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Thursday, May 26, 2011

Goodnight Old World

If ever there has been a crazy week, this must be it.  I won't bother with the screwy things going on in my life just before Memorial Day, but for people who follow PERS news, the week borders on bizarre.  Of course, we have the news reported on Monday about the Ways and Means Committee possibly abandoning the revised HB 2456 and reverting consideration to the grossly illegal version original proposed.  By now that's old news, but it hasn't happened yet and there is still time to write members of the Ways and Means to object to any action except passing the REVISED bill.

Everyone who has been sentient for the past week or so is aware that the Portland City Club put out their long-overdue report on PERS, in which it concludes that the sky is falling again and trots out a whole bunch of bogus reasons why the stock market isn't going to recover the unfunded actuarial liability, ever.  They then propose a package of novel - to them - changes that will save $2 billion nearly instanteously.  As you can imagine, none of these savings will come by charging employers more or making employers pay their bills when they are due.  No, this must always come from the members of PERS to reduce benefits measurably.  There are lots of useless bits of detritus in this bill - noise akin to earwax and toejam - but my personal favorite recommendation is to end the IAP account for Tier 1 (and Tier 2?) members and redirect the employee contribution into lowering the UAL.  In effect, this is tantamount to shutting down Money Match except for a small number of Tier 1 members whose balances are high enough when the accounts were closed in 2003 that they would continue to get a pension benefit large enough from the Tier 1 account balance.  For everyone else, this would mean that they would take a 6% pay cut to cover the UAL and get no benefits whatsoever from the money.  They would retire under Full Formula.  Oh, and there is that small matter of cutting the Full Formula factors from 1.5% per year to something around 1%.  The objective is to produce a benefit of about 45% at retirement that, coupled with Social Security, would be about 80% of pre-retirement salary.  From my quick survey of PERS retirees on Social Security, I haven't met a single one whose Social Security Benefit approaches the 35% that the City Club assumes.  My Social Security benefit is about 16% of my PERS pension.  Even if I had waited until I was 65, my Social Security wouldn't ever be more than 20% of my pension.  I guess the genuises at the Portland City Club just picked a number out of the air, assumed no one would check it, and came up with an average social security amount.  And for this, we waited nearly a year to get the report.   I hope this report dies a slow and painful death, as the research is sloppy, the facts barely supported by evidence, and the questions asked led to the conclusions they wanted.

And, if that weren't enough, I discovered another Legislative "game" that can be played late in the session.  It used to be that "gut and stuff" was the game of choice of legislators.  They would wait until late in the session after a bill had gotten a hearing but was heading no where, and they would gut the contents of the bill and stuff in new language remotely related (in principle only) to the original topic and present the bill as "not" a new bill.  People have gotten wise to that trick and so a new trick was used this year (I'm sure it has been done before, but I never paid much attention).  Representative Jason Conger (R, Bend) apparently "reserved" his right to introduce one bill late in the session.  This appears to be a courtesy extended to a few people every year.  So, on Monday, while all eyes here were diverted to the possible calamity in the Ways and Means Committee over HB 2456, and the editors of major newspapers were chin-wagging over the City Club Report, Conger introduced an 8 point "School Survival Act" (don't quote me on the name of the act).  The first two elements of the act would (a) kill the 6% pickup in its present form and make employees choose between keeping it or using it to prevent layoffs and furloughs or to lower cost of health care premiums; and (2) brings back the limitation on the retiree COLA to no more than the average of PERS benefits, $2000 per month.  So, active employees would get to choose which poison they'd like to use on themselves, and retirees would get no COLA on amounts above the average PERS benefit.

Then, we have the delicious news that the Mercer Experience Study presented today at the PERS Board Meeting (I won't be there, doctor's appointment, see paragraph 1 for other craziness), is leaning towards a reduction in the assumed interest rate to 7.5% from 8.0%.  This isn't a done deal and Mercer itself recommends more time to study and get input from stakeholders, but this decision will be made at the July meeting.  If PERS adopts the change, it would take effect on January 1, 2012 and would affect all actives then and anyone who retires on or after that date.

