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Monday, May 31, 2010

Standing Eight Count

By this time in the game, I should understand that there are many, many, many ignorant people out there when it comes to PERS, Occasionally I run across something that makes ignorance look intelligent and I thought I would share my latest experience with monumental stupidity with a vengeance.

The background story is irrelevant. How I came into possession of this speech doesn't matter. What does is that I got hold of it AFTER it was delivered, which only multiplies my frustration at how this stuff continues to perpetuate itself.

As you all know, Representative Dennis Richardson (R, Some Place in Southern Oregon), has been on a one-man crusade to introduce some new, dastardly, legislation anti-PERS legislation into the 2011 Legislative session. Richardson isn't the brightest bulb in the pack and hasn't yet learned from prior court experience what is legal and what isn't legally changeable within the context of the existing PERS contract.

Now, imagine a dim bulb like Richardson sharing a bit of quiet time with a broken bulb like Gary Coe, President of Speed's Towing in Portland. Gary may know what he needs to know about running a towing business, but when it comes to PERS, my 11 month old granddaughter knows more than he does. So imagine what comes out of the blender when dim bulb meets dimwit. You get a speech so wrong, so incoherent that those who heard the speech will be laughed out of the room if they spout any of these inaccuracies near anyone who really knows anything about PERS. To arm you, I have prepared a lengthy rebuttal to give you what you need to refute this nonsense. I'm not going to repeat Coe's speech, but I'm going to highlight all of his egregious errors for you here:

  1. According to Coe, the PERS Board consists of 12 Members and a huge bureaucracy. This is just plain wrong. The PERS Board was reduced to 5 members in 2003, only one of whom is a union member. The remaining four are three citizens and one PERS agency manager. PERS has about 350 employees to service 321,000 members and retirees.

