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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. Also, due to the volume of email I'm getting right now, I am unable to guarantee that I will respond to all personal emails sent to my email address. I am being buried alive under an avalanche of email. Please go to the PERS Oregon Discussion (POD) Group, linked below (left) under LINKS to post your question and get a variety of answers. Thank you.

Tuesday, November 20, 2012

The Boy In The Bubble (LONG)

Seems to have peeked out of the bubble for a moment.  Groundhog Day?  Or Governor Kitzhaber checking in with the world 6 days after the election handed him complete control over the Legislature.  Oddly, on Saturday, House Majority Leader Tina Kotek announced that the majority would not introduce any PERS legislation that would fall to litigation.  Moreover, Rep. Kotek announced that the priorities in this session would be jobs and education, not PERS.  This was pleasant news coming from the newly appointed leader of the majority caucus.  Imagine their surprise when their titular leader, the Governor gave a speech to the Oregon School Board Association in which he highlighted PERS as one of his major items for the 2013 Legislature.  HELLO?  ANYONE HOME?  Kitz has always been accused of being aloof and standoffish.  This must set a new record for pure lack of ANY communication.

So, what should we do?  Who should we believe?  I can assure my readers that there is not much likelihood that PERS won't be considered this session.  Moreover, Governor Kitzhaber has spelled out the areas that many of us have feared for some time - retiree COLA cap, jettisoning the 6% pickup, and discontinuing the out-of-state income tax remedy for all eligible retirees (not just those retiring after 1/1/12).  So in today's musings we shall review a bit of history and assess the likelihood that Governor Kitzhaber's agenda will meet Representative Kotek's requirements.  Short answer:  unlikely.

Much has been written about the 6% "pickup" so that little review is required.  The very short version is that the 6% pickup was Governor Victor Atiyeh's suggestion of a way out of a salary impasse back in 1979 when inflation was nearing 10% annually.  Prior to 1979, PERS members paid their own contributions to PERS in AFTER TAX dollars.  When the various unions negotiating the contract back in 1979 asked for and fully expected raises that would keep up with inflation - in the vicinity of 10-12%, the state balked and argued that it didn't have that kind of money.  Governor Atiyeh, following on a suggestion from Bob Straub proposed that in lieu of a salary increase, the state would "pickup" (i.e. pay for) the employee's contribution to PERS.  It would still be regarded as the employee's money and would count towards salary at the time of retirement.  After running the numbers, the unions as well as the unrepresented members decided that this was a reasonable trade that would effectively cover the needs of members at the time.  This was not offered as a temporary solution; it was offered as new benefit for all employees.  That subsequent contracts included sizable pay increases did not mitigate the previous replacement of benefits in lieu of salary increases.  Whether this is contractual or not remains to be determined.  It is clear that this is part of collective bargaining and not legislative tampering.

