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Sunday, May 31, 2009

Shelter From The Storm

In one of the few upbeat moments of the PERB meeting Friday, there was an official announcement that the 2009 COLA would be 2%. This isn't a surprise and has been known for several months now, although I don't recall it being mentioned at any previous Board meeting. Since the CPI-U for the Portland/Salem Metro area was 3.26% for 2008, an additional 1.26% will go into the COLA bank for future use in those rare instances when the cost-of-living is less than 2%. Unlike Social Security recipients, PERS recipients will be able to draw on this bank in the future. While SS will not be giving any raises for the new two years, in all likelihood, the PERS COLA will be one of the few bright spots in our otherwise dismal economy.

Friday, May 29, 2009

Stay Wide Awake

I spent much of this afternoon attending a long, tedious, and occasionally informative PERS Board meeting. With me were about 8 or 9 POD members, about 20 people I've never seen before, and the usual cast of characters. Attendance was strong and the room required extra chairs by the time the meeting got fully underway.

The agenda was chock-ablock with interesting tidbits, but the star attraction was the set of two presentations by Mercer and Company (PERS' Actuarial Firm) concerning the modelling of assumptions for the 2008 valuation. This modelling forms the prelude to the 2008 system valuation as well as forming the basis for the essential 2009 valuation, which will inform decisions about the employer contribution rates to be effective on July 1, 2011. Rates scheduled to go into effect on July 1, 2009 have been set and employers can expect about a 2% *decrease* for that 2 year period.

Prior to the Mercer Report, there were several other business items to be discussed. Representatives from PEBB reported to the Board on the status of health insurance rates for the 2010 year. It was quite interesting to hear everything that went into the process and retirees should feel assured that PEBB did everything it could to hold insurance rates as low as possible. For most members, the rates will not increase significantly, and for those belonging to Kaiser, the rates remain flat. For those using Clearchoice in Eugene, a late change in their bid reduced their proposed rates dramatically and their increase for Medicare plus Medicare Advantage has been limited to a 4.2% increase. This is down dramatically from the rates listed in the agenda packet that appeared online this past Tuesday. There were many representatives from Health Care firms present at the meeting, and most left once the Board approved the new rates for 2010. This is quite good news for most retirees used to double digit increases annually. One disappointment, but certainly not a surprise, was the fact that BC/BS refused to submit a bid and is not available to anyone enrolled in the PEBB plan. This is consistent with BCBS's stated intent to get out of the Medicare business. Providence Health Plan is making a significant move to be available throughout the state - or at least the entire Willamette Valley and Southern Oregon.

The bulk of the meeting time was spent listening to 2 presentations from Mercer and Company on the economic assumptions surrounding the 2008 Valuation study. These presentations lasted close to 2 hours and were mind-numbing in the amount of numeric detail presented. The PERS website now has digital copies of both presentations available online and we will shortly have these documents up on the PERS Document Library. Rather than repeat the tedium of these reports, I will try to summarize the essence of the message Mercer tried to make. Just to make myself clear, this was a report to the Board, not a call for action. The Board will get a third presentation by Mercer at the July 16 meeting, at which time the Board will have to approve, modify, or reject Mercer's recommendations.

