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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.


Monday, March 30, 2009

Fleet of Hope

For those of you concerned about yesterday's "hit" piece in the Whoregonian, PERS has posted some helpful facts for you today. You can read it here. If you like what you see, go over to PERS Oregon Discussion to discuss.


Sunday, March 29, 2009

Second Time Around

In their typical desperate search for news, the Boregonian's Sunday edition (today) has a front page and inside "A" section article on the financial troubles at PERS. It isn't like this is anything new. The paper has had several articles previous to this that say pretty much the same thing. Today's new twist is that they are whining about the potential for a change in the investment mix and effectively claiming that the taxpayers will be on the hook for backfilling PERS if the market doesn't recover. Well duh. In any taxpayer funded system, the taxpayers are always on the hook if the needed revenue doesn't materialize to fulfill contractual obligations. What makes this news? What is different now than before.

The reporter also makes the snarky comment about the actuary recommending that the PERS Board remove the 18-month "rate collar" that protects employers from market vagaries for at least 18 months after they occur. But does the Oregonian report WHY this rate collar exists? Nope. Again, they make it appear that there is some unknown force preventing this from happening. What is preventing it from happening is that the PERS Board exists solely for the benefit of the employERS, who don't want to pay their obligations in a timely manner.

The Oregonian doesn't also consider one of the other possible implications of changing the investment mix. They never mention the possibility that the change of the investment mix *could* also lead to a lowering of the assumed rate, which would make the system solvent more quickly, but at the expense of both employers and employees. They don't mention this because either they are ignorant, or because they don't want to antagonize the employers.

What is clear from the article, and especially looking at the online version where comments can be posted, is that the article has succeeded in fomenting the public's anger about the PERS system and its beneficiaries. Yet again, we will be called upon to defend ourselves and our benefits, just when we thought the flogging would stop for awhile. I've resigned myself to the fact that the Oregonian will never stop beating on the system, and that everytime they do, it will be the fault of public employees and retirees. Get used to it. Believe me, it is not better the second time around.


Thursday, March 19, 2009

Gouge Away

Welcome to the world where up is down and black is white. We are, of course, talking about everyone's favorite three letter agency, the IRS. The new tax laws just enacted by Congress have thrown all us retirees a curveball. Pension income, such as what we receive from PERS, is taxed as ordinary income and is subject to the same withholding rules. On the other hand, the new tax rules, "Making Work Pay" or somesuch, treats pension income as ineligible for the new tax treatment. Thus, a paradox. The withholding tables that PERS uses are for ordinary income, but retirees don't work (some do, but their pension income doesn't come from active work). PERS is caught between a rock and a hard place. Because they have to treat pension income as ordinary income, the new withholding tables from the "Making Work Pay" bill includes the adjustments to credit single workers with an extra $400 and married workers with an extra $800. So, the good news is that PERS will be withholding using the new schedules as of April 1. The bad news is that at the end of the year, we'll all find out that PERS has been underwithholding because we are ineligible for the tax breaks. Having fun yet? The only temporary solution is to go online, download a new W-4P withholding form and REDUCE your withholding by one exemption. In this way, you will ensure that the PERS doesn't underwithhold. But changing one exemption will probably end up reducing your monthly benefit by more than what you need to offset the tax break you're not entitled to get. If you are thoroughly confused, thank Congress for this gift. If you understand what is going on, then give yourself a small pat on the back. If my explanation helps you, then give me a small pat on the back. Oh, me. I'm doing nothing.