The big ticket item in Kitz's quiver is the retiree cost of living increase.  The retiree COLA provision was enacted in statute in 1971 (before collective bargaining was prominent).  The statute stated that retirees would receive the lesser of 2% or the actual CPI-W (Portland/Salem Metropolitan Cost of Living Adjustment).  The 2% would be applied to the received benefit.  In the event the CPI-W exceeded 2%, the overage would be "banked" and the bank drawn on in years when the CPI-W was less than 2%.  There is nothing in statute that says the COLA will be applied to only part of the benefit, as Kitzhaber would like to have happen.   The idea of that cutting the Cost of Living to retirees is acceptable to retirees is simply hogwash.  Retirees did NOT create the funding problem and so it is questionable that the lion's share of any savings.  Let's analyze the math.  Presumably, capping the COLA at $24,000 (an amount that we shall question later) will save about $1.1 billion over the biennium.  This will save employers about 4.4% of payroll if estimates are to be believed.  But let's stop for a minute and examine the $24,000 figure.  Where did it come from?  It originated in 2010 with the Portland City Club's report suggesting that the PERS average salary, which was then about $24,000, be used as the cap.  Today, the average PERS benefit is $25,500, not hugely higher.  But let's look at who gets it.  PERS publishes a document entitled PERS BY THE NUMBERS twice annually.  The latest came out on 9/20/2012 - two months ago.  If you look closely at the document, you will observe that approximately 33% of all PERS retirees receive a benefit of $25,500 or less.  This is nowhere near the 50% that Ted Sickinger wrote about in his latest series of hit pieces on PERS published this past weekend in the Oregonian.  The fact is that examining the same tables that accompany the number Ted doesn't use show that about half of PERS retirees receive benefits below $40,000 and half above.  The problem with using the average or mean benefit level is that it is unduly influenced by part-time employees and a rather large number of retirees who worked between 5 and 10 years prior to retirement.  It is typically not possible to accumulate a reasonable benefit in that period of time unless you start out in a very high paying position and retire under the formula.  That isn't the case for most people and so we have a left-skew to the distribution (it isn't a normal distribution) in which 67% of benefit recipients are to the right of the average benefit.  Consequently, picking any number to the left of the 50th percentile will insure that far more people are hit by the cap than would be hit if this distribution were normal.  Career employees average closer to $48,000 in benefits, not $24,000.  So any plan proposed by the legislature to cap the COLA immediately puts far more people in jeopardy than one that truly affects "about half" of PERS retirees.  Finally, we should note that the Washington judiciary has just turned down the Washington Legislature's attempt to eliminate their COLA for certain groups of retirees (they have 7 different retirement systems for public employees so it is a bit harder to compare theirs with ours, but the principle still holds).  In Washington, the decision is only at the Circuit Court level and has a long way to go before it is final and our brethren in Washington see their COLA reinstated, but the decision should give our Legislature some pause before it launches into its apparent plans.

Lastly, we have the income tax subsidy for residents of states other than Oregon.  This issue is much more tricky than it appears on first blush.  The subsidy traces to a US Supreme Court decision rendered in 1988.  The case, Davis v Michigan, centered on the question of whether Michigan could give its state retirees tax treatments it did not offer those Federal retirees living in Michigan.  The Supreme Court held that Michigan was wrong and had to treat both groups of retirees identically - either tax both or tax neither.  Federal retirees followed suit in Oregon, objecting to the fact that they were subject to Oregon tax while PERS retirees were not.  Their suit, Hughes v Oregon, prevailed in the Oregon Supreme Court in 1991.  In 1989, the Oregon Legislature passed legislation to start taxing PERS retirees rather than remove the tax on Federal retirees.  By 1991, the Oregon Supreme Court ruled on the Legislature's decision in Hughes, explaining that Oregon had to comply with Federal law and thus were correct in their decision to tax PERS retirees, but then they explained that the income tax exclusion for PERS retirees was part of the PERS Contract; therefore, the state had to come up with a remedy for the breach of PERS' contract.  Eventually, this resulted in two different Legislative solutions in different sessions.  The 1991 Legislative session passed a small subsidy to offset the taxation.  This remedy was SB 750.  This turned out to be insufficient and another bill eventually made it through the Legislature in 1995.  This bill, captioned HB 3349, attempted to remedy the shortcomings of SB 750.  Principally, SB 750, did not fully remedy for the breach and didn't satisfy the Oregon Supreme Court's original ruling in Hughes.  Instead of repealing SB 750, however, the Legislature adopted HB 3349 with implementation on January 1997.  At the same time the Legislature passed HB 3349, it adopted many other changes to the PERS system, including terminating Tier 1 with its guaranteed rate of return.  It created Tier 2 with language that stated that their benefits were explicitly NOT CONTRACTUAL.  Moreover HB 3349 passed with language stating that it, too, was not a contractual right.  Sometime during the early 1990s another Federal law changed stating that retirement income would be taxed in the state of residence, not from the source state if the two were different.  Prior to this change, all PERS income was subject to Oregon Income tax no matter where retirees lived.  Because of this, the earlier SB 750 had been part of the PERS contract, but by 1995 PERS income was only subject to Oregon Income Tax if the retiree lived in Oregon, not elsewhere.  When HB 3349 was considered, the issue of residency came up in the discussions.  Both PERS and the Oregon Department of Revenue objected strenuously to having to check residence of recipients and so the Legislature decided to pass HB 3349 without a residency requirement.  HB 3349 applies ONLY TO TIER 1 MEMBERS WHO WORKED ANY PART OF THEIR CAREER BEFORE OCTOBER 1, 1991.  The benefit was computed by determining the amount of time worked prior to 10/1/1991 as a percentage of total work time.  The resulting fraction was multiplied by 9.9% and the result determine what income tax subsidy an employee was eligible for.  As an example, I began my career in 1970 and retired completely in 2002.  Thus, in simple math, I worked roughly 67% of my career before 1991 and my tax subsidy is roughly 6.2% of my benefit.  

