are made by the local pension board--which is dominated by cops and firefighters, who have a street-level understanding of how their peers are exposed to injury every day. As good as this is for the local cops and firefighters, it's not been ideal for the taxpayers who shell out approximately $8 million a year for about 400 claims--most of which stem from knee, neck and back injuries, according to Freeman. A scathing 1994 city audit pinpointed a variety of problems in the way claims were managed. The audit found, for instance, claims that lacked any medical documentation, bills that were paid twice, and one case in which the board of cops and firefighters overruled the opinion of a cardiologist so a police officer could stay out of work. The shortcomings were costing taxpayers more than $1 million a year, the audit concluded. Freeman is quick to stress that the pension fund has improved its record-keeping and hired a claims manager since the audit. Elsner, the mayor's representative to the board, says he's confident the board isn't approving any bogus claims. But problems do persist, and it appears the board's main flaw is its inherent sympathy toward public safety employees. Just $4,000 of the pension's $56 million budget next year will be spent investigating claims. "Are we softer and gentler because they are our brothers and sisters? I would have to say yes," admits Freeman, who was a cop for 30 years before he retired and started working for the pension board back in 1985. Robert Hebison's widow is a prime example of the board's kindness. In February 1995, Hebison, a Portland firefighter, got in an off-duty drunken-driving accident. Afraid that he would get fired, he killed himself. The board voted--over the objection of its civilian members--to rule that his death was service-related. Therefore, his wife got the highest possible benefits. The decision cost taxpayers approximately $200,000. Freeman concedes that a civilian board might not have been so generous. "It's fair to say there could have been a different outcome," he says. Elsner cites another case in which a female police officer won a disability award because she had been sexually harassed by a male superior. Elsner suggested to the pension trustees that they sue the harasser to recover some of the cost incurred by the disability. "I got the evil eye," Elsner says. "It was like, 'No, we're not suing a cop.'" Cronyism isn't the pension fund's real problem, as far as city officials are concerned. The city has a much more selfish reason for borrowing $825 million for the pension fund: It wants to protect its own programs from being devoured by the fund's ever-growing liability and its lien on the city budget. The problem is that the pension fund--unlike any other in Oregon--is "unfunded." That means it has no reserves in a trust fund. The advantage of having such reserves is that they can be invested to make money. That's what the state Public Employes Retirement System does. Under PERS, the city makes two contributions each month to the system on behalf of its 3,300 non-police-and-fire employees. One is considered the employees' contribution but is actually picked up by the city. It's set at 6 percent of the employees' salary. The other, the employer's contribution, fluctuates depending on factors such as inflation and life expectancy. Combined, those contributions are invested by money managers hired by a board appointed by the governor. The investments on its $25 billion trust fund are a crucial part of PERS funding. During the last decade, the investments averaged an annual return of 15 percent--and those earnings reduced the share that employers must fork over to PERS. But Portland's police and fire pension fund has no such nest egg. This year's property taxes pay for this year's benefits. That's it. If the cost of benefits rises, the pension fund has a license to print money--it can simply hike taxes (up to a limit of $420 per year on a $150,000 home). This system has two flaws. First, it costs taxpayers more. Because the system isn't earning dividends on investments, Portlanders paymore in pension costs than residents of six similarly sized cities ("Paying the Pensioners," page 30). The pension fund gets $1 of every $7 in Portland property taxes that go to operate local governments. The second and more serious shortcoming is that the pension fund owes--by contract--big money to retired and working cops and firefighters. Meeting that contract could siphon resources from other city services. The $825 million owed to cops and firefighters isn't a problem in itself. As long as there's property in the city and owners pay taxes on it, the city can meet its obligation to retirees. The rub comes because the pension fund has first dibs on property taxes collected by the city. If a new property tax limit comes along and constrains what Portland can collect, the pension fund will automatically start drawing money away from other city agencies. City officials came dangerously close to that scenario last year after voters approved Sizemore's Measure 47. Under Sizemore's "Cut 'n' Cap" measure, the city's general fund would have lost $80 million over five years--and not a penny would have come from the pension fund. "The city would have gotten absolutely hosed under Measure 47," says Elsner. Fortunately, through some deft political maneuvering, the pension fund was exempted from Sizemore's cuts and caps when the Legislature rewrote the flawed measure. But it's doubtful the city can dodge many more bullets. McIntire, architect of Measure 5, 1990's statewide property tax limit, is taking aim at city officials. "When these guys say there's something else coming, you better friggin' believe it," he warns. McIntire vows that he and his allies will try to put a measure on the ballot in two years that will limit increases in government spending to the rate of inflation. Because city spending has outpaced inflation, such a measure would have the effect of reducing city services while leaving the insulated pension fund untouched. In addition to eroding basic city services, the $825 million pension liability could also hurt the city's credit rating--a coveted AAA since 1974. "We are very, very concerned about that," says city budget director Ken Rust. "It could spread across all city borrowing programs." A drop in credit rating could start a domino effect, Rust explains, hiking interest rates on money the city must borrow for massive public works projects. That, in turn, could lead to increases in fees, such as sewer rates. As if that weren't enough, just worrying about the pension fund costs the city big money. Last year, when it appeared that Sizemore's Measure 47 would cut their budget, city officials started issuing bonds in case they needed to bail out the pension fund. By the time city officials learned that they had escaped the threat through a Measure 47 rewrite