The reports were grim from an economic standpoint. The system took a substantial hit in 2008 and early 2009 and it will take many years to recover from the losses over that 15 month period. While this was a once in 70 year anomaly, its impact still has to be factored into the PERS rate-setting structure and benefit matrix. Mercer modelled three different scenarios. The first was a baseline scenario in which nothing changes in the system. They modelled system growth using Monte Carlo techniques with 1000 replications. They used the median (500th replication) as the baseline and reported out to plus/minus 2 standard deviations. In a word, they can see only a small likelihood that the system will return to 100% funding within the next 20 years. Once the 2008 valuation is done, the system will be 71% funded without side accounts. At the bottom of the 20 year forecasting trough, PERS could drop all the way to a 61% funding level and in a worst case scenario could come close to 50% funding. From that Baseline, they they looked at what would happen if the employers were given 30 years to amortized the UAL (unfunded liability). In short, going from 20 years (now) to 30 years (proposed) would do little to keep employer rates from rising. The key variable is the rate collar, which the Board adopted in 2004 to stem skyrocketing employer rates. The rate collar works to spread the losses from a bad spell to a limited amount. Mercer can predict with certainty that the rate collar mechanism will come into play for the 2011-13 period and 2013-15 period. Employer rates are expected to decrease to 12% (from 14%) for 09-11, then rise to 18% in 11-13, and hit 25% in 13-15. Mercer then modeled the impact of capping employer rates at both 25% and 30%. Both mechanisms have little impact immediately but would magnify the system instability in the outer years of the forecasting period. Primarily this comes about because the effects of bad years are magnified far more than the effects of good years. There is no model of good years that could dig the system out from its position following the past 15 months. Finally, Mercer consider the impact of lowering the assumed interest rate from 8% to 7.5%. When questioned about the 7.5% figure (instead of, say, 7%) the actuaries commented that they have no basis to drop below 7.5% given their own longterm capital market forecasts and the investment policy of the Oregon Investment Council. Not surprisingly, the lowering of the assumed rates would lower benefits for those approaching retirement age, but higher benefits could be recovered by working longer (7 months for a 60 year old wishing to retire now, 11 months for a 55 year old planning to retire at 60, and 17 months for a 50 year old planning to retire at 60, all assuming a Money Match retirement). So while members would receive lower benefits at retirement, the current rate collar would protect employers from any immediate rate increase, but would have the effect of increasing employer rates from between 1% and 2% near the end of the time horizon, on top of any other rate increases they would face.

Until the Oregon Investment Council establishes its revised investment policy at the June meeting, Mercer has no basis to use any figure other than 7.5% as the lower bound on the assumed interest rate.

Of course, the Board and Mercer expected some discussion about the potential for lowering the assumed rate. They got some discussion from an employer, a union representative, and two Tier 1 actives. While the Board tried to reassure all stakeholders that no decision would be made, they did remind everyone that IF changes were made, they would take effect on JANUARY 1, 2010 (7 months from now) when the new Actuarial Equivalency Factors would go into effect.

When I went into the meeting today, I would have handicapped the odds of the Board changing the assumed interest rate at about 80% likely. After today's meeting, I'm no longer so confident that they will change anything on that front. Right now, Mercer's own Capital Markets Projection unit forecasts long-term capital market returns at about 7.75%, while the OIC is expected to forecast their own long term rates at about 8.1%. From the Board's reactions to questions and comments, I got the distinct impression that a small reduction in the assumed interest rate would generate far more sturm und drang than it would generate resources for the system. Mercer reminded the Board and the audience that the MEDIAN assumed rate for public and private sector pension plans remains at 8% and only those systems with significantly greater assumed rates are changing them. I don't think Mercer will push very hard for a change from 8%, but if they do I don't expect the rate change will be very big (50 basis points tops; 25 basis points most likely). PERS has promised that it would post hypothetical impacts as soon as any decision got made, assuming a decision was made to reduce the rates.

So, at this point, the big decisions will get made at the July 16 meeting when Mercer gets the information from the OIC and it finishes its demographic analysis of the PERS membership. From there, the meetings in September and November will finalize the methodology for the 2009 Experience Study that will form the basis for everything taking place in 2011.

If you have a numeric mind, the publications from Mercer detail this much more fully than I can. Read them and you will see what I'm describing here. For now, you can find the reports at the PERS web site, but by tomorrow they should be available through the PERS Document Library (Oregon PERS Document Library) . Enjoy the sunshine. It's Rose Festival and I'm amazed it isn't raining. Have fun while it lasts.

Tuesday, May 26, 2009

Can't Wait

Until Friday May 29th. At 1 pm. The PERS Board meets. The agenda and packet is posted online at the PERS website. Among the items to be discussed include the Mercer (actuarial firm) presentation on the economic assumptions that will underpin the 2008 experience study. This is the study that determines actuarial factors, employer contribution rates, assumed interest rates and other things of trivial importance to every PERS member and future retiree.

