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Friday, July 27, 2012

Fool To Love You (Long Version)

Our State Treasurer, Ted Wheeler, is reported to have written a letter to the PERS Board urging them to consider lowering the assumed rate from its current 8% to something closer to 6%.  Ted also suggested that retirees share the burden of future cuts to PERS by altering the COLA provisions to apply to only a certain portion of a retiree's benefit.  No amount was given, but a guessing person might be inclined to think that Ted would be happy with something along the range of the mean PERS benefit (roughly $25,000 per year).

Between Ted Wheeler and Knute Buehler, candidate for Secretary of State, PERS members don't need any enemies in the Legislature.  One current office holder, Wheeler (what is it with guys named Ted?), and another candidate for an unrelated office want to take away benefits from existing retirees, and hammer current workers getting close to retirement.  

First, for the assumed rate change.  It is well-known that the PERS Board, along with the independent actuary working with PERS, determine the assumed rate.  The last time this issue arose was in 2011, when the PERS Board and the actuary considered changes from the current 8% to either 7.5% or 7.75%.  The actuary concluded that the long term (30 year) likelihood range of returns on investment would be between 7.75 and 8.25%.  At the time, there seemed to be no compelling reason for PERS to change its assumed rate from 8%, since the middle of the estimates included that very value.  Fast forward a bit more than a year later and public retirement systems across the country are reconsidering their assumed rate profiles and many are lowering their long-term estimates from 8% or more to the mid 7% range.  CalPERS and CalStrs - the two biggest retirement systems in the country - lowered their assumed rate to 7.75% last year, and to 7.5% this year.  There is no doubt that the 8% assumption is probably too high, and there is no doubt that the PERS Board has the authority and responsibility to change it.  Whether it deserves to be dropped all the way down to 6% is an entirely different argument.  I can find no evidence anywhere that public systems are going that low.  The lowest I've seen assumptions from systems in PERS' range is about 7% - most are higher.  A reduction to 6% would have profound effects on future retirees, current Tier 1 members, and employers.

A 200 basis point reduction in the assumed rate would mean that employers would have a substantial increase to their already high contribution rates.  This is because if PERS is assuming a lower rate on investment returns, then the money not raised by the additional 2% would have to be made up by employers.   Ted proposes that PERS could mitigate "some" of the employer increase by lengthening the period of time over which the balance due is amortized.  This would be equivalent to making a 30 year mortgage into a 40 year mortgage.  The payments are lower, but the amount of interest collected is significantly higher.  For active Tier 1 employees, a reduction in the assumed rate would have two effects:  one, it would lower the return on their Tier 1 accounts significantly and would reduce their final account balance at retirement significantly;  and two, it would increase the likelihood that they wouldn't retire under Money Match for much longer.   Remember that PERS has to pay the member the retirement benefit that is the highest of two different calculations - the Money Match calculation or the Full Formula calculation.  For members on the cusp of retirement, the impact would be more immediate.  Assuming that the rate change takes place on a normal schedule (Jan 1, 2014 effective date), any retirements taking place on or after that date would have benefits calculated on the basis of a significantly lower earnings assumption.  Last year when PERS considered lowering the rate to 7.5%, the actuaries reported that the impact would be such that a member would have to work 6 additional months to offset the benefit loss.  If that's the case with a 50 basis point reduction, then the effect of a 200 basis point reduction would extend that to 24 months of additional work just to receive the same benefit as one would receive on December 1, 2013.  For those who can't wait to retire, the immediate effect would be approximately 17% lower benefits (dependent on age of retiree and benefit option chosen).

The second proposal is a change to the COLA provision.  Ted didn't provide any detail here, but other similar proposals have been made.  Assuming that Ted's idea is about the same as the others, the effects are pretty straightforward.  It isn't clear whether Ted is proposing this for current retirees or only future retirees, but it doesn't make a lot of economic sense to propose it only for future retirees.  Legally, however, it probably does make considerable difference.  The current COLA provision was enacted in 1971.  In statute is the requirement that PERS provide a COLA based on the Portland-Salem metropolitan area inflation index.  The requirement is that retirees receive the lesser of 2% or the actual change in the cost-of-living index for the previous year.  In February of every year, the US Bureau of Labor Statistics releases the relevant figure.  If the change from the previous year is more than 2%, retirees receive a 2% cost of living adjustment on July 1 (paid August 1) of each year.  If adjustment is greater than 2%, the difference between 2% and the actual change is "banked" for years in which the cost-of-living adjustment is less than 2%.  Both the amount (2%) and the banking provision are contained in the statute.  In 2003, the legislature enacted a COLA freeze for retirees in the April 1, 2000 to April 1, 2004 retirement cohort to recover alleged over crediting of the 1999 earnings (the City of Eugene case).  The COLA freeze was challenged by Martha Sartain and OPRI, and the Oregon Supreme Court ruled in the consolidated Strunk case (including the Sartain challenge) that PERS could NOT pay a retirement benefit to which no COLA attached.  In other words, the Legislature had altered the contract between retirees and PERS.  The Supreme Court ruled this to be a breach of contract and the COLA freeze was lifted (there were other twists and turns in these cases that made the impact on retirees the same, but that isn't the point here).  So, any attempt to alter the provisions of the existing COLA for current retirees is likely to be met with a strong legal challenge again, and if history is any guide, PERS and/or the Legislature is unlikely to get away with a change that alters the existing contract.  When retirees retired, the agreement in effect at that time was that they would receive a COLA on their entire benefit annually so long as the cost of living increased in the previous year.  Both the amount of the COLA (2%), the benefit to which it applied (all of it), and the banking provision are all spelled out in the Oregon Revised Statutes and have been in effect since 1971.  