  • "All long-term Tier 1 PERS members are paid more than 100% of salary". The average PERS retiree has served 22 years and is aged 59. The average benefit from 1990-2008 was 58% of final average salary; for 2008 alone it is 52% of final average salary. For the period from 1990-2008, 8% of ALL retirees received 100% or more of FAS; while in 2008, it was only 5%. The average length of service for the "long-term" employees was 31 years and they represent approximately 12% of all retirees. Therefore, the math alone does not support Coe's assertion that ALL "long term" employees earn 100% or more of FAS. In fact, barely half of them do and many of them have more than 35+ years of service.
  • "One of the problems is the guaranteed 8% annual yield on their investments". One again a generalization not supported by the facts. ONLY Tier 1 employees are eligible for the guarantee. Tier 1 members now constitute only one-third of all active and inactive PERS members. The remaining two-thirds of PERS members are NOT eligible for any guarantee of any sort. More to the point, of the Tier 1 members still in the system, almost 90% are already age eligible to retire and most would retire if there were any effort to change the guaranteed rate. Moreover, the guaranteed rate is evaluated by PERS and its actuary every two years since it is so integral to determining employer rates. The employer rates ASSUME an 8% rate of return; what employers actually pay is dependent on that assumption. Lower the rate and the employers rates will go up, not down. There is hard math involved here, but if pressed, I would be happy to show how this is true. The PERS Board and the actuaries just visited this topic in January 2010. They concluded that there was no compelling reason to change the assumption since actuaries from all over the country representing hundreds of public employee retirement systems were still making the same assumption.
  • "Tier 1 employees can retire as early as age 50, then because of PERS legislative loopholes, continue to work and collect their full salary on top of their retirement benefit". This is only partly true. It leaves out the part about having to have 25 (Police and Fire) or 30 years (general service) to retire this early. As for the loopholes, they are very limited to an even smaller number of members. The back to work provision applies only to areas with populations with 75,000 or fewer residents, is limited to a fixed period of time, and applies only to certain professions where there are extreme shortages of qualified professionals. PERS is already proposing to study the loopholes to reduce the number of instances where there are exceptions granted. But regardless, this doesn't apply to just any retiree; only a subset that probably numbers a few hundred of the more than 100,000 retirees out there.
  • "Warren Buffett says that 8% is unsustainable". While Warren Buffett may be a "guru" on many things, he is not a pension actuary. State statute requires that the determination of the assumed actuarial rate be done by the PERS independent actuary and then reviewed by the Board and stakeholders. Thusfar, pension actuaries around the country have predicted that the long-term earnings rate on equities will range between 7.75% and 8.25%. The current assumed rate falls exactly at the midpoint of those estimates and provides adequate safety for all concerned. The PERS fund earned 19% in 2009 and 11% of those earnings went into reserves.
  • "Supreme Court Judges ... are Tier 1 PERS members" [at the time Measure 8 of 1994 was passed]". This is true, but irrelevant. The Supreme Court and all other judges are PERS members, but are not eligible for the same benefits police, fire, and general service members are eligible for. Judges get only a Full Formula benefit, which doesn't depend on account balances or the guaranteed rate. I think it fair to assume that they can be impartial, especially when their decisions have no impact on their own accounts.
  • "Ballot Measure 8 required members to pay their own 6% [instead of permitting employers to "pick up" the 6% for the employees]". A brief bit a history is required here. In 1979, with inflation running at 16%, the unions asked for a 10% across the board pay increase. The employers balked at that pay increase and offered, instead, the 6% 'pick up' of the employee portion of PERS. This is properly a subject for collective bargaining, but be aware that the employers do not have the unilateral bargaining power to force unions and their employees to accept paying their own 6% without some compensation increase elsewhere. Many agencies have already done this - given employees pay increases and bargained for them to pay their own 6%. There is nothing to prevent this from happening now, but it would have to be bargained, not unilaterally imposed.
  • Coe's solutions are as follows: "Change the law that does not allow local governments to opt out of PERS. Replace PERS with a standard 401K, like the private sector". Well, even if this happened, what would become of the legacy structure of PERS. The IRS won't allow changes that affect accrued benefits. So, even if the employers were to opt out of PERS, the employees would be permitted to retain all their accrued benefits in PERS and the employers would be paying for both PERS and the 401K. Actually, the 2003 Legislature did this already for all employers. The PERS system, as we knew it, doesn't really exist for active employees now. Employee contributions go into an IAP account (a 401K in everything but name), while employer contributions maintain the legacy structure of PERS. Absolutely nothing would be accomplished by doing this.
  • "Drop health coverage when PERS member reaches age 65 and qualifies for Medicare". I don't even know where to begin with this one. First, there is no health benefit for retirees. Retirees are allowed to PURCHASE health care prior to becoming Medicare eligible. This health care is paid for out of the pockets of the retirees, not from PERS or the former employers. There is a small subsidy available for certain PERS retirees, but only if the retiree purchases the [very expensive] PERS health plan for retirees. In the main, retirees, pre- and post-Medicare, get no paid health care benefits as part of their retirement packages, and so terminating health coverage when members reach Medicare age isn't likely to save any money. It isn't even relevant to any rational discussion of PERS. That PERS has a unit devoted to health care benefits for retirees is a service provided for retirees and all this service does is to negotiate with health care providers to get the best deals available for an aging pool of retirees. Eliminating all of this infrastructure wouldn't save the money it would cost to outsource this service.
  • "Reduce the Bureaucracy governing PERS. Review the size and compensation of the PERS Board; privatize the IT functions and the auditing functions." Yoo hoo. The PERS Board has 5 members, all volunteer except for transportation expenses. Reducing their compensation would save exactly what they cost: $0. Privatizing the IT and auditing functions is rather scary. The PERS chapters of the ORS are more than 74 pages long. Having IT and Auditing in house is required to accomodate all the changes imposed on PERS from the Legislature and the Courts. Just because a few members have gotten incorrect information from PERS and PERS has been sued a dozen or so times isn't going to change if these functions were privatized. In fact, privatizing those functions would be a complete disaster. PERS manages accounts for 321,000 members and retirees. It administers a system that has been changed in almost every legislative session. It is hard enough for the in-house team to manage all of PERS' functions correctly and in a timely manner now; just imagine what would happen if this were turned over to a private firm(s) who would take years to get up to speed on all of the complexities and nuances of the system and be legally exposed the entire way. Can you imagine the indemnification required? Right now, PERS is fairly insulated from litigation because it is a state agency. The minute this was outsourced, the external agency would lose the protection of the state and would be exposed to some nasty litigation. How much, do you think, you'd actually save by outsourcing PERS' central functionality? I'm betting it would cost 4x as much as it would save. Have you bothered to look at the size of PERS' budget? It is probably less than the budget of your towing operation.
  • "Reduce the guaranteed 8% from this day forward." As discussed earlier, this is already reviewed every two years. Until you understand how the assumed actuarial rate interplays with many elements of the PERS system, you shouldn't be discussing this. It sounds good to say it, but implementing it would be very expensive and certainly would not save anyone any money in the first 5-10 years.
  • "Negotiate in future Union contracts that employees make their own 6% contribution to PERS." You assume that such negotiations are unilateral. How do you plan to "force" unions and their members to agree to this without exchanging this benefit for some other form of compensation. Your understanding of union/management negotiations is ignorant.
  • "Consider a 'Nuclear Option' and lay off all public employees on December 31 and hire them back January 2 under a new and affordable retirement plan." From Dennis Richardson's mouth to God's ears. There are some not-so-small problems here. The state isn't bankrupt; neither are any other public employers. Thus, the IRS prevails in such actions. The IRS requires that ALL employees be given their "accrued benefit" to date before the new system starts. Since the "accrued benefit" includes all existing account balances, any matches due to an employee as a result of vesting, plus any other benefit that was part of the system on the day of termination, this would probably cost about $63 billion (give or take a few billion). The PERS portfolio is valued at about $52 billion right now, there aren't enough assets in the system to completely pay for all "accrued benefits" to date of termination. How do you suppose these agencies come up with an additional $10-$12 billion? Borrow it? How much of the state's credit rating depends on the assets in PERS? What happens to the credit rating if all those assets are transferred from the state to individuals? Finally, remember that there are about 60,000 PERS members (Tier 1 and Tier 2) who are already eligible to retire by age and/or service right now. Do you think that they would stay around and wait for the "nuclear option"? Then what would you save versus what would it cost. Everytime I hear this proposal I just laugh and laugh and laugh. There is almost no way to come out a winner in this scenario because so many members have the option of retiring at the first hint of something like this. Getting rid of those employees now simply removes their funds from the PERS side and puts it in the individual side where the benefits can't be touched.