Saturday, March 14, 2009

Heartless

A fair number of readers have emailed me for some update on the various cases still "out there" awaiting some ruling. In particular, readers are interested in when Judge Henry Kantor will do something, anything by way of a ruling. Judge Kantor must be the slowest Judge in the history of the judiciary. The only case I am aware of awaiting a ruling is the White case, which argues against the settlement agreement in the City of Eugene case. Judge Kantor took written testimony in that case last summer and early fall and was scheduled to take oral arguments in early October. For reasons unclear, he decided that there was nothing relevant to be gained by oral argument and so he cancelled the oral testimony and reported that he would rule from the bench. It is now March 2009, some six months later and we've heard nothing, nada, zero, zip. Not a peep. Easter is April the 12th and perhaps the chickies will peep then, but I have no real hope that Judge Kantor will. I don't have any more of clue when Judge Kantor will declaim on White than anyone else. Whenever it comes, it will surely be anticlimactic as the loser will appeal the case to the Oregon Court of Appeals and ultimately to the Oregon Supreme Court. About the only thing about which I am certain is that the last of the litigation surrounding the City of Eugene case, and the 2003 legislative reforms will probably not come until 2012 or 2013. I find this utterly heartless as many PERS retirees may not live to see any form of justice in these cases. I wish I had more information, but nothing is seeping out of the cracks, the sewer, or anywhere else.

Tuesday, March 10, 2009

Listen To The Lion/The Lion Speaks

PERS has posted a Frequently Asked Questions about the 2008 economic downturn. It is reassuring if you accept that there aren't any other mitigating factors. You can read the report here. What is significant is what question isn't asked and what question isn't answered. Read it and see if you figure out what the missing question is. Enjoy your week.


Sunday, March 08, 2009

Sleep Through The Static

Lots of chatter is still around about the possibility of an assumed rate change. As a form of reassurance - certainly not intended to lull into a false sense of security - the study presented by Mercer (Board Actuary) to the PERS Board this past November is a worthwhile read. It is scary on a number of levels as it discusses the system's funding status relative to retirees and immediately future retires, income to outgo projections, and asset mix. The only nominal reassurance can be found in the report's statement that employer rates are set through June 30, 2011. While this isn't a guarantee for anyone, it does suggest that any changes in the base assumptions of the system: assumed interest rate, salary growth rate, mortality factors, investment mix, etc - are set for another 2+ years. The May 29, 2009 PERB meeting is set to discuss the framework for the next actuarial experience study. This study may commence soon, but nothing is set in concrete until calendar 2009 is over. It will cover the period between January 1, 2008 and December 31, 2009. These experience studies usually provide the framework for setting employer rates, valuing the worth of the whole system, establishing any changes to actuarial tables, and a host of other issues that go into the construction of a retirement system. I take from the November 2008 study that the actuary is well aware of the bad experience in 2008 (and most certainly so far in 2009), but that this isn't relevant to the system right now, only for the next system valuation.

I will endeavor to stay on top of this issue. I have heard NOTHING from PERS yet on the issue of assumed rates, except for the indication that it could be part of the discussion at the May 29, 2009 meeting. I plan to be at that meeting and I will continue to keep my ears to the ground. In the meantime, I suggest that members near or at retirement age continue to monitor this situation closely, but to not take precipitous and irreversible course unless you are not comfortable with the suspense. If you are NOT ready to retire, for heaven's sake, don't make any decision rashly based only on rumor, speculation, and absent any fact. You will regret such a decision if you make it in an uninformed manner.


Friday, March 06, 2009

Kinky Sex Makes The World Go Around

Did I get your attention with that title? Hope so. Today's entry is a short explanation. I hope it helps people understand the relationship between employer contribution rates to PERS and the actuarially assumed interest rate. I've been receiving a lot of questions about this and I feel that a short, simple, explanation is in order. If you've been following my comments over at PERS Oregon Discussion, this shouldn't be new information, but it will be the first time I've put it down in one place.

To think of the employer's contribution rates, we need to think about employee salaries, the Full Formula, the assumed interest rate, and the projected growth of salaries over a career.

Imagine a new employee with a $35,000 annual income. When this person became PERS eligible, he/she and his/her salary became part of the employer contribution matrix of PERS. Imagine that employee having a 30 year career and try to forecast what his/her salary will be 30 years down the road. There is no simple way to do that, but actuaries make certain assumptions about salary growth. Suppose, for the sake of argument that salaries grow (on average) about 4% per year. That means that our $35,000 per year employee in year 1 will be making about $131,000 per year at the end of 30 years of work. Surprisingly, this formula works very well in forecasting final salary. It worked for me, for many of my friends, and for many acquaintances who shared their salaries with me.

