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Sunday, September 02, 2012

September

The heat of the summer is winding down a bit, the days are getting shorter, and the nights are cooler.  The Anna's hummingbirds are engaged in aerial acrobatics over our feeders and are getting short tempered with each other.  It is also the month in which many of the retirees from the period 2000 - 2004 are starting to see their bills from PERS for the 1999 overcredit.  PERS retirees have discovered my blog and those who have been regular readers are nearly as startled as the "newbies" that PERS is billing them for something that happened over a decade ago.

Let's review.  In March 2000, the PERS Board, then composed of 12 people, decided to credit 20% earnings (out of 25%) to the Tier 1 Regular accounts for 1999.  Employers, still stinging from being stuck paying for the income tax remedy, were mad at the increasing rates that started right after the tax remedy began.  They decided to challenge the 1999 earnings crediting decision.  In early April 2000, they filed an administrative lawsuit alleging that the PERS Board had abused its discretion in awarding 20% without putting some of the surplus (over 8%) into the various reserves statutorily required.  Right here, at this point in time, the 1999 earnings crediting was suspended, leaving it in limbo until the Marion County Circuit Court (Judge Lipscomb) vacated the 20% in 2002.  Those members and retirees who benefited from the 20% decision were immediately at risk, but PERS failed to tell anyone in an obvious way what this meant.  Of course, years later, we know what it meant.  It meant that we had been overpaid by 8.67% on our Tier 1 regular account balances.  That overpayment continued to compound at 8% per year for every year it wasn't corrected.  Members retired with 20% credits on their records.  Lawsuits were filed, legislative actions taken, and throughout it was clear that PERS would eventually be moved to collect on the overpayments.  

The first phase of the collection effort was to stop the continuing overpayment of benefits, or the continued compounding of the 8.67%.  So, in the period between 2006 and 2008, PERS adjusted the benefits of the retired who received 20% by recalculating their base benefit using 11.33% as the 1999 earnings rate.  This resulted in an immediate drop in the base benefit.  They then added back all the COLA increases that should have been made, but had been withheld pending resolution of the cases, and most retirees barely noticed a change in benefits.  This led to some confusion because many members did not realize that they HAD received the withheld COLA.  PERS didn't do a very good job of explaining why, even after receiving all the withheld COLA increases, that benefits didn't change much.  At the same time, PERS invoiced members for the amount they had already been overpaid - money that was owed.  PERS sent out a lame collection letter, which was followed by a detailed accounting of what was actually owed.  The accounting was done very well and it allowed those interested to verify their own numbers quite easily.  Unfortunately, that letter was ignored by most PERS retirees because the Multnomah County Circuit Court had enjoined PERS from collecting that debt until higher courts could rule on the legality of the original collection letter.  So most people just filed their letters away or, worse, threw them away.  Finally, in early 2012, the Oregon Supreme Court, ruled that the Circuit Court had erred and remanded the case back.  In effect, this pulled the injunction and permitted PERS to move forward again with collections.  By this time, PERS had enough experience and heard enough complaints about the previous method of collection that they changed approaches completely.

Fast forward to today.  On the last Friday of August 2012, the first of the collection letters went out.  Once again, PERS has erred by NOT sending the detailed accounting of the balance due.  Retirees have been presented with just a bill for a dollar amount and are given 30 days to decide which of three methods they want PERS to start using to collect the debt.  People receiving a monthly benefit have been prepared for the collection by quarterly newsletters from PERS, but retirees who took a lump sum and have had no ongoing relationship with PERS haven't been so lucky.  Many of them, according to dozens of emails I've received, claim to have never received the original collection letter back in 2006-2007 when they were sent.  I don't know whether this is true or not, but judging from the number of emails I'd say that at least some of these individuals are correct.  PERS initially wasn't going to provide a copy of the original collection letter, but now I've learned that people who call the special PERS line are receiving what should have been included in the first place.

