Kitzhaber’s Grand Bargain: Pension cuts for retired Oregon schoolteachers, tax cuts for wealthy business owners

By DON McINTOSH, Associate Editor

In a Sept. 30-Oct. 2 special session called by Oregon Governor John Kitzhaber, state lawmakers voted to shrink pension benefits for 329,887 public employees by nearly $5 billion, while giving away over $500 million in new tax breaks to owners of certain kinds of businesses. But that’s not how the governor’s office described it.

Kitzhaber’s Sept. 18 announcement of the special legislative session described “a framework to boost education funding by $140 million.” It was an agreement which would include “cost savings from additional PERS reforms” with “new revenue to fund education, mental health, and senior services” and “targeted tax relief for small business owners and working families.” The agreement consisted of five bills, and all of them passed.

The spending was real enough. House Bill 5101 appropriates $100 million to hire teachers and add school days to K-12 schools, $40 million to lower tuition at state universities and community colleges, $41 million for services to senior and disabled Oregonians, and $10 million for mental health services. The spending bill passed with only two “no” votes.

For retired public employees, belt-tightening

But the big game in the special session was “PERS reform.”  SB 861 would produce immediate “cost savings” for state and local public employers by reducing cost-of-living increases for retired school teachers, firefighters and others. Cutting amounts owed to retirees in the future reduces the amount public employers currently must pay into PERS to make up for financial market losses.

Around 95 percent of all public employees in Oregon are in Oregon’s Public Employees Retirement System (PERS), including workers and managers at state agencies, universities, community colleges, school districts, cities, counties, and other local government units. For decades, PERS gave retirees an annual 2 percent cost-of-living adjustment (COLA). Under SB 861, the increase will be 1.5 percent this year and 1.25 percent in future years. [The reduction is offset partially by supplemental payments of 0.25 percent that won’t change the base amount for future COLA calculations.]

The reduction doesn’t sound like much, but it adds up, through the magic of compound interest, to an estimated $4.9 billion over a 20-year time period. Last year, the average PERS retiree received a benefit of $29,235. At 2 percent a year, that benefit was set to grow to $35,637 in 10 years. Now, under SB 861, it would grow to $33,267. In other words, SB 861 will be costing today’s average PERS beneficiary $2,370 a year in 10 years, by which time they will have lost a cumulative $11,811 in benefits.

And that doesn’t figure in actual inflation. In the last 10 years, the real cost of living has increased an average of 2.4 percent a year, so even at 2 percent, PERS retirees were losing ground. Reducing the COLA to 1.25 percent means retired Oregon public employees will be cinching their belts a little tighter every year for the rest of their lives.

Tax reforms to benefit the 1 percent

Meanwhile, a certain class of business owner will enjoy a tax cut that grows in impact each year. HB 3601, the revenue part of the package, makes a number of changes to the state tax code. It increases the corporate income tax rate by one percentage point, to 7.6 percent, on profits between $1 million and $10 million; increases the cigarette tax 15 cents a pack; eliminates the $183-per-person personal exemption credit for incomes over $100,000; changes the senior medical deduction and limits it to incomes under $100,000; expands the Earned Income Tax Credit for low-income filers who don’t owe taxes; and lowers taxes on certain businesses that export products overseas.

But by far HB 3601’s biggest tax change — by dollar amount — is a new lower tax rate for “active” company owners whose business income is taxed on their personal income tax returns. Instead of counting business income alongside other income, those business owners will now be able to calculate it separately and pay a lower rate on it. [The new rate is 7 percent on the first $250,000, rising to a maximum of 7.6 percent on income over $1 million; up to now, those taxpayers paid 9 percent on that income.] How the new rule will work is complicated, so much so that the Legislative Revenue Office had a hard time predicting how much it will cost the Oregon treasury; estimates are $38 million for the 2013-15 biennium, rising to $205 million and $239 million in subsequent two-year periods.

“Accountants and tax attorneys will have a heyday helping people restructure to take maximum advantage of this tax break,” explains Chuck Sheketoff, executive director of the Oregon Center for Public Policy. Sheketoff testified against the tax break, and  predicted  that about 85 percent of that $500 million tax cut will go to the top 1 percent of taxpayers, who would get an average tax cut of $6,011 a year.

Opposition to the bargain

It’s a strange kind of bargain that takes away $2,370 a year in benefits from retired public employees and gives away $6,011 a year in tax cuts to people making over $330,000 a year.

[pullquote]What is the message this Legislature is sending when we cut taxes on thousands of lawyers, doctors, lobbyists, accountants on the same day that we are reducing benefits to retirees?” — State Rep. Brent Barton (D-Clackamas County)[/pullquote]As lawmakers prepared to pass the legislation, labor organizations came out in opposition. Elana Guiney of the Oregon AFL-CIO, Mary Botkin of American Federation of State, County, and Municipal Employees (AFSCME), and Rob Sisk of Service Employees International Union Local 503 testified against the PERS cuts. In a letter to legislators, Oregon Education Association (OEA) said the PERS changes “don’t meet any standards of fairness.”

The Oregon State Fire Fighters Council was the only labor group to support the PERS COLA cut. Legislative Director Bob Livingston said supporting the PERS cuts was a difficult decision, but it frees up revenue to provide public services, and puts further changes to PERS “off the table” for the first time in decades. Some Republicans had pressed for much deeper changes to PERS, but Kitzhaber vowed “that’s it” once this one passed.

Kitzhaber’s package deal included two other bills: One removes future legislators from PERS and cuts PERS benefits for felons; the other bars cities and counties from regulating Genetically Modified Organisms (GMOs).

The PERS cut passed 22-7 in the Oregon Senate and 31-24 in the House, and the tax bill passed 36-19 in the House and 18-10 in the Senate.

As the tax measure came up for consideration in the House, Clackamas County Democrat Brent Barton delivered a floor speech about the “so-called grand bargain,” calling the revenue bill “a major cash giveaway” to thousands of well-off taxpayers.

“What is the message this Legislature is sending when we cut taxes on thousands of lawyers, doctors, lobbyists, accountants on the same day that we are reducing benefits to retirees?” Barton asked. “There is nothing grand about it. It is certainly not a bargain.”

It’s also not clear the bill cutting PERS will stand up in court. In 2005, the Oregon Supreme Court struck down an attempt by the Legislature to eliminate PERS cost-of-living increases, in a case known as Strunk vs. PERB. Public employee unions united in the PERS Coalition (a group which includes the Fire Fighters) had already filed a legal challenge to legislation passed earlier this year to cap the PERS COLA at 1.5 percent. PERS Coalition attorney Greg Hartman said the new legislation will be added to that court challenge, which goes directly to the Oregon Supreme Court. It could take 18 to 24 months before the court reaches a decision, however.

“You can talk about adding classroom teachers and adding back days,” OEA president Hanna Vaandering told the Labor Press, “but when you’re doing it at the expense of the working class and in a way that could very well be overturned by the Oregon Supreme Court … it doesn’t make sense.”

“It’s incredibly disappointing that so many people felt this had to be done, because it didn’t, and there were other solutions,” said Guiney, legislative director of the Oregon AFL-CIO.