The final change Ted proposed was a revisit of the tax remedy payments for out-of-state retirees.  In the 2011 Legislature, legislation was approved and signed into law that prevents PERS from paying any tax remedy payments to Tier 1 members who retire on or after January 1, 2012 (and who were eligible for such payments in the first place).  The original proposal would have removed the payments from ALL out of state retirees, regardless of when they retired.  After hearing from the Legislative Counsel and (probably) the Attorney General, the Legislature wisely decided that applying the rule retroactively to members already living out of state would be challenged legally and that there wasn't a strong case that could be made in favor of the retroactive provision.  Ted is proposing that the Legislature reconsider that proposal and apply it to all PERS retirees who no longer live in Oregon, retroactive or not.

Some PERS retirees have just finished a 12 year period of constant litigation, uncertainty, and anxiety.  Just now, as the dust has settled on the 2000 City of Eugene case, the 2003 Legislative reforms, and the 2004 PERS-City of Eugene settlement agreement, another Ted is proposing another set of changes to PERS that would trigger yet more litigation, more uncertainty, and higher anxiety yet for people who just want to live their retirement in peace.  We all lived up to our end of the bargain - we did our jobs at a high level of competence, we accepted a lower salary in exchange for a reasonably secure retirement, and we retired based on contractual promises made at the time we retired.  We've lived through the last decade always in doubt about when and what shoe would fall next.  Two of the three proposals suggested by another Ted would reinstate the uncertainty and dread that surrounds existing PERS retirees.  The third proposal would take people who are on the verge of retirement and change the rules significantly.  At what point do those of us who did our jobs and who are doing our jobs get to retire with some certainty that our benefits are really secure?  Apparently two people named Ted, both of whom got lots of love from PERS members and retirees in their election campaigns, feel that we don't deserve any peace.  That's a rotten repayment for all those votes.  

So, to both Teds I say, "I was a fool to love you", and all you've done is to increase my cynicism at the whole electoral process.  It just isn't worth squat voting these days, especially for offices in the State of Oregon.  Promises be damned; contracts be damned; statutes be damned.  

 P.S.  See what I mean by "Ted".  Ted Sickinger of the Oregonian is another of the nutso journalists that continue to write screeds against PERS members and retirees and advocates changes to benefits.  Fortunately, I have no friends named "Ted".  If I did, I'd probably want to defined them just because they were named Ted.  I don't trust people named Ted anymore.

P.P.S 8/2/12.  Indiana's PERS just dropped its assumed rate from 7.25% to 6.75%, the lowest I've seen thus far.

Saturday, July 21, 2012

Traveling On

I'm always amazed at the strange twists and turns in the PERS fiesta.  The latest irony to hit the street is that the Salem Statesman-Journal's crack PERS and public employee reporter, Dennis Thompson, has been lured from his reporter's job to a job as Public Affairs spokesman for the Oregon Department of Revenue - the people who collect the income taxes, the people who will track down PERS miscreants, and the people who are all members of PERS.  While Dennis was reasonably fair and mostly accurate in his reporting on PERS, he will now find himself to be a beneficiary of PERS' supposed munificence.  I wish him well in his new job.  Instead of criticizing PERS and demanding all the information on every PERS retiree, Dennis can now join the PERS party and find out what it is like on the other side of the fence.



Monday, July 09, 2012

Lawyers, Guns and Money

For those of you who are concerned that you are just going to get an invoice from PERS, guess what:  "you are correct."  PERS does *not* intend to justify the amount invoiced this time through.  They assert that you were invoiced once in either 2006 or 2007 and you had 60 days to appeal or contest the amount.  Thus, they are not required to either document how they arrived at the amount you owe, or give you any further appeal rights.  

While all of this may be true, it seems bad policy to send an invoice with no explanation for how PERS came to the amount you owe,and claim they notified you 6 (or 5 or 7) years ago of the amount and that you have no right now to ask for an explanation or be able to challenge the amount.