Without any of this going on, with no changes actually approved, PERS is on track for another record year of retirements.  They estimate 11,000 for 2011, but this is before any of these things described above could possibly happen.  If any or all of the things described above were to take place, it is important to remember that there are, according to the latest numbers from PERS (Monday May 23, Board Meeting Packet), 70,000 members currently eligible to retire today by age or service or both.  I'm guessing that if the Board reduces the assumed rate from 8.0% to 7.5%, the retirement numbers will swell to well over 20,000 by 12/1/11.  I can tell you that if it were me, and I had put in my time, I'd be gone in a microsecond if that were the case.

Finally, there must be a special hell reserved for my colleagues in the Oregon University System who decided way back in 1996 to accept the OUS' one-time offer to withdraw from PERS and join the OUS' "Optional Retirement System".  Money deposited into PERS remained in PERS but future money went into a variety of accounts managed by the system.  The system has always been part of the Oregon State Government and paychecks have always come from the State of Oregon.  But this doesn't seem to matter at retirement, as some at PERS have decided that the period between 1996 and retirement, IF YOU ARE IN THE ORP, do not count as state service for the purpose of eligibility for the RHIPA pre-retirement health care subsidy, which is only available to "state" employees based on years of service.  For reasons totally opaque to anyone, they are fighting counting the period post-1996 as service to the state.  All I can say is that for those of you in that system, watch out for this diamond back.  It will hit you at the worst possible time, and it seems to be the result of an bureaucratic and arbitrary decision by someone in that Department at PERS.  Hopefully, as I write, this will be straightened out.  Retired people shouldn't have to fight these kinds of battles over healthcare.

As you can see, it is only Thursday and the week is jam-packed with fun news to contemplate and to cogitate.  And here you thought your retirement days were going to be like swinging in the hammock in the backyard.  Who knew you'd have to train for ultimate fighter just to retain what you earned.

Have a nice Memorial Day Weekend.  Use it to remember the old days, because the new days are looking different everyday.


Monday, May 23, 2011

Caught By The Light

A firestorm is brewing in the Legislature and elsewhere over HB 2456.  The story goes like this:  the originally proposed bill would have removed the income tax subsidy from PERS current and future retirees who live in states other than Oregon and who pay no Oregon Income Tax.  Before the bill came up for review in the House Business and Labor Committee, OPRI decided that the original bill was unacceptable, and quite probably illegal.  Nevertheless, the bill original bill seemed to be getting traction, and OPRI decided to introduce an amended bill that would make the punitive and illegal parts of the original HB 2456 go away.  Their changes, encapsulated in what was known as the dash 7 amendments,  made the bill prospective only and would apply to those PERS members who retired on or after 12/31/11 and who did not reside in Oregon when they received monthly benefits.  After reading the Legislative Counsel's thoughts on the legality of the original HB 2456, the House Business and Labor Committee voted HB 2456-7 (the OPRI version) out unanimously.  The bill then went to the Ways and Means Committee (since it involves money), where it has sat for some time now as more pressing bills were considered.  Since the dash-7 bill has arrived at the Ways and Means Committee, several things have happened.   The most significant change was the Portland City Club's long-gestating report on the state of PERS.  This was followed today by the Oregonian's scathing editorial calling out the Legislature and the Governor to do something about PERS before the session ended.  Given where everything is in the Legislature and with less than a month before the Legislature calls sine die, the pressure is ratcheting up to do something to get a handle on PERS.

I will have a separate post identifying all the factual errors, distortions, and faulty assumptions in the belated City Club Report, but I want to focus on one element that is suddenly regaining traction.  The City Club report (and this was repeated in the Oregonian) still cites the $72 million savings that would occur if the income tax subsidy were eliminated for all PERS retirees, not just those retiring after 12/31/11.  Notwithstanding the legal analyses that show the post facto application to existing retirees to be a breach of contract, the more significant point is that the bill in its original form will not save anything close to $72 million.  That figure was from PERS who simply estimated the savings from not paying the subsidy to anyone living out of state as of a date certain.  That figure did not include implementation costs, enforcement costs, administrative overhead, and the difficulties of turning the subsidy on and off again for members who pass back and forth through Oregon residence.  If we are lucky, the net savings on a heavily reprogrammed HB2456 will be about 25% of the amount estimated by PERS - about $18 million - before taking into account the legal expenses involved to defend the breach of contract.  While this might be viewed as being better than a "hit in the head", it is far cry from the amount reported by the City Club and repeated by the Oregonian.  It is really disturbing when numbers get repeated uncritically from one source to another all because researchers and writers fail to ask the right questions.

