If you wish to help support the ongoing costs of running this blog and you haven't purchased anything through Amazon on this site, please consider a small donation to defray basic costs. It isn't free to me to keep this site current. I have to pay for bandwidth, costs of duplicating documents when they exist only in paper form, and keep printer ink around to read lengthy documents, and the time to do the research. Thank you. Marc Feldesman, site owner and publisher.
Oregon PERS Information is Copyright Marc R. Feldesman (c) 2003 - 2017 All Rights Reserved. Posts may not be reprinted without prior consent.


Please don't post your comments more than once. I moderate all comments and a delay between posting and appearing is part of the drill here. I get to all comments in due time. Please don't continually repost the same comment. Only one will be posted. Thank you.

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.

11 comments:

Phil H. said...

Since 1929, just before the great depression, though today, the market has returned around 8.8 percent. Returns over the last 3 years are about 27% in 2009, 15% in 2010, 2% in 2011 and we are up about 14% TDY.

The media has been on a tear with its "OH no, we wiil never earn market returns ever again!!" fear mongering...and even deep thinking folk like yourself are falling for it.

Please, please don't give ground on the assumed rate. The data clearly supports an 8% rate...and any is based more on politics then it is on the evidence in the historical record. Anything less then the 8% is just plain bad analysis and flat out wrong.

Phil H. said...
This comment has been removed by a blog administrator.
mrfearless47 said...

@Phil. This isn't ME speaking, this is reality talking. It doesn't matter what the returns of the past three years. The minimum length of time actuaries think in is 10 years, 20 years, 30 years. The last ten - actually 12 - have averaged less than 8%, period. If it were true that the long term average supported the 8% rate, you wouldn't see virtually every major system in the country lowering their benchmark rates. A lower rate of return hurts everyone, but that doesn't change reality. At the same time, earning 8% (actually more is required) doesn't happen any more. Consider where the market would be this year without stocks like Apple. Apple alone is moving the S&P and the Nasdaq daily. When Apple gains, those two indices typically move with it, and it only can offset a lot of volatility in the market. I'm not falling for the media hype. The material I'm reading is completely different and extremely well informed. The actuary recommended that PERS go with a 7.75% rate last year, but the Board voted to keep 8% because the data weren't crystal clear. I just don't see that happening again. The literature I read, which isn't as widely available, is directly related to public employee retirement systems across the country. And it really tells the story of what is happening. If you want to be worried, check out what is going on in the litigation in bankrupt cities in CA, including Stockon and Rancho Bernardo.

I'm not a fear monger, but I am a realist. Until you've sat in my shoes, getting hundreds of emails even now from people who still do not understand why they have to repay money from retirements in 2000-2004, then you don't understand just how unaware PERS members are. I'm giving them the truth, as I see it, not some inflated hope that will cause them to make a bad decision. I'm not telling anyone to retire; I'm telling them to BE PREPARED. Believe me, I'll be the first person to shout if PERS either decides to do nothing, or to do something, and to tell people when the decision will be made. PERS doesn't make these decisions in secret, but not everyone goes to the PERS meetings.

Phil H. said...

I understand you are fighting the good fight.

But, I am sorry, a 10 to 12 year timeframe...and a self selected one at that is no where near "long term". Retirement planning is, at a minimum, a 25 to 30 year proposition. If one randomly picked any 30 year period from 1929forward it would be highly unlikely to select any time period where the return did not exceed 8%.

Back in 1999-2000 we kept here the phrase "new economy" to justify the NASDAQ at 5,000. Most folks, smart folks, bought it...even though the returns were well in excess of historical averages. Then, folks, smart folks, piled into housing based on double digit returns over the previous few year.... even though the returns were well in excess of historical averages.

Now, folks, smart folks, are buying into another "new economy"...where annual return will be well below historical averages....even though the returns folks are talking about are well below historical averages.

I know I will have little chance of convincing folks, smart folks, as emotion, be it fear, greed, or faith, always seems to trump information (believe me, I tried very hard to convince those I cared about during the dot.com and housing bubble... with only one person heeding the advice). But, I do not like to see inflential folks such as yourself give ground in this fight. It just seems gives permission to the decision maker to lower the assumed rate.

Thank you for your efforts and all that you do and continue to do for us.

Phil H. said...

I understand you are fighting the good fight.

But, I am sorry, a 10 to 12 year timeframe...and a self selected one at that is no where near "long term". Retirement planning is, at a minimum, a 25 to 30 year proposition. If one randomly picked any 30 year period from 1929forward it would be highly unlikely to select any time period where the return did not exceed 8%.

Back in 1999-2000 we kept here the phrase "new economy" to justify the NASDAQ at 5,000. Most folks, smart folks, bought it...even though the returns were well in excess of historical averages. Then, folks, smart folks, piled into housing based on double digit returns over the previous few year.... even though the returns were well in excess of historical averages.

Now, folks, smart folks, are buying into another "new economy"...where annual return will be well below historical averages....even though the returns folks are talking about are well below historical averages.