Now, for the issues that have arisen.  Monthly benefit people haven't complained much except for the lack of documentation.  But those who have and who've received the documentation seem satisfied that PERS' calculations are correct and unchanged from the 2006/2007 letter.  On the other hand, the lump sum people are completely taken aback by the size of their bills.  I've heard from people who received bills for as much as $61,000.  So, in an effort to explain what *might* be going on, I'm going to share some insight into how those numbers are computed.  First, and probably the most important piece, is the original error.  All regular Tier 1 accounts were credited with 20% for 1999.  This is 8.67% higher than amount ultimately authorized.  So, if you have your 1999 member statement (mailed in May 2000), you can compute the original overpayment quite easily in dollars.  Then, for each year you worked after the March 2000 crediting, the 8.67% grew by 8% compounded.  So if you retired in January 2003, your balance grew by 1.0867 x 1.08 x 1.08 x 1.08 = 1.37 (37%).  So, this answers the first part of the question of how much you were actually overpaid.  But, there is a second part that most people forget about.  Since you removed both the employee balance (yours) and the employer match (which is dollar for dollar in regular accounts), you also owe the same amount for the employer match.  Once you compute how much you owe from your own account, you then double that because the employer match was equally affected.  Monthly benefit recipients have already started to repay this because their total benefit (employee and employer match) has been adjusted downward.

So for those lump sum people, the pain is twice as large as you might have figured it to be because you've, undoubtedly, forgotten the employer piece of the equation.  You may also have forgotten about the time value of money.  PERS isn't charging you interest or penalties or anything else.  They are merely charging you for exactly what your overpayment was to the day you retired.  Once you took all your money, you stopped owing any more money, but the amount that you did owe was fixed at that point.

Hopefully this short explanation will help people better understand the balances they find themselves owing PERS.

4 comments:

Rivrdog said...

Excellent summary, but you fail to note that each one of PERS' oversights is a legally-actionable fault, and it is to OUR discredit that those who pointed this out at the time (when the faults may have been actionable) were ignored.

We're probably too late now to legally hold PERSB's feet to the fire, but there may be one more legal opening for some. I believe a PERS beneficiary may claim that due to PERS' malfeasance, the complete panoply of choices for settling with PERS was not available to debtors, and those missing choices have since cost us dollars which ought to be subtracted from the amounts owing.

Also, Marc, I'm a "window" retiree who retired on FF+A, and I've yet to see how much my "debt" for the "+ Annuity" is calculated, since I bought-back previous time from a service-split AND bought the complete P&F annuity in one big transaction.

Bottom line for me, the fight ain't over, and it leaves me wondering how many other FF+A people have fallen through the cracks.

bogcandle said...

Thank you for the clear and concise summary.

I have both my own PERS retirement account and a beneficiary account. Each falls within the 'window' in different years. One is a monthly benefit and one was a partial lump sum so I'm grateful for any information I can get to help figure out this mess.

Flat Stanley said...

Thank you for all the information you have provided over the years. I am a window retiree awaiting my repayment letter. Before I make a decision, I would like to find out about the tax implications. I have paid tax on every $ of the overpayment. I have researched the IRS 1040 instructions and Pub 575 without any results. Any ideas???

mrfearless47 said...

If you repay by monthly reductions you have one set of tax issues. Part of the problem is solved by PERS withholding the repayment pre-tax, so you aren't taxed a second time on the money. That doesn't alter the fact that you've already paid taxes on this money when you initially received it. From what I can make out from the various IRS publications, trying to recover the taxes already paid this way is incredibly difficult, but you will have the amount you pay recorded annually on your 1099R form, and so it is theoretically possible. As for lump sum repayments, I don't think there is an easy way to recover it all, especially if you owe more than $9000, which many of us do. The IRS limits your claim to a total of $3000 annually for 3 years (I think). But, it comes off as an itemized deduction on schedule A. If you don't itemize, you are already in trouble, and even if you do, you will take it as a Miscellaneous deduction, which gets limited in many ways by AGI. I havent figured out any benefit to repaying as a lump sum either for convenience or for tax purposes. I suggest consulting a tax professional.