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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.


Matt said...

I really enjoy your blog. I just read 5-6 posts but I found it pretty interesting. I am a newly vested PERS member, I found your website as I was research PERS costs and trying to decide what to do about it. Have you written a post with your ideal fix in it? I'd be interested to read it.

Matt said...

Ugh, my comment was just erased when I submitted it...

I really enjoyed reading a few articles from your blog. I recent became vested in PERS, it is coming up as an issue bargaining this year so I have been doing some research. I was wondering if you have ever done an article on how you would fix PERS, providing you agree it needs fixing. I would enjoy reading your opinion on the matter.

mrfearless47 said...

I haven't written such a blog post because my reach is too great and people in high places tend to think that if I suggest it, I approve it. I'm reluctant to "go there" because whatever I say will gore someone's ox. I think there are some places where PERS could be changed for the future, but you'll never catch me enumerating them publicly. I will say that none of the current proposals will achieve the objectives over the long haul, and many of them have almost no chance of surviving the inevitable legal challenges.

mrfearless47 said...

One clarification. Adjustments to the assumed rate are perfectly legal so long as they follow the normal rules. PERS and its actuary have the legal responsibility to review the assumption every two years and make recommendations to change the rate if circumstances compel it. To date, there have been no compelling reasons to alter the assumed rate; however, the global world presents a challenging landscape for investors to continually expect returns like they've been in the past. I would not be opposed to a change to the rate for future retirees and the remaining Tier 1 members, PROVIDED such a reduction can be justified by real data, and not just the hysteria of the crowds. I don't think there is any justification for a reduction to 6%, but a reduction to something in the low 7s can probably be justified easily. Of course, the employers don't want this to happen because it will cost them more money in the short run, but 5 years out and their expenses will be less. It may be necessary for employers to suck it up short term to achieve the longer term goal of reducing the system costs. I don't agree with any effort to make it easier for employers; they've gotten the lion's share of PERS' munificence and generosity in the past decade, whining all the way to keep their rates lower than they should be.

Jackie said...

What is UAL? Just read what the BIF is.

mrfearless47 said...

Unfounded actuarial liability. It is the difference between the funds, value and what would be required to satisfy all retirement obligations of every person in the system until the last beneficiary died.

M&S said...

Excellent, informative blog, with an even-handed approach to the complicated PERS system. Due to the separation of the IAP account, you may need to re-hit that explanation - you did a good one in one of your comments. I mean a re-explanation why eliminating the 6% pickup would not save employers money for years. Thanks, MTJC PS Have you ever heard of a union group losing all of a big cost of living raise (6% pickup "before tax dollars") and for them to lose it after over 30 years since the COLA was given/won? (year 1979, rampant double digit inflation). If lose 6% without a pay raise, then that will teach us to be creative, to help State and us with use of pre-tax dollars, and to not simply go for the 9-10-11% raise way back when.

mrfearless47 said...

I didn't mention the "pickup" in this blog post. What are you referring to?

Jay T. said...

Does the word "unfounded" refer to the liability or to the fears that some have when considering it? ;-)

mrfearless47 said...

Thanks for picking up that typo. It should be "unfunded actuarial liability". Damn spell check..... :-). On the other hand, maybe it was a Freudian slip.

TruthSeeker said...

This must be the only issue the repugnicans in Oregon have to rally their base. I'm really, really tired of then continually trying to rob meof my pension benefits...yes, and I know Ted Kelvinator did the same.