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Tuesday, March 31, 2009

Everything is Broken

And everybody's got different ideas on how to fix. I attended today's PERB meeting in Tigard. The primary purpose of today's meeting was to approve the earnings crediting for 2008. This was done with virtually no discussion. Tier 1 regular gets 8%, Tier 2 get tagged with -27.18%, BIF gets tagged with -27.18% (right from the reserves), IAP accounts will be reduced by -27.75%, the employer accounts will lose -27.30, the OPSRP member pension plan gets hit with a -28.63% loss, while Tier 1 variable accounts will experience a -43.71% loss. All tolled, the 2008 "allocation" cost members and employers about $16.6 billion in lost equity position in their accounts.

The Treasury rep present, Ron Schmitz, outlined the current position of the PERF and indicated that the OIC is currently studying whether to change the asset allocation mix. He noted that through all the various scenarios the OIC had run, the asset mix held up as the most stable over the long run. He also noted that 2008 was one of the worst of three years in the past 160 years of record keeping. He presented 10 year moving averages that showed no other time in stock market history where a year like 2008 repeated itself in the next year. It has never happened before. He's somewhat optimistic that we may be at the market's bottom. He also noted that the fund was down an additional 17% through the end of February, but that the March performance recovered at least half of those losses. He made it clear that the OIC has to take into account the uniqueness of the PERS system in terms of its liability side and its guarantee side and that more stress testing will be done before any decision is made to change the asset mix. But note that it will take a virtual consensus by members of the OIC and its investment partners to change the asset mix. So, while the media have been reporting this as though it were a "done deal", it is anything but. There's a long way to go before the asset mix comes into play and influences other decisions PERS will have to make over the next 4 or 5 months.

The rest of the meeting was given over to discussing the Board's responses to various PERS bills wandering through the Legislative process. Two bills of immediate interest are HB 3304, which OPRI sponsored, to provide ad hoc increases to PERS members. The Board and PERS staff pretty well shredded this bill for its sloppiness, its failure to attend to critical details, and the fact that as written, it would become "baked" into the system. The Board ultimately decided to recommend a "No Pass" on the grounds that this was not an appropriate time for such a bill. The Board was open to the idea of a more targeted bill that had no long term financial implications, more along the lines of a "bonus" or a 13th month payment that expires the minute it is given, or an ad hoc increase that could be taken away if the financials no longer support it. There was virtually no support for the bill but the PERS Legislative Liasison will report back to the Bill's sponsor what form a future bill ought to take. All I can say is "shame on OPRI" for introducing such a poorly thought out bill. I'm all in favor of honoring our long retired public servants, but this bill seemed to me to be embarrassing in its blank spaces. OPRI's lobbyist group should be ashamed of this bill.

The second bill the Board spent considerable time discussing is SB 897, which is the PERS Coalition's Omnibus Bill. This bill tries to do an awful lot: it seeks to raise the membership of the PERS Board from 5 to 7 members. The additional members would be a retired member, and another non-affiliated member.

This element of the bill received considerable attention, and I testified in favor of any configuration that allows for a retired member on the Board. I am ambivalent about the Coalition's Bill. I'm a former manager in Higher Education. I've never seen a committee improved by adding more members. I've seen committee's improved by changing the composition of the group, but the amount of time involved in bringing two additional members into an already complex scheduling problem is not one I'd like to be involved in. I am in favor of either form: amending existing stature to permit the PERS member to be active or retired, or to keeping both representatives on an enlarged Board. The Board agreed with my analysis and was willing to support a modification of the existing structure, but was unwilling to accept the proposal for a seven person Board. Only Tom Grimsley favored the Coalition's proposal in this area.

The second element of SB 897 is aimed at addressing the problem that arises when an employment dispute results in a verdict favoring the employee so that the employee, now retired, would be entitled to additional PERS benefits under the Court-ordered ruling. The idea was to make the person "whole" for the employment dispute resolution. There was no active opposition to this part of the bill.

The third part of the SB 897 involves the issue of "Data Verification" and no doubt derives from the Kay Bell case. The Coalition is asking PERS to provide a process for members nearing retirement to verify certain data that becomes the central component in retirement calculations. PERS Staff recommended, and the Board concurred, that any legislation defined to involve "data verification" be centered around three "core principles": (1) agency data must be valid, accurate, and complete, and the agency (PERS) should have supporting structures, including reports, reviews, and penalties, that secure that result; (2) the agency is obligated to provide data that is clear, consistent and in a transparent manner, but data that is not valid, accurate, or complete should not create an entitlement to a benefit beyond that earned by a member's actual employment history; and (3) All of the retirement system's stakeholders are individually responsible to ensure that data is valid, accurate, and complete, and the agency needs to have adequate resources to provide systems and processes that facilitate the fulfillment of that responsibility.

The PERB concurred with the staff's recommendation and will communicate this back to the the bill's sponsors in the Legislature.

Finally, at the end of the meeting the Board did something unusual. It asked for questions from the audience. Bill Robertson (from the Robertson Federal Case) asked the PERB and Paul Cleary if they could articulate the pieces that come into play to make a decision regarding a change to the assumed actuarial interest rate. The Board and PERS agreed to provide such explicit linkages on the PERS website.

In all it was an interesting meeting. The forward looking calendar holds the greatest interest as it is clear that the first of a number of discussions about the next formal actuarial valuation will take place at the May 29th Board meeting (there is no April meeting). I cannot emphasize too strongly how important this meeting will be to those wanting to know what kinds of moves PERS may be considering in the future. The whole question of actuarial assumptions, including the assumed interest rate, will be up for discussion starting in late May.


mrfearless47 said...

One more thing. The Board is adamantly opposed to any more tinkering with 1039 rule exceptions until the entire 1039 system is examined thoroughly. The most recent estimate is that more than $100,000,000 in annual public payroll goes to 1039 retired members. This costs the system $15,000,000 per year in lost income from a $7,000,000,000 annual payroll. It is clear that the Board is thinking that the whole 1039 system is so broken that it needs to be reevaluated in its entirety. The City of Portland's Finance Director recently proposed to terminate all 1039 members working for the city of Portland as of July 1, 2009. Either go through real hiring, or vacate the position. This would have to be approved by the Portland City Council, which is "studying" the matter. In other words, it isn't going to happen, but it underscores what a hot potato this issue has become.

Rivrdog said...

Excuse my naiivete, but isn't the 1039 problem resolved by having retired workers who want to work, work as independent contractors and not draw a salary per se, but bill out their hours?

If it's that easy, why hasn't it been done?

George, dba perspac

mrfearless47 said...

George, the problem is that the 1039 rule has turned into a way for the employers who want to solve their problems by keeping part-time, rather than full-time employees on staff. Added to this are all the localities that are trying to legislate exceptions to the 1039 rule so that retirees can work full time while continuing to draw a pension. The exceptions are so plentiful that they are becoming unmanageable, while also not doing anything to solve the difficult problem of not having employees contribute to the system and help fund PERS. None of the 1039 employees contribute anything to the system, costing about $15 million per year in employer contributions and $6 million per year in employee contributions.