Nearly half of all property taxes paid by Portlanders go to an unusual — and costly — pension program for police and fire personnel. For those who pay property taxes in Portland, their tax bill has a line item reading "PORTLAND FIRE/POLICE PENSION."
Let’s say, for example, the assessed property value was in the ballpark of $300,000 in 2021. In that instance, the Portland Fire/Police Pension segment of the tax bill would be roughly $1,400 — less than taxes for education on a property of that value, but far more than the Multnomah County Library tax ($570), more than Urban Renewal ($1,100) and more than the Portland Public Schools bond ($1,100).
In 2021, the taxes funding this pension cost more than the city of Portland, Metro, Multnomah County and Portland Community College Bonds combined, and they pay for the pensions for some — but not all — of the Portland Police Bureau and Portland Fire and Rescue Bureau employees. This system funds only those who became employed prior to 2007.
All told, in 2021, the pension program cost taxpayers $141 million. This year, the Fire and Police Disability and Retirement Bureau, or FPDR, Board of Trustees requested $199 million for pension payments.
Portland's FPDR pension system is rare because it does not require employers or employees to contribute, and it doesn’t fund pension payments through investments. It's so rare, in fact, it may be the only public pension system in the United States operating this way, a costly outlier going against common pension fund management practices.
Street Roots found Portland is operating what is likely the most expensive pension program in the nation, a system which imposes a significant cost burden and could incur some financial risk to the city. Though the city doesn’t believe the system is risky, analysts warn the right combination of low tax revenue and high pension costs could result in this pension plan consuming a substantial portion of city property taxes. This perfect fiscal storm could result in budget cuts to competing programs and reduced pensions for employees. Beyond this, some believe asking taxpayers to foot the bill for pensions isn’t fair.
An archaic system
The FPDR system is unusual for a few reasons. Firstly, it’s funded almost exclusively by property tax revenue, and presently, it absorbs millions in taxes every year.
The FPDR system is a “pay-as-you-go system,” meaning funding for the pension isn’t accrued in advance like a typical pension plan. Instead, the FPDR Board of Trustees determines the cost of pensions each year and requests corresponding funding from the Portland City Council, which then allocates that funding from property tax revenue.
Stacy Jones, deputy director of the Fire and Police Disability and Retirement Bureau, said operating a pension fund this way is uncommon.
“Traditionally, a pension plan is pre-funded like Oregon PERS (Oregon Public Employee Retirement System); we may be the only remaining pay-as-you-go plan in the country,” Jones said.
Notably, a pay-as-you-go system funds pensions after employment ceases, shifting the tax burden of a pension to future generations, explains Kevin Machiz, a financial researcher for investment consulting firm Callan LLC.
“For FPDR, money is not spent to fund the plan when the benefit is earned by working,” Machiz said. “Instead, money is spent after participants retire and start receiving benefit payments. In the United States, the only two places utilizing this type of funding policy are Portland and Puerto Rico.”
Machiz is a Portland resident who learned about the tax-funded FPDR fund in February this year, and believes it isn’t fair to taxpayers. He was angry enough about it to visit the FPDR board meetings five times (so far) to recommend and demand changes to the funding system.
The second reason the FPDR is unusual is also why it’s endured: funding for the FPDR pension system is written into the city charter. Portland residents voted to create the first pension system covering police and fire personnel back in 1902.
“Other cities in Oregon don't do that,” Machiz said. “If you look at the Oregon State Constitution, it barely mentioned PERS, for example. So it's very unusual that you would have, you know, the company policy and the benefit policy dictated by the city charter.”
This system doesn’t cover all PPB and Portland Fire and Rescue employees, just those who joined the bureaus before 2007. Employees in this system contributed 7% of their wages until 1990, when all employee contributions ceased.
Portland (probably) runs the most costly public pension plan in the United States
Employees and employers don’t pay into the FPDR pension system, and investment earnings don’t buttress the funds, which is how almost all pension plans work. Because of this, it costs the city more than a typical public pension would because it is almost entirely paid for through taxes — investments or contributions don’t offset the cost.
“Portland runs the most costly public pension plan in the United States,” Machiz said.
In the 2019-2020 fiscal year, the city paid $129 million in FPDR pension funds alone, a total that doesn’t include contributions for employees participating in the state retirement system, which is also paid by the city, but costs the city less because it only pays a contribution — not the entire plan.
As of June 30, there are 1,612 former employees already receiving benefits from the FPDR pension system. The requested funds for 2022-2023 were $198.9 million. Actual amounts per person will vary according to pay rate and the amount of time worked, but according to the amount of funds requested, this would amount to approximately $123,357.83 per person for the year.