and called in the bonds, they had lost $500,000 in debt service payments. "That's the cost of trying to provide protection when you have uncertain laws," Rust says. These kinds of financial pressures are driving city officials to act in a hurry. Language for a November ballot measure is being hammered out by an array of actuaries, underwriters and bond counsels. The job must be finished in roughly 90 days to allow time for the kind of campaign needed to sell such an expensive prospect to voters. "We're in a position to have something done by June," says Rust. "That gives the council time to build a strategy for talking to The Oregonian and people about what this really means." It won't be an easy sell. In essence, voters will be asked to accept short-term pain for the hope of long-term gain. How much pain? For 40 years, Rust says, property taxes will be hiked about $37.50 a year (in today's dollars) on a $150,000 home--that's just to pay off the $825 million debt and interest. Meanwhile, the same homeowners will continue to pay as much as $200 a year for the regular pension obligations. The gain? Rust is banking that the arbitrage--the spread between the interest on the debt and the earnings on the investments--will average $12 million a year. After 40 years, that means homeowners will pay only about half of what they do today for the pension fund. The scheme may benefit our grandchildren, but they aren't the ones voting in November. The plan is likely to face opposition from both outside and inside city government. "I absolutely guarantee you there will be clear voices telling taxpayers about the dangers of this con game," says McIntire. If the city raises taxes for the scheme, he says, it should cut spending by the same amount so there's no net increase on taxpayers. McIntire also argues that cops and firefighters should start contributing something to their own pensions, and new cops and firefighters should be forced to join PERS. A November ballot measure will face other tough questions. For instance, why should 100,000 mid-county taxpayers who were annexed into the city starting in the mid-1980s be required to pay the unfunded liability for retired cops and firefighters who never served them? "It really isn't fair to make mid-county residents pay for the unfunded liability," says Wilton, of the watchdog Tax Supervising and Conservation Commission. Wilton sees other challenges. "Given that voters have made it clear that they will only tolerate a certain level of property taxes," he says, "is now the time to be increasing taxes by over $800 million? Is the pension fund the highest priority? Is it more important than Portland schools' budget shortfall? The county's need to expand jail capacity? Or a whole litany of other social and infrastructure needs?" Internal battles have also erupted over the pension fund proposal. They most recently surfaced in an acrimonious exchange of letters between Bob McCrory, a Seattle financial analyst hired by the pension fund, and Harvey Rogers, a high-powered bond lawyer hired by the city. When asked about the testy letters, pension fund administrator Freeman scribbles a single word on a notepad--"control." Indeed, city officials and pension trustees are haggling over three areas: who will control the $825 million investment; who will control the fund's ability to levy taxes; and who will control the retirement and disability awards. Katz has made it clear, she says, that the pension board "ought not to manage" the huge investment--and it appears she'll get her wish, although the issue hasn't been formally settled. The second matter--who controls the fund's taxing authority--may prove more contentious. "If there's
a wrinkle, a stumbling point, that's where it's going to be at," says
firefighters union president Tom Chamberlain. Finally, there's the issue of controlling the pension fund itself and changing the composition of the pension board so it's not dominated by cops and firefighters. The 1994 audit recommended a change. Sizemore wants a change. Elsner, the mayor's representative on the board, has recommended a change. City Auditor Clark also wants a change. "This is a system with no brakes," she says. "Unless there is some change in the governance I would not support this measure in November." The unions won't budge on that one, says Chamberlain. Period. The city, Chamberlain stresses, needs the November measure more than his members, who are legally guaranteed their benefits no matter what problems befall city finances. "I don't seen any reason to change the board," he says. Members of the City Council are clearly troubled by the pension board's autonomy. Katz was galled last year to learn that the board spent $45,940 on travel to conferences in Palm Springs and Hawaii. The travel spending was 35 percent higher than in the previous year--even though most city agencies were tightening their belts under Measure 47. This year the pension board budgeted a 36 percent increase in out-of-town travel money, and it plans to pay outside consultants $167,000 to study the legal and financial angles of the proposed November ballot measure--rather than using the city's in-house experts. "I do have some concerns," says City Commissioner Jim Francesconi. "The problem is that I don't have oversight." Freeman, a pleasant but firm former cop, says city officials should "come on down" to pension board meetings and air their concerns. If they did come down, he says, they'd understand that the conferences in Palm Springs and Hawaii provide important training to pension trustees. "I don't say a word when members of the City Council go to China or Europe," he adds, stopping himself before he goes any further. "After 30 years in law enforcement I don't like conflict," he chuckles. Freeman has good reason to smile. City officials are already caving on the makeup of the pension board. "I'm willing to leave the board alone," Katz concedes. "It's a very pragmatic decision." Katz will capitulate for one simple reason--cops and firefighters must support the ballot measure, or voters won't be persuaded that pension change is good for the men and women who risk their lives in the line of duty. Plus, the unions are expected to kick in $400,000 for a political education campaign. "Voter approval is only feasible if the city and the FPD&R Fund join hands and work together," Rogers, the bond counsel, wrote in a recent memo to pension fund and city officials. That leaves city officials in a box. They're damned if they do try to reform the pension board--because they'll lose rank-and-file support. And they're damned if they don't, because they'll risk alienating voters. Their choice? Gamble on voters. "If we tackle the idea of making changes in the board I think we're going to lose it all," says Katz. "What's really the goal here? It's to manage the liability. I think funding the system is more important." |
