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Friday, April 21, 2006

Pretzel Logic

Awhile back, after receiving the first part of the "actuarial reduction tables" Mercer developed for PERS, I questioned various PERS senior officials about them. In the main, my query involved the "life expectancies" implied by the tables. In my reading of the tables, it appeared that Mercer was assuming extraordinarily long lives and, that by so assuming, PERS would never collect the full amount. I was quite skeptical that this was the intent, and raised a hypothetical with PERS. In one response, PERS told me that "...when you factor the impact of COLAs on the reduced benefit, it brings the payback period in line with current longevity assumptions". I responded: "...how do COLAs on the revised benefit factor into anything related to the payback since the payback is based on amounts allegedly paid illegally, frozen on a date certain, and to be repaid based on actuarial life expectancies." I further wrote: "...if Joe Blow owes PERS $5000...is 60 years old, and .... will live to 80 years old, then Joe would pay back $5000/240 [$20.83] per month no matter how long he lives." And finally I concluded: "...the revised tables suggest that Joe is going to live to 98, virtually guaranteeing that he will never repay the full amount (unless the $5000 which is owed is actually inflated by a 2% COLA that he isn't receiving and, according to PERS, isn't entitled to receive.)"

I've waited patiently for PERS to get back to me on this. Earlier this week, I received an email from PERS which contained "the" answer to my question, direct from Mercer. I'm going to quote it directly in italics to set it off from the rest of the text: "The overpayment is a fixed amount that is collected over the expected lifetime of the retiree and his or her beneficiary with no interest charge. The method of collection is to reduce the benefit the retiree would otherwise be entitled to. Because this benefit amount is entitled to an annual COLA, by reducing it, we are also reducing future COLAs. By including an assumption of a 2% COLA in the development of the reduction factor, we are taking into account the reduced future COLAs as a part of the repayment so that we do not collect too much from the retiree. So, the retiree is not making level payments on the overpayment, but is making payments that are assumed to increase 2% per year. Using your example of a retiree who owes $5000 and is expected to live 20 more years, monthly payments would start at about $17 per month, but would be expected to increase 2% each year. The starting payment is less than the method you proposed ($5000 / 240 = $20.83), but with the 2% increases becomes about the same after 10 years and collects the same $5000 after 20 years."

It took me quite a bit of time to parse carefully what Mercer is saying, but I finally think I understand it. The actuarial repayment tables are an artifact of the 2% COLA. What Mercer has proposed is that we will be paying back a fixed amount each month, determined by the actuarial factor at the time repayment begins. Although we will not "see" this, the repayment amount is "assumed" to increase by 2% annually, although it will not, in fact, increase. By "assuming" a 2% annual COLA on the payment, it is also assumed that by the time we reach our TRUE actuarial life expectancy, the original amount we owed would be paid back. I suppose one could view this as good news because the actuarial reduction is smaller than common sense and simple math suggest, but it actually changes nothing significant. If you die early, you pay back less; if you reach an older age than actuarially expected, you pay back more. The only consolation is that you pay back in dollars that are deflating by the true cost-of-living less the 2% COLA assumption, and your monthly amount is fixed at a lower amount from the beginning.

Addendum: If you are concerned about the implications of this explanation, you should definitely express them to PERS, to its Board, and to the PERS Coalition. I plan to make a portion of the Actuarial Repayment Factors available shortly. I have only those for Option 1, 2, and 3 retirements. I don't have those for Option 0, 2A, 3A, or 4. You can use my "Lipscomb Calculator" to get some rough idea of how much PERS thinks you'll owe (use this as a guide, not as a statement of fact), and what your adjusted benefit will be (without actuarial reduction). Then use the actuarial reduction factor table for your retirement option to determine the "factor". That will tell you what your monthly repayment amount will be. The hard part (for some) is to take that starting amount and increment it by 2% annually for as long as YOU expect to live based on your known history. That will tell you how much you're actually repaying over your lifetime.

Monday, April 17, 2006

Gallows Pole

The wait is over. Today I went to the post office (the gallows pole) to mail my 2005 Federal Taxes and my Multnomah County I-Tax (hooray, this is the last year, ever!). Now that I've climbed and survived that pole, the next pole awaiting us is May 9th. That is the drop-dead date for PERS retirees to file appeals of the METHOD used to recover alleged overpayments resulting from the Strunk/City of Eugene litigation/settlement. This deadline has generated a huge amount of angst as retirees debate the merits of filing individual appeals, group appeals, PERS Coalition appeals, and/or OPRI appeals. Loosely organized groups of individuals, fed up with the lack of information from the PERS Coalition and, especially OPRI, are considering filing their own appeals based on the language of section 14b of HB 2003, passed by the Oregon Legislature in 2003. For those unfamiliar with that section, it decribes the "exclusive" remedy for the City of Eugene case in the event the court upheld Judge Lipscomb's decision. The exclusive remedy consisted of freezing COLAS and/or charging off retiree overpayments to PERS administrative expenses. The Supreme Court held that freezing COLAs was a breach of contract, while it declined to rule on the "administrative expense" petition by the PERS Coalition during the Strunk case. In considering its options, the PERS Board declined (some say refused) to use the "exclusive remedy" because they felt that taking the funds from administrative expenses (off the top of earnings) would disadvantage active Tier 1 and Tier 2 members. The concern over active Tier 1 members is entirely bogus and misplaced - Tier 1 members will never have access to earnings in excess of 8% again. The issue with Tier 2 may also be misplaced, although the concern might well be genuine depending on the Board's future actions and the system's earnings.

Driving much of the angst is the refusal of the PERS Coalition and OPRI to offer even a smidgen of advice to members other than to suggest consulting an attorney of the member's choice. The Coalition and OPRI have declined to comment on the entire 14b argument, although it is well-known that many of the unions in the Coalition are pressing for a separate 14b lawsuit to be filed before May 9th. I'm reasonably confident that something will be filed on 14b on or before the drop-dead date. I've even heard back-channel rumors about who might be involved. But the rumors are vague and amorphous. I'm not certain who will be filing it - a group of retirees pursuing it on their own (I know of such a group) - OPRI, the PERS Coalition, or a separate organization apart from the Coalition. I can't imagine letting this opportunity go by - section 14b is a very ripe fruit begging to be picked. Whether the Courts would find any merit in the argument that the Legislature compelled PERS to use this remedy and PERS chose to defy the Legislature remains to be seen. But it strikes me that to NOT challenge the legality of what PERS is doing, in light of section 14b, would be a travesty of justice.

Monday, April 10, 2006

Kiss & Tell

Just heard back from PERS. The definitive answer is that NO invoices for Strunk/Eugene have gone out to any retiree. Invoices won't start until Fall. A few retirees may have received notices of adjusted benefits along with a listed "overpayment" amount. But, that isn't the official invoice and the retiree owes nothing until the actual invoice is sent and received in Fall (???August for September 1 due date). So, whatever reports I've been getting, PERS denies they represent official invoices for the Strunk/Eugene settlement.

Saturday, April 08, 2006

Always Look on the Bright Side of Life

Don't let the title of this post fool you. Read Bruce Cockburn's lyrics and you'll see why. Just a quick note to say that I've heard from two correspondents who have "window retiree" friends that have recently (as in last week) received "invoices" from PERS for their alleged overpayments due to the Strunk/Eugene settlement. None of these invoices has been confirmed, nor has PERS responded yet to my inquiries about their authenticity. Nevertheless, if you look closely as the PERS timetable for recovery, the very first invoices were to go to "window retirees" who took some form of lump sum settlement at the time of retirement. Those invoices were scheduled (on the timetable) to go out during the April - July timeframe of 2006. If confirmed, PERS is keeping to its schedule. As soon as I have confirmation, I will post. I'd really like to see a copy of an actual invoice to find out what information PERS is providing to retirees and whether it is sufficient for the member to reconstruct the amount accurately. Stay tuned.