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Friday, August 24, 2012

The High Road

As expected, the item in the PERS Board agenda on the assumed interest rate was in response to Ted Wheeler, State Treasurer, letter to Paul Cleary. In Mr. Cleary's response to Mr. Wheeler, included in the PERS Board packet for next Tuesday's meeting, is a detailed schedule of the NORMAL cycle for considering an adjustment to the assumed interest rate. As predicted, Cleary is simply informing Mr. Wheeler and the Board of what the process is and how the statutes compel compliance. According to the schedule, the rate considerations will take place next Spring with a target date of adopting whatever assumed rate is appropriate at the July 2013 Board meeting. This means, as I predicted, that PERS intends to follow the statutes and any changes in the assumed rate will occur normally and go into effect on January 1, 2014 for members and will make up the new employer rates calculated for the 2015-17 biennium.

Cleary also infers that this would also allow PERS time to figure out how to implement any plan changes that MIGHT be adopted by the Legislature as well.

I think that, for now, this should give members some breathing room to make intelligent decisions about when or if to retire.

Since we don't know what the Legislature is planning to do, that is still an open question and affected members should be watching closely for any changes introduced during the 2013 Legislative session.

P.S. The Board packet is posted on the regular PERS web site under "Board". You can download a copy of the entire packet for your own reading pleasure. It is a 138 page pdf file.

Sunday, August 19, 2012

First Taste of Hurt

It has been awhile.  PERS news has been sparse except for the occasional snarky screed by some print media journalists who continue to hammer on the libertarian theme of drowning government in the bathtub.  The local rag continues its rapid descent into irrelevance by continuing to harp on the cost of PERS and ways to reign in the costs.  The usual spate of lies continue - get rid of the 6% pickup and cut the 8% assumed rate.  In the meantime, the IRS just published its new interest rate assumptions for private sector employers on defined benefit plans, that lets them assume a roughly 7.5% rate of return.  Perversely, the rate had been in the 5% region for quite some time.  This means that the private sector employers can assume interest rates of 7.5% and contribute less, while public sector employers will be required to assume lower rates (less than 8%) and pay more.  The media's continue harangue on the 8% assumed rate has pressured PERS into considering when to consider the "assumed rate" at its next Board meeting on August 28th.  This meeting is out of sync in both month and day of week.  PERS cancelled the July meeting, and rescheduled it for August 28th, which happens to be a Tuesday.  Normally Board meetings are on Fridays. There is probably nothing sinister in the change of meeting days and months; summer travel plans interfere with everyone.

The discussion of when to discuss the assumed rate is interesting for its timing.  Normally, assumed rate discussions take place in the spring of odd numbered years as they are part of the overall set of assumptions that go into the biennial system valuation and employer rate setting for the next biennium.   So, routinely PERS would take up this question in March or May of 2013, and the effective date of any changes would be January 1, 2014 for members, and July 1, 2015 for employer rates.   The fact that PERS is raising the timing of the overall decision suggests that there is pressure being brought to bear from somewhere or everywhere.   I think it is fair to say that a change in the assumed rate is inevitable.  The 8% rate has been in effect since 1989, and the past decade has been a particularly volatile period in which the 10 year average return is well-less than the 8% assumption.  So the question really is when PERS will change rate and by how much, not IF they will change the assumption.   Anyone who is at or near retirement needs to keep this fact in mind.   Anyone unconvinced that PERS will change the assumed rate is delusional at this point.  Every public employee retirement system is either considering reductions or already making reductions (CalPERS has reduced twice in the past two years).  The 8% assumption is no longer sustainable for future retirements, for employer rate calculations, or for Tier 1 earnings guarantee.  Some have suggested that PERS drop its assumed rate to 6%.  It is unlikely to go that low, for PERS would be completely out of phase with every retirement system, public and private, in the country.  But I don't think 7% is out of the question.  Just remember that the assumed rate affects not only the Tier 1 earnings rate; it also affects the mortality and annuity factors computed for retirees.  Last year when PERS discussed the assumed rate, the actuary reported that a 50 basis point reduction in the assumed rate (to 7.5%) would result in about a 6 month shift forward in the tables.  Logically, a 100 basis point reduction would likely shift the tables by 12 months.  In other words, this would mean that the difference between an 8% assumption and a 7% assumption would require a retiree to work an additional 12 months to achieve the same benefit of the higher rate.  This is figuring in the reduction in earnings on the Tier 1 corpus, as well as the reduction in the base benefit amount.

I don't want to be a prophet of doom and gloom, but I think it only fair to warn people, especially Tier 1 members, that changes are afoot.  It is no longer likely that 8% will be the guaranteed rate of return.  The only question is whether PERS will succumb to public pressure and accelerate the schedule for changing it, or whether they will hold firm and change it in the timely and orderly manner prescribed in Chapter 238 of the Oregon Revised Statutes.  For many people who are eligible for retirement now, this may be the first taste of the hurt to be delivered from PERS, notwithstanding any changes the Legislature may prescribe as well.  This is no time to be complacent.  If you are even remotely thinking about retiring soon, pay very close attention to what is going on.  I will try to keep people apprised of what PERS decides to do at the August 28th meeting.  I am hoping they will stand their ground against the idiocy of proposing a change in the middle of a biennium and foul up every member's and agency's financial plans.  This is a change that is likely to please no one, except for the crazy print media that is dying rapidly.