While the Board will not take action on the report at Friday's meeting, the report will pretty well telegraph the direction the Board intends to take at the July meeting. From reading through the minimal information in the Board packet (items C2 and C3 are what I'm talking about), it is clear that this experience study *could be different* from previous studies. In particular, Mercer will be looking at how varying assumptions affect the structure of PERS. Included would be actuarial assumptions, employer contribution assumptions, rate guarantee assumptions. This is a very important Board meeting. I strongly suggest that if you can make it, you try to be there in person. Of course I will post a report, but since the presentation is not available yet (it might be after the meeting), the only way to have this information is to attend the meeting in real time. Parking is free at PERS HQ in Tigard (Haines Street Exit off I-5). The more stakeholders present, the greater the more impact we have as a group.

Please do try to attend. Those of us already retired have nothing to gain or to lose by this meeting, but those of you on the precipice of retirement in the next few years might find yourself with lower benefits if any of these pieces of data change in the economic modelling by the actuaries.

Tuesday, May 19, 2009

Into The White

Finally, we have a date and time for the hearings on the White case. Plan to be at the Multnomah County Courthouse by 9:00 a.m. on Friday June 5, 2009. At this event both sides will get a chance to present their arguments. Since this case has been in the "mill" so to speak since 2004, it might be entertaining to watch as Judge Kantor tries to understand this case. Apparently he thought it was going to be an easy case for him last year, but decided after canceling the earlier hearings to reschedule them afterall. In a followup post, I will explain the issues involved in White. Suffice it to say right now that White challenges PERS' right to enter into the settlement agreement in the City of Eugene case (remember that one?) without involving one of the parties to be affected by the settlement (the members).

Tuesday, May 05, 2009

Life Is Hard

The news just keeps coming. The latest is the story of the fellow who retired some years back as a municipal police officer. Seems he went to complain to PERS that his PERS-offered health premiums were too high and wanted to know why. PERS told him that they had gone up because they had audited his account and discovered he was receiving a RHIPA supplement that he wasn't entitled to. For those who don't know, the RHIPA supplement is an agreed-upon health care supplement supplied to retired State of Oregon workers. It isn't much, but every bit helps. In this fellow's case, not only didn't he apply for the RHIPA supplement, he knew he wasn't eligible for one. Therefore, he had no reason to believe or expect he was getting one. And you guessed the punch line in this story. The folks at PERS want him to repay all $9000+ of his supplement he didn't know he was getting, never applied for, and knew he was ineligible for.

You'd think that we members and retirees would have some protection against this kind of gross negligence on PERS' part. You cannot ever sleep comfortably knowing that PERS may eventually uncover some silly mistake it made years ago about which you had no knowledge. This is the inverse of the Kay Bell case. It also makes you concerned that the Legislature is not holding PERS' feet closer to the fire about the accuracy of their calculations and their estimates.

Let the people who make these mistakes pay for them. Why should innocent retirees be body-slammed for something they played no part in? This just sucks.

Sunday, May 03, 2009

Beyond Here Lies Nothing

Today's entry is not about PERS. Instead, it is about Social Security. This morning's New York Times has a brief, section A, piece about the decision by the Social Security Administration to NOT award a COLA for recipients in 2010. This is the first time in a very long time that the administration has not awarded a COLA. In 2009, the COLA was 5.8%. Just as I become eligible for Social Security (December), I face the possibility of my first year's benefit without the usual COLA. Thankfully, PERS will be giving out its usual 2% in August, but that is offset by the fact that the 2008 CPI-U for the region was 3.3%. So, while costs of everything seem to be going up, or at least not going down, Social Security has decided we don't get a COLA, and the PERS COLA continues to lag considerably behind the actual cost of living increases.

For those also Medicare eligible, you can expect to see some significant increases in costs for the various supplementary plans that will hurt even more with no SS increase to offset any of the pain.

I'm afraid that for all of us "baby boomers", the collision course has begun. Right now, many of us are fortunate to not be feeling the pain of the current economy, but many others are hurting so badly that it is painful to watch. It is beginning to look as though the poet of our age - Bob Dylan - has hit the nail on the head when he says, beyond here lies nothing. He just may be right.

Friday, May 01, 2009

The Beat Goes On

Just a quick note here to let people know that Judge Kantor granted PERS' motion to stay implementation of the Robinson judgement. This ruling affects only people who were invoiced and either paid or were started on the actuarial reduction plan before Judge Kantor's ruling in June 2007. PERS will not refund any payments received or collections started before that date until all final rulings at the appelate level play out.