With me so far. Our hypothetical employee is projected to be making $131,000 about the time he/she comes up for normal retirement in 30 years. The full formula (for Tier 1 and Tier 2) requires that the final retirement benefit be equal to Final Average Salary * 1.67% per year of service. A 30 year employee making a FAS of $131,000 (or close) will require a pension under the formula of roughly $65,000 annually drawn from two sources - employee contributions and employer contributions. Employee contributions (regardless of who pays them) are statutorily fixed at 6%. The employer is required to make up the difference between what the employee contributes and what is required to fully fund that pension.

Both parties have assumptions (especially Tier 1 members) about the growth of funds. Currently, the assumed rate of growth is 8% for both. In the past, the employers contributed just about the same amount as employees, but as Money Match overtook the formula, the employers were required to come up with increasingly larger amounts of money to "true up" the employee's account at retirement. But, the entire funding depends in large part on the Full Formula. So suppose, both employer contributions and employee contributions are assumed to only grow 6% instead of 8%. Money grows more slowly, the money match ceases to be the dominant method of retirement, and the Full Formula retakes its primacy. Well, if the employee's account balance grows more slowly, and the employer has no guarantee on its earnings, the final "true up" to get to the Full Formula takes more employer cash. The actuaries control for this in employer rates. They try to spread out the costs of that Full Formula retirement over the employee's work lifetime. Thus, the employers contribute significantly more than the employees do to the final retirement. If the average earnings rate declines from 8% to 6%, but the formula doesn't change, the employers have to contribute more than they would have to if the average rate were higher.

Over the long haul, there will come a point where the cost to employers will be lower than it is today once Money Match disappears completely, but the Full Formula is *the* method of retirement for all classes of PERS members. The plain fact is that so long as salary growth continues to average a positive amount (which it will), the employers will be paying more under a lower assumed rate than under a higher one. The higher assumed rate lets the market take care of the employers' excess costs, while the lower assumed rate dumps more costs back on the employers up front.

I hope this helps people better understand the relationship between employer contribution rates and the assumed interest rate. It varies inversely in a pure pension (Formula) system. This is the reason why so many private employers want to move employees from a traditional pension (defined benefit) to a defined contribution (401K-like) plan. The costs are determinate in a DC system, while they vary considerably in a defined benefit system.

Apologies in advance to all actuaries. This is a very simplified example. I know that the determination of employer contribution rates is far more complicated than this, but I think that in a traditional pension system, the basic principles I've explained above hold pretty true.

Enjoy your weekend.


Party People

It is pretty clear now that the PERS Board doesn't want any more at their party. At yesterday's Board meeting (by phone), the Board took the position that they would oppose a bill proposed in this year's legislature (no bill number announced or introduced, but drafted) that would increase the PERB from 5 to 7 members. The objective of the bill is to require a sixth member from the retiree ranks (good) and a seventh member from the unaffiliated (not in PERS) ranks (yawn). The Board is open to the idea of having a retiree (instead of an active) on the Board, but not to increasing the Board size. Tom Grimsley (the current active Board member) was the only one who spoke in favor of this proposal; the others objected because they thought it would make the Board more cumbersome and have more difficulty arranging meetings. So their solution would be to trade out the active member for the retiree, leaving the Board composition at 5.

I can imagine the real thinking is that the concept of having two members on the Board who both experience PERS as "members" might be too much information for the outsiders. Ironically, the most vocal opponent was Brenda Rocklin, who sits on the Board as a PERS Member from Management.

It will be interesting to see how this bill fares in the Legislature. If the bill does not come up for a hearing before March 31, the current Board will discuss it at its March 31 meeting.

You can read the report on the rest of the agenda at the PERS Oregon Discussion group. See link to group on the left.

Sunday, March 01, 2009

Ring Them Bells

Of warning. As predicted here months ago and discussed here for at least 4 years, the shoe may be about to drop. This article from today's Boregonian tells the story. You don't need to read between the lines. It is pretty much all there except for making it official. The assumed rate of 8% appears to be on its last legs. In future posts we will discuss more fully the impact this would have on members and future retirees. To be fair, we will also discuss the impact on employers. This is not a done deal, but the article reveals a great deal about the plans, especially when we have members of the OIC and the PERS actuary interviewed.

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