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ATLAS
December 5, 2016 ee
Governor Kate Brown
Office of the Governor
160 State Capitol
900 Court Street
Salem, OR 97301-4047
RE: Oregon Public Employees Retirement System
Dear Governor Brown,
‘As my nearly twelve years of service under you and your two predecessors comes to a close, | write to
thank you for the honor and privilege of allowing me to play an important role in the management of the
‘Oregon Public Employees Retirement Funds (OPERF) through my service on the Oregon Investment
‘Council (OIC). Ihave had the pleasure of working with a dedicated and talented staff as well as three
Treasurers and nine fellow councilors during my tenure. The purpose of ths letter is also to point to some
of our successes, as well as the challenges facing those entrusted with the management of our significant
OPERF portfolio in the coming years.
|1am pleased to report that during my term of service on the OIC, both as a member and twice as its
Chair, we have significantly improved the business terms between OPERF and many of our alternative
investment and private equity mangers. While this might seem a bit arcane, lowering transaction costs has
directly improved the returns for our beneficiaries by hundreds of millions of dollars or more during my
twelveyear tenure. We have also demanded and received preferred returns on our investments from
‘managers previously unaccustomed to offering such terms, as well as valuable coinvestment rights that
allow OPERF to “follow-on” to attractive opportunities while paying our mangers significantly lower fees or
‘even no additional fees. Again, these changes had the effect of boosting significantly the returns for our
beneficiaries. 1 was proud to be a part of a team overseeing a Fund that is considered by its peers to be
{an innovator, a global top-performer and a bellwether in the industry.
PORTLAND OR. 97209Unfortunately, not even the top-tier results achieved by the OIC are sufficient to overcome the severe
underfunding that exists in OPERF. This underfunding can only be resolved through significant structural
changes requiring your bold leadership and a bi-partisan effort in the legislature. Failure to act quickly and
decisively will result in a severe imbalance in our State’s obligations to the beneficiaries compared to the
State's resources to meet those obligations. This “house of cards” will quickly collapse, leaving Oregon in
a fiscal crisis. The following suggestions are likely to draw opposition from both sides of the aisle, which
probably means that they have merit in solving our State's approaching train wreck:
|. The unfunded PERS actuarial ability must be honestly and independently calculated in a non-
partisan manner, preferably as US. corporations are required to calculate and report their
unfunded pension liabilities. We know that the PERS unfunded liability is currently between $22
Billion and $50 Billion, depending on future rates of return
2. The State should make an annual PERS unfunded liability debt repayment of at least §1Billion until
the PERS unfunded lability has been fully amortized
3. Allelected officials should be moved to a 401K program to which they must contribute, just as
their constituents are asked to do. This will help to alleviate one of the current points of conflict
of interest
4. Non-performing public employees, after reasonable notice and efforts to rehabilitate, should be
permanently terminated to make room for those that can properly and productively do their job,
The productivity in the State would drastically increase if this were instituted statewide, but
specifically within Treasury | estimate the productivity would increase by at least 25%. For me,
this is one of the primary drivers to supporting Investment Modernization Act (IMA). A bad
employee is not a neutral, its a significant decrease in productivity and morale. Again, the State
workers should be subject to the same rules as private sector employees.
‘An increase in the public employee full retirement age must be implemented. tis currently 58 and
should be raised to at least 67, to match Social Security.
6. State employees should contribute a portion of their wages to their pension plan, just as their
private sector counterparts are asked to do.
7. We should again attempt to freeze the COLA until the fund reaches a 90% funded status similar to
‘what New Jersey has accomplished. This shows good faith that the less than 150,000 Tier 1
retirees (and those able to retire Tier 1) are willing to pitch in to help solve this crisis that affects
education and essential services for the 3 1/2 million other Oregonians,8. Retirement benefits should be calculated based on an average salary over at least 5 years and not
based on a last minute hyper inflated number created just prior to retirement.
Implementation of these and other similar measures taken in the aggregate will increase the public’s
confidence in our public employee retirement system and will demonstrate to all Oregonians that both
state employees and elected officials now have some “skin in the game” in rectifying this looming fiscal
crisis.
Governor, let's please fix our badly leaking roof once and for all, before we buy new furniture and
carpeting for the living room.
‘Again, | appreciate the trust and confidence you have placed in me asking me to serve on the O1C. My
suggestions are meant to be constructive and non-partisan, as | only wish for a bright and fiscally secure
future for our state and its citizens,
Katherine J. Durant
Chair
Oregon Investment Council
ce. Senator Betsy Johnson
Senator Tim Knopp
Treasurer Ted Wheeler