In 2004 the State of Oregon decided to isolate the “employee contribution” part of PERS and put these amounts into what are called IAP (Individual Account Program) accounts. These 200,000 IAP accounts are essentially a defined contribution program, not unlike a 401K, for which members earn returns based upon market results with no guaranteed rate of return.
Today these accounts total more than $8 billion and are invested right alongside the other PERS assets, the largest share being private equity, hedge funds, alternative investments such as cash flows from pharmaceutical sales, etc.
As I write this post there is clearly a ferocious lobbying battle going on for this $8 billion contract with leading vendors likely to be Fidelity, Vanguard, Northern Trust and BlackRock. The media is silent.
This is the time for of Oregon’s 200,000 PERS participants to stand up and shout, WE WANT VANGUARD!!
The potential for abuse given the choice of Fidelity, Northern Trust or BlackRock is sizeable as these target funds will likely be a dumping ground for high fee inferior illiquid investment products including private equity issued debt. Only Vanguard passes the credibility test. Northern Trust has potential yet it is too new to this area and presents numerous conflicts of interest not suitable for these balances. The current Chief Investment Officer of Oregon PERS comes from Northern Trust.
The problem the OIC has rightly identified is that all employees receive the same mix of investments for their IAP’s, whether you are 2 years from retirement or just starting out as a first year teacher.
Recognizing this fundamental weakness, the OIC is considering breaking out the IAP assets from the main pool of PERS investments and putting them in so called “target date funds” based upon when one plans to retire. Employees IAP balances would then be mapped to the target funds based upon their age. This is sound logic.
What this also means is that a single contract will be awarded to manage these target date funds, with assets totaling more than $8 billion. A key part of this role will be determining how to allocate the existing assets to each employee target group. Naturally one would expect those members closer to retirement to receive a higher allocation of lower risk liquid investments and younger members to receive more growth oriented, higher risk less liquid private equity, etc.
The good news is that the current OIC chair is likely the most competent investment professional in 25 years to supervise the council.
Oregon PERS is a vital system for public employees yet what Adams inherits now looks more like the former caste system in India, in which heavy age based discrimination is openly practiced against younger workers:
- Tier 1 (Brahmins) These are members hired prior to 1996. Assuming most begin working at 22, on average, this means there are no tier 1 participants under the age of 42.
- Tier 2 (Warriors) These members were hired from 1996-2003, implying an average age range or at least 35-42.
- Tier 3 (Merchants) Hired from 2004-2014. These members would be between at least 24 and 34 years old.
- Tier 4 (Servants/Peasants) Hired from 2014- Current. Under the same assumptions, these members are between 22 and 24 years old.
The difference in benefits is dramatic and the unions representing their members do not seem concerned. For example, if Tier 1 Joe retires with $400K in his Tier 1 account, he can choose the money match option. PERS then doubles his account to $800K and pays him an annuity at 7.5 percent or $60,000 for life.
Conversely, if Sue is Tier 3 and retires with $400K in her account, her annual pension will likely be less than $30,000.
Choosing the right vendor to segregate these IAP accounts is a crucial decision the OIC simply can’t miss. Too much is at stake for younger participants, in particular, and of course the public is increasingly sensitive to PERS abuses regarding highly compensated members that have served to unfairly discredit the system.
One need only look at the poster child for PERS abuse, Steve Goldschmidt. Remarkably, Goldschmidt was a destructive force for Portland Public Schools and greatly tarnished the districts reputation thru a series of disastrous decisions. His contract at the time as head of HR indicated he could only be fired for “moral turpitude.”
Perhaps his worst decision was to illegally fire all the school custodians, saying they were permanently laid off, even though they had one year left on their contract. This was a disaster in that large infrastructure, including high schools, were left to be maintained by outsourcing firms that mostly swept floors and checked boxes. This has led to various problems, including the recent discovery of inadequate testing for lead, resulting in high lead levels in the drinking water at many Portland schools.
Not only is Goldschmidt earning more after retiring from PERS, 127 percent of his salary or $279,000 per year, but he also sits on the board of OnPoint Credit Union, whose former name was Portland Teachers Credit Union.