Friday, May 21, 2010

Shine A Light

I feel a bit like the Monty Python "Dead Parrot" skit.  I'm not dead; I'm resting.  PERS news has been remarkably sparse these days.  Good news occurred last week when the Oregon Court of Appeals held for the plaintiff in the case of Murray v PERB.  This case has potential ramifications for PERS members who weren't retired between 2001 and 2002.  The case involved apportioning administrative expenses from the Variable Annuity Account in two years when there were negative returns.  In those two years, PERS deducted the losses from the accounts and then applied administrative expenses on top of the losses deducted from the remaining principal of the individual account balances.  The Oregon Court of Appeals held that PERS couldn't do that as losses were not legally defined as "negative earnings" from which PERS could still deduct administrative expenses.  This is a particularly complicated case and it isn't clear yet what the outcome will be for people who were still active members at that time.  If PERS doesn't appeal, and we might know after today whether that is the case, then it will have to decide how to administer the outcome.  It could, theoretically, decide to apply this as a class action case, or it could decide it applies only to the plaintiff.   Time will tell, but, in the meantime it is a victory to celebrate for a change.


I attended the PERB meeting today.  Meetings like this make you want to chew glass for entertainment.  Talk about a terminally boring meeting.  The tedium was exacerbated by the lengthy reading of changes to administrative rules, reports on the portfolio value (nothing new to report), and the final turgid explanation of the ETOB (equal to or better comparisons required by state law when a public agency decides to stay out of PERS) comparison methodology to be used this year.  The *only* relevant message to be taken from the ETOB comparison is really for those who want to terminate PERS.  The methodology for determining whether a plan is comparable to PERS or not has some sobering results.  It would be REALLY, REALLY, REALLY expensive to terminate PERS and meet IRS requirements for making members whole.  So those in the Legislature espousing this as a "solution" for PERS' (non)problems ought to read this analysis carefully.  Compare the risk-free rate of 4.7% to the assumed rate of 8%.  Bottom line is that to guarantee all members that they got present value of their accounts would cost billions and billions of dollars.  Not gonna happen now or anytime soon.  I am very glad that Mercer shown a light on those kinds of calculations.  The PERS Board was in shock seeing the cost and they weren't even talking about terminating PERS.  This is the take-home message from that.



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