Nearly every year since about 2001 one or more legislators introduced a bill trying to clarify HB 3349 to indicate that it was only intended for retirees living in Oregon.  And from 2001 to 2010 the bills died without a hearing.  In 2011, the Legislature got more serious about PERS and again introduced a bill to limit the tax subsidy only to Oregon residents.  This time the bill got traction and after ferocious lobbying ended up passing.  However, the revised bill was not the bonanza anyone expected because it only applied to members retiring on or after 1/1/2012.  The mainstream media were livid because the whole point of the bill was to recapture revenue that escaped Oregon for, in their opinion, no good reason.  Because the Legislative Counsel was concerned about the legality of the move, the Legislature backed off on going after all out of state residents receiving the tax subsidy.  This year, however, the calls for repatriating that income have gotten louder and more shrill.  Moreover, because the HB 3349 language explicitly states that this isn't a contract right, it is unlikely that the Legislature will avoid trying to recapture the subsidy from members living out of state.  This would not be a retroactive capture; it would be simply cutting off that portion of the benefit in the future.  For out of state retirees, this would result in an approximately 5-10% benefit reduction; however still looming is the fate of SB 750 which was passed before the state started inserting "no contract right" provisions into changes to PERS.  Moreover, SB 750 passed before the source tax was eliminated.  So it is far from clear what impact a change to HB 3349 would have on out of state retirees, especially if SB 750 is viewed as a contract right.

Needless to say, these are but a few of the possible changes to PERS to look for in the 2013 Legislature.  I expect an attempt to put new PERS employees in a pure 401K type plan (a Tier 4 if you will).   No doubt other changes will be sought, including a change to the way retiree benefits are computed - an attempt to decouple the actuarial assumed interest rate from the assumed earnings rate on the fund.  

This is the year where PERS members near retirement and all retirees need to become politically active.  Truly draconian bills are unlikely, but draconian is still in the eyes of the beholder.  It is time to write your legislator, starting with your House representative and then to your Senate representative.   Silence is not golden.  Make your letters or emails short and to the point.  For the COLA, it is a CONTRACTUAL MATTER with more than 40 years of documented history, no caps, and already ruled on once by the Oregon Supreme Court.  If you were a union member during your working career, make sure you contact your union and ask how you can contribute to their political action fund.  The PERS Coalition is a group of unions that handles legal, political, and lobbying duties for the member unions.  If your group is a member of the PERS Coalition, emphasize to them how important some or all of these issues are to you personally.  Offer to help in any way you can.  If help isn't needed, send money.  This is going to be an expensive battle both politically and legally.  It is your (and my) retirement income at stake.  

Saturday, November 03, 2012

If In Money We Trust

But not necessarily PERS.  The PERS Strunk/Eugene recovery is in full swing now.  I got my repayment letter while I was gone on vacation.  Both the amount owed and the repayment amount were correct (good news), but that's not the story with many people I've heard from.  We have instances of people being asked to repay more than the law compels (10%), and people asked to repay amounts they claim not to owe.  I trust that PERS will get these issues sorted out.

Unfortunately, a much larger problem remains.  The new method compels retirees to repay ONLY what they owe, not a penny more.  Since the payment amount adjusts annually with any COLA