There are 803 employees enrolled in this program who have not started receiving benefits yet. So the amount the city pays will keep rising until all employees have moved through the program.
According to the city’s actuarial analysis of the program conducted in 2020, the anticipated yearly payouts are expected to rise from $154 million in 2023-2024 to $216 million in the next decade. Analysts anticipate the annual cost will increase for another 16 years, then decrease after that.
According to city projections, by 2049-2050, the program will consume $5.8 billion in property taxes over a span of just 30 years. This sum doesn’t include the amount spent between 1948, when the fund started, through 2019 — this timespan was not included in the analysis.
The program is costly, but it also raises concerns about the city's ability to furnish the amount of money it is on the hook for if a) property taxes fall or level out relative to costs, and b) if there is a spike in retirements increasing the amount of money needed for pensions in a given year.
Annual actuary evaluations of the FPDR system flag the looming risk of the city’s pension obligations consuming large amounts of taxes.
In a presentation to the FPDR bureau in January last year, Matt Larrabee, a principal and consulting actuary for the consulting firm Milliman, laid out the possibility of the fund consuming increasingly large amounts of tax revenue based on a “pretty robust set of possibilities for what might happen with the economy.”
In an analysis of various economic scenarios, the firm found annual tax costs could rise to $403.1 million by 2039 in a likely case and $493.6 million by 2039 in a worse-case scenario.
In a worst-case scenario, if pension plans required a larger portion of taxes, the city would cut funding to other programs. This risk, and tax burden, is a result of a system that essentially has only one funding source. Even if the cost of pensions doesn’t outweigh available tax resources, it is still likely to cost hundreds of millions in taxes each year.
Pension costs already consume a hefty amount of property taxes. In 2019-2020, pensions cost approximately $129 million when the total available revenue was $267 million — more than a third.
The following year, pensions absorbed $137.2 million of $280.3 million — nearly half.
In 2021-2022, FPDR pensions took even more of the pot: the city paid $141.6 million for pensions out of $296.3 million in tax revenue.
Reform
The FPDR board can’t nix this tax-consuming pension system, Jones said.
“All aspects of the plan, including its funding sources, and mechanisms, are defined in chapter five of the city charter, and that can't be changed by the (FPDR Bureau); it can't be changed by the Board of Trustees,” Jones said.
Only a ballot initiative introduced by City Council or voters can change the fund.
This happened in 2006 when residents voted to close future enrollment in the system, which meant new hires from 2007 on would enroll in the state's public pension program.
Jones said the risk for pension costs disrupting the city budget or leaving the city unable to foot the bill is low.
“It's its own dedicated tax levy that was created in 1948 enshrined in the charter,” Jones said. “And it's always been adequate (to fund) the plan.”
Because this system is in place and has been funded to date, Jones said, there has not been a push to look at other ways to fund it.
“To the best of my knowledge, no other primary revenue source has been considered,” Jones said. “And most likely the reason is because there's a property tax levy that was created specifically for this purpose.”
Jones said shifting away from the plan would be extremely costly because the process would involve essentially buying out the current pension and moving it over to the PERS system.
“It is very difficult to put existing employees into a pre-funded plan (like PERS),” Jones said. “It's hard. There really is not a good way to pick up somebody in the middle of a pay-as-you-go plan and put them in a pre-funded plan. You have to immediately come up with all of the money that you would have been paying into the plan from when members started their service (and it) would be very expensive.”
Theoretically, it could cost billions, which the city would need to provide up front.
The plan is also a “closed system,” Jones said, meaning because no new employees will be added, it will eventually expire. Still, that outcome is decades out, and in the meantime, the fund is absorbing hundreds of millions a year.
Jones told Street Roots the city has never conducted an analysis of what it would cost the city to transition employees to a pre-funded pension.
The result is that some FPDR members get their pensions from taxes. Because pensions don’t pay out until they actually retire, taxpayers are paying for past work. This means, Machiz said, that someone can be paying the pension of a police officer in Portland for work on the force that happened before they were even born.
''I think the transgression against future generations is egregious,” Machiz said. “I think a good example would be, you know, my daughter, (who is) two years old. So if my daughter was lucky enough to buy a house here in Portland, (and) she turns 30, she's still expected to be paying out of a property tax bill (for someone who isn’t) working and serving.”
Machiz believes this system isn’t fair.
“In addition to just being a best practice and good governance to make the changes,” Machiz said. “The way it works right now is just wrong. It's a way for the government to make taxpayers pay for a pension, when there are other ways to fund it.”
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