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.

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.