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Monday, July 25, 2011

Back To Black

While I was gone the Oregon Supreme Court issued an order joining the Arken and Robinson cases for the purposes of issuing a final opinion.  While the cases are different, they cover enough similar ground that the Court apparently feels it can issue a "one size fits all" decision.  Greg Hartman doesn't know whether this is good news or bad news, but he opines that it probably means that they are closer to a final decision than he would have expected at this point.

This coming Friday, the PERS Board holds its bi-monthly meeting.  The agenda is long and there are many issues to be discussed.  For members approaching retirement in 2011 or 2012, the most significant item will be the Mercer presentation and recommendation of demographic and actuarial assumptions for the 2010 and 2011 system valuations.  For members, the critical assumption will be the assumed earnings rate going forward.  While Mercer's previous studies have shown that the current 8% is within the range of variation in their simulation studies, there is considerable pressure being brought to bear by many sources to lower the assumed rate to around 7.5%.  If this action were taken, it would take effect on January 1, 2012 and would affect future Tier 1 regular earnings (the "rate guarantee"), and, more significantly, will change the mortality factors used to calculate benefits in retirement.  The impact will be negative to members and post 1/1/2012 retirees alike.  However, the wild card in this discussion is that the assumed rate also affects the expectation of contributions from employers.  There is an inverse relationship between the assumed rate and employer contribution rate.  If PERS lowers the assumed rate by 50 basis points, employer rates would be expected to rise to offset the loss of revenue from a lower assumption.  Whether PERS will try to "decouple" the employer assumed rate and the Tier 1 assumed rate is an unknown right now.  If they don't, the employers will try to fight the reduction just as hard as the Tier 1 members.  The meeting packet is posted on the PERS website right now, but there is no hint of which way Mercer is likely to go.  They hinted at a slightly lower assumption in May, but it wasn't transparent.  This time around they will have to go out on the limb and make a recommendation.  They will be damned if they lower the rate and damned if they don't lower the rate.  Expect some lively discussion.

So, there is lots of black clouds still looming over the PERS horizon.  One of those clouds will either be lifted on Friday (no change in the assumed rate), or the deluge will begin (it gets lowered).  The other cloud awaits us at the Oregon Supreme Court, where a decision in the Arken and Robinson cases will probably come before summer's end.

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