I know I will have little chance of convincing folks, smart folks, as emotion, be it fear, greed, or faith, always seems to trump information (believe me, I tried very hard to convince those I cared about during the dot.com and housing bubble... with only one person heeding the advice). But, I do not like to see inflential folks such as yourself give ground in this fight. It just seems gives permission to the decision maker to lower the assumed rate.

Thank you for your efforts and all that you do and continue to do for us.

Unknown said...

Having sat through several years of PERS Board meetings, I see this pretty much the same way you do, Marc. I was actually surprised that the PERS Board listened to their actuary and stayed with the 8% guarantee that last time they voted on this. It is clear the Board faces pressure from the public, the employers and the members; that it is a challenge for them to make a smart decision instead of an emotional one. The next time they vote on this, I truly believe they will lower the rate, it is only a question of how much and how soon. The Board will want to follow their usual implementation schedule as this change will bite into employer budgets as well as increase PERS' work load as eligible members head for the doors. Thank you Marc for doing the responsible thing, giving members close to retirement a realistic idea of what is probably in their future.

peg

Kolbs said...

I, too, was surprised when the PERS Board left the assumed rate at 8% last year. I do not expect that to happen again. I just hope they follow their own guidleines and timelines for doing so. Anything else will be chaotic. As Peg said foretold is forewarned although I must say I know quite a few people who are nearing retirement and are not following all of this. It's amazing.

Randy

Unknown said...

If the PERS Board makes a changes in the 8 precent assumed rate earlier than its usual review timeframe, how much notice do you suspect current PERS members will have to retire before the new lower rate is implemented? For example, could the PERS Board vote to make the change effective the start of the next month after its votes to change the rate? Could the rate change be made retroactive?

mrfearless47 said...

As I've said before, the statutes compel notification of stakeholders and commentary period. This is not something that the PERS Board is likely to do without careful, thoughtful, consideration. Because the stakes are so high and the "assumed rate" is intertwined with virtually all pension business (employer rates, actuarial tables, Tier 1 earnings rate, Benefits-In-Force Reserve Fund) it just isn't likely that they will hurriedly make this decision. I can't guarantee they won't decide to move earlier than the regular schedule, this is an issue that arose just last year, and so commissioning another actuarial study just for the sake of answering a question that will need to be answered again next spring seems a frivolous waste of resources. The rate you receive will be the rate guaranteed at the time you submit your retirement papers for the first day of your retirement. Retroactivity is one of those things that the Supreme Court rulings have expressly forbidden and pension law more or less forbids. If they could make it retroactive, don't you think they would go after everyone who retired under the 8% guarantee? Benefits, once awarded, are not changeable retroactively except in the case of the error made for the 1999 earnings crediting. That was NOT a retroactive decision because the court had vacated the initial earnings crediting decision (20% vs 11.33%). Thus you can change what is not set, but you can't change that which is fixed (except to increase it).

I think we'll have our answer on how PERS intends to proceed by the time we see the meeting packet posted on Friday 8/24. It will probably, maybe, have a memo from PPLAD (planning people at PERS) outlining the issue and why it is on the agenda now at all. It will probably recommend a path to follow and is probably in response to Ted Wheeler's letter to Paul Cleary. Wheeler is the State Treasurer and is nominally in charge of PERS, although I'm not sure how the reporting sequence goes. So Wheeler has some weight, but he also understands what the statutes of Chapter 238 require, which is adequate notification, hearings, etc.

Finally, let me add that PERS just got approval for $3 million in temporary hires and IT infrastructure to handle the load from the collection efforts from the Strunk/Eugene litigation decisions. They are straining to get a handle on collecting $164 million from 29,000 members. I don't think they have room on their 2012 plate for any more unnecessary work. Changing the assumed rate is a big undertaking, which is why there is so much embedded inertia in doing anything. It requires action, effort, and a ton of extra work. In addition, with 60,000 eligible PERS members, the crushing load to retire before the deadline would likely bring PERS to its knees. There is no precedent for the size load this change is likely to bring. There is also no incentive to try to "sneak" this in to unsettle as many eligible members as possible. All that would do is bring on years more litigation and uncertainty, when following the statutes could guarantee that when the decision is made, there is nothing to litigate. The "assumed rate" is NOT cast in stone. It has never been "guaranteed" to remain at 8%. It has changed, mostly up, about 5 times in PERS' history, and like gravity, what goes up can also come down, but in an orderly fashion. It makes no sense for PERS to do it any other way. But it does pay to be attentive, especially if retirement is in your near future.

Unknown said...

"The "assumed rate" is NOT cast in stone. It has never been "guaranteed" to remain at 8%. It has changed, mostly up, about 5 times in PERS' history, and like gravity, what goes up can also come down"

It's amazing how many PERS members think it IS fixed at 8%. I've tried to tell several people that it is not and they think I'm crazy.

Rich

nomzam said...

Very Informative post and what I wanted to say or ask about annuity last 3 comments made my prob quite easy. Thank you guys.