There are many people genuinely concerned about this matter.   They may have been invoiced back in the day, but many are under the impression that when the invoices were enjoined from being collected, they were effectively nullified.  Again, the policy is clear, but the implementation seems a bit heavy handed to me.  Since they have copies of the 2006 or 2007 letter, it would add little to the collection costs to include them again to remind people how they came to the amounts.  This would probably save more money in the long run than cost in the extra postage and printing.  Penny wise, pound foolish.  Also, a chance for more lawyers to get involved.  PERS cannot prove they actually sent the invoices since they weren't sent certified or registered.  People can easily claim they didn't get them.  Ugly and foolish if you ask me.  

Thursday, July 05, 2012

The Age of Worry

Not a lot of PERS news to report these days.  We've been quiet here on the Fearless front.  Yours truly did get his 3 seconds of fame being quoted in the July 2012 issue of Kiplinger's Magazine on the repayment to PERS.  The article is about "recoupment" as a new worry for retirees across the country.  Somehow they found this blog, and found me.  I interviewed for about 15 minutes nearly 2 months ago and they managed to find two sentences to use in the one page report.  Fortunately, they spelled my name right and quoted me correctly.  

On the good (I guess) news front.  Anti-PERS crusaders have decided (apparently) not to take a stand at the ballot box.  As far as I can tell, there are no anti-PERS initiatives circulating for the November ballot, and it is now passed the date for new initiatives to be approved for petition circulating.  The November elections present a variety of candidates running on anti-PERS platforms, so I'm sure that next years' legislature will have a variety of anti-PERS bills.  The Salem Statesman-Journal's Dennis Thompson suggests that the two big numbers to keep in focus are the 6% "pickup" and the 8% assumed rate.  

I've been ruminating about those two numbers for quite some time and I'm afraid that I can't see how things will play out.  Stay with me for a moment and I'll clarify as we go along.  First, you need to understand that PERS gets money from three places:  employee contributions (regardless of who pays it), employer contributions, and earnings.  Currently, about 71% (or something close) of PERS' income derives from earnings on the fund.  The rest comes from contributions made by employers and by employees.  Suppose for a moment that the legislature decides to do away with the mandatory 6% employee contribution.  What that means is that no money will be contributed to the fund from employees.  That reduces the income source to two:  employer contributions and earnings.  If the fund doesn't get 6% from employees then its overall cash flow changes, and the unfunded liability rises.  We don't want that, so we might have to increase employer rates to offset the loss of funds from employees.  Now, here's where the second shoe drops.  The fund assumes an 8% return on investment annually.  This is true for employers, is true for employees (Tier 1 anyway), and for all retirees.  If PERS lowers the assumed rate to, say, 6.5% or 7%, then Tier 1 rate guarantee goes down for all future earnings, the actuarial tables are revised for future retirees to reflect lower earnings growth, and the disparity between actual earnings and needed earnings rises.  There is only one place to get that money - from employers.  So, as you can see, both the Legislature and the PERS Board have a real conundrum on their hands.  If you eliminate the employee contribution (and the employer obligation for the "pick up" where it exists), employer rates will go down, but the overall health of the fund declines as well.  Consequently, while employers might see a first pass reduction of 6% in their overall contributions,  PERS will be forced to raise the rates to offset the anticipated unfunded actuarial liability that arises from having less cash flow to the fund.  Then, if they also cut the assumed rate, employers will again be called on to contribute more.  If you're lowering the assumed rate, you're admitting that you can't grow your way out of the problem.  The solution is to get more from the employers, not less.

So, while these two issues should be of concern to everyone, the ones who will really be opposing any change in the assumed rate will be the employers.  So will Tier 1 actives and in actives, but their voices will not count as much as the employers.  As far as the 6% goes, the only way that could change is to make it owned by employees.  That means an effective 6% pay cut for all those employees working for employers providing the pickup (largely State of Oregon).  Many employers today do NOT pick up the 6%.  Way back when this was first raised, employers and the employees and their unions agreed to some compromise that has the employees picking up their 6% and the employers provided some initial boost to base salaries as a partial offset.  The State doesn't have that luxury.  So, what I expect will happen is that this issue will come up during collective bargaining and the legislature will, likely, stay away from it.  On the surface it sounds like a great way to save some money, but the money saved will end up being very expensive for employers in the long run (and in the short run).

I'm not a seer, nor a forecaster, nor even that connected, but logic dictates that the two numbers Thompson suggests are going to become most important are likely to be backed away from by the Legislature when the true nature of the problem is explained to them in financial terms.  Those dogs won't hunt.  

What this means is that we are going to have to be especially alert because when you take away obvious things, the less obvious become more attractive.  Keep your eyes peeled, and ask hard questions to candidates running for legislative office.  Try to expose their real positions and what their objectives might be.  Knowledge is power in the age of worry.