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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.


Kolbs said...

Thank you for another well done post. I have a question and an observation.

If the Assumed rate is reduced doesn't that also reduce the future obligations (to future retirees) that reduces, at least somewhat, the amount the employers contribution would have to cover?

It seems to me that one course the legislature could take is to change the law that requires any "pickup" to be the full 6%. Let the agencies negotiate with their employees for a partial pickup. Even a 3/3 split would make a significant financial change and would help to show the public that the employees are helping fund their own retirement system. I know all about the early 80's and the pickup rational (I was there) but the public has long forgotten it and the perception that the employees pay nothing for their retirements is a major perception problem for PERS. People like Richardson could claim a major reform if the employees picked up 3% and, in this economy, it is not unreasonable to ask.

mrfearless47 said...

Re: the assumed rate. You are correct about future obligations, but you are forgetting the legacy obligations to more than 100,000 retirees who've locked in retirements based on the assumed rate of 8%, which can't be changed at all. So, eventually the employers rate will go down (estimates are from 7-9 years before any reductions from the major increases would mitigate).

On the pickup, your comment is well taken and it is possible that's how things will work out. But if the Legislature decides that the employee contribution is to remain at 6% (the issue of who pays for it is a completely separate issue that really is the purview of collective bargaining), the burden falls to employers to negotiate their way out of the predicament. PERS can't afford the loss of the cash flow and the employees know that, so they are in a better negotiating position than people think. I'm not working any more and so I'm not going to wager an opinion on what I think about the prospect of getting employee movement on the pickup. Lord knows, those of us who worked for State employers know that there were many instances when the "pickup" could have been replaced with salary improvements and this problem wouldn't be there to be solved today. Just remember that State employees have already taken as many as 9 furlough days at no pay annually to make up for some of the shortfall, so imposing another salary decrease on them in the current economy seems punitive. Perhaps that is what it will take, perhaps not. I still think that people ought to be on the lookout for some smaller things that might be floated. They could end up being more damaging than anything out there that is obvious.

Unknown said...

The 6 percent employee contributions that the State employer currently pays only goes into employees' IAP accounts. It would not appear that money going into IAP accounts would have any effect on the PERS liability funding needs. Why would there be any increase in the employer's contributions to PERS if employees had to start making their own employee contributions to IAP?

mrfearless47 said...

While the 6% pickup goes into the IAP, it is still part of the overall investment portfolio that generates income for the whole fund. The issue isn't about who pays it; indeed, as long as the money keeps coming in, then the fund hasn't lost a source of revenue. My point was that if the legislature decides to take the approach of simply doing away with any requirement that *any* employee contribution be made - an approach advanced several times in the past - then the revenue stream to the PERS fund will have to be made up somewhere else. If employees are not required to contribute at all, this is where the problem lies. If the legislature tries to forbid the "pickup" there will be litigation (do remember the OSPOA case in 1996). The only way the issue can be settled without litigation would be to forbid employee contributions legislatively, or to negotiate the pickup under collective bargaining. One approach has an undesirable side effect on employers, while the other approach isn't going to come cheaply or for free.

Unknown said...

Is it possible that the legislature could pass a law that eliminated money match as an option for Tier I future retirees? Wouldn't that lower the PERS unfunded liability, since money match provides more 'generous' payouts than the formula? As I remember in the long past, money match was not an option until the Legislature approved it? Thus, couldn't Money Match be rescinded?

mrfearless47 said...

The legislature considered abandoning money match in 2003 and was advised that it wouldn't pass constitutional muster. You can add benefits but you can't take them away. Money match was effectively terminated in 2003 when the legislature stopped further contributions to tier 1 and tier 2 effective 1/1/2004. Money match accounts for less and less of retirements and will decline to insignificance in a few more years. The legacy liabilities from current retires cannot be touched.

mrfearless47 said...

Seems Dennis Thompson of the Statesman Journal disagrees with my analysis of the problem. While Thompson is right that the 6% contribution ends up in the IAP, the old axiom that it takes money to make money also applies. The 6% is commingled with the rest of the PERS assets during the year, being invested in exactly the same way as Tier 2 funds are invested. Thus, to the extent that the loss of a 6% revenue stream to the fund side causes a loss of flexibility in the investment side, there may be a downside to eliminating the 6% required contribution altogether. I'm still troubled by the OSPOA decision on Ballot Measure 8 from 1994, since it ruled that you can't arbitrarily take away the "pickup". Don't know exactly how that will come into play during the Legislative session, but I suspect people will be looking long and hard at that. Also, it is the case that employers who've already negotiated away the pickup in exchange for something else for employees aren't faring much better in the whole contribution rate game either. So, if employees are already making their own contribution and this has not benefited the employers who are NOT making the contribution, you have to ask yourself, why?