The real problem with the original HB 2456 is a legal one.  Given the tests typically applied by the Oregon Supreme Court to whether a change is permissible or not, the set of guidelines used comes from none other than the Hughes case, which involved the income tax subsidy in the first place. It would be ironic, to say the least, that PERS and the Legislature find itself back in court trying to undermine part of the agreement put into place following the Hughes decision regarding the income tax subsidy.  The Legislative Counsel has already weighed in on this and concluded that HB 2456, as originally written, would be a retroactive change to a PERS agreement and would, therefore, be considered a breach of contract.  The reason the revised bill was introduced in the first place was to avoid that very trap of passing a sweeping bill that would be overturned by the Oregon Supreme Court as a breach of a retiree's contract.  Once a retiree starts to receive the tax subsidy, which is backed up by a piece of paper called a Notice of Entitlement, PERS is on the hook to continue to pay the subsidy.  Nothing in existing law gives PERS or the Legislature the right to turn off the subsidy in the future.

The dash 7 version of HB 2456 is before the Ways and Means Committee.  The belated City Club Report and the bashing by the Oregonian have gotten members of the Ways and Means Committee stirred up and, according to rumor, members want to revise the bill again back to what it was before the Dash 7 amendment was passed unanimously.  While the dash 7 amendment doesn't save a lot of money in the near term, there is probably a considerably windfall over time.  More importantly, the dash 7 amendment doesn't have the critical legal flaws that the original HB 2456 bill had.

Most people don't ask my advice (OK, some do), but I'm going to offer the Legislature some advice here.  Stay far away from the original HB 2456 or any revisions of the dash 7 version that try to put back provisions that were taken out.  It has been almost 10 years since mistakes from the 2003 Legislature are finally being sorted out because of all the litigation spawned.  The Legislative Leadership promised that the 2011 Legislature would not pass out any bills that would lead to the kind of legal limbo that a great deal of the 2003 Legislation ended up with.  An original version of HB 2456 would flat out contradict that promise and would lead back to the legal chaos that has dominated the last decade.  If you must pass a bill, the dash 7 version of HB 2456 is legally the safest way to go and, while it won't save much in the short run, the long run savings may be more than you think.  On the other hand, passage of the unrevised HB 2456 would lead immediately to legal stasis and would continue to mess with retirees'  heads and tie up the courts for years.  The original HB 2456 is bad and probably illegal public policy.




Thursday, May 19, 2011

Hard Times

Google has been a bit problematic the past several weeks and so I've had to hold back some comments I had intended to post.  Two posts went astray and I've yet to see them appear here.  So, I'll try to reconstruct one of the two, and will have a new one tomorrow.

It has been awhile since we chatted about HB 2456.  As you recall, this bill was heavily amended to affect only members retiring after 12/31/11.  It will remove the income tax subsidy that some of those retirees are entitled to.  The bill passed out of the House Business and Labor Committee unanimously without the required Fiscal Impact Statement. Apparently, the committee didn't feel it needed to know whether this bill would save any money or not.  Those of us with knowledge of the system and how the tax subsidy works knew that it couldn't possibly save much money.  Now, the Fiscal Impact Statement is out and has received virtually no coverage.  It is hysterical to read as it demonstrates the silliness and meanness of HB 2456.  In the 2011-13 biennium, the bill will cost almost $200,000 more to administer than the system will recover.  A new Legislative miracle - negative savings.  Even after 2011-13 when most of the sinking costs are over with, the estimates of savings are virtually nominal.  The estimates indicate net savings of about $100,000 per biennium - a true genius measure that barely recovers any money at all.

The bill sits before the House/Senate Ways and Means Committee where it will be considered any day now.  I know that members of the Legislature read this site.  Here's hoping that this bill - as badly botched a bill as can possibly be put together and that ends up being simply mean-spirited and nothing else - will be dispatched with the same haste as Osama bin Laden.  Man and woman guys of the Ways and Means Committee.  Pretend you are Seal Team 6 out to save the State of Oregon from stupidity.  I know times are hard, but surely not so hard that you would pass a bill to spend more than you save.  As a policeman on a snowy mountain pass once said to an idiot driver trying to pass a line of traffic going uphill - "get some intelligence".