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Friday, October 31, 2008

The Ghost of Tom Joad

It's looking a bit bleak these days. With the stock market gyrating pretty much out of control, with the Bush administration and Congress passing handouts to nearly any business who asks, and the US deficit climbing to record levels, there is little doubt that things will take awhile for us to recover. It should, therefore, come as little surprise that PERS has taken a pretty substantial hit. Recent estimates show that through the end of September, the PERS Fund lost about $13 billion. While it did better than my personal portfolio, that is still a substantial hit that will pretty much wipe out any surplus it has and leave the fund with an unfunded actuarial liability again. Ron Schmitz of the Oregon Treasury estimates that the fund may only have between 90 and 95% of funds required to meet all demands of all members. While this is a paper number that has no real meaning with two thirds of the membership still working, it also means that there won't be any treats available when PERS trick or treaters come around tonight or during next year's legislative session.

The good news is that PERS is better prepared to weather the crisis than most public employee retirement funds across the country. The OIC has done a remarkable job in keeping the fund in the black and I have confidence that once the current crisis settles down, they will be able to place funds where they can once again return in excess of the assumed rate.

In keeping with the Tom Joad theme, I do think that there will be pressure on PERS to *reduce* the actuarially assumed interest rate (currently at 8%). Right now, this is tough to do because the rate is linked to the construction of the mortality tables, linked to the payouts at retirement, and intimately bound to the rates charged to employers. Any reduction in the assumed rate would not only negatively impact members, it would also raise the employer contribution levels. At a time of shrinking budgets, the employers would protest vigorously any proposal to change the "guarantee". Nevertheless, I think a change is inevitable in the current climate and it would not surprise me to see either next year's legislature or the current actuary (Mercer) propose that PERS do just that.

The second Tom Joad theme is that I rather doubt any proposal constructed by OPRI to give current PERS retirees an ad hoc rate increase will get through the Legislature. While the purchasing power of all PERS retirees has declined, especially that of long-time retirees, the fund simply doesn't have the resources to pay such increases. Moreover, since COLA increases and ad hoc increases come directly from employer contributions or from earnings on the Benefits-in-Force reserve (currently negative), the enthusiasm for digging deeper into budgets isn't there.

Finally, the $13 billion loss in the PERS Fund does *not* include the month of October, which has been the worst in recorded history. If there were any residual belief that any of the above would or wouldn't happen, October should just about erase that.

Trick, no Treat, Mr. Joad.

1 comment:

shecker said...

While in California recently I came across this story about the UC retirement system. No contributions by employer or employee for 18 years! but all coming to a crashing end:
http://www.signonsandiego.com/uniontrib/20081028/news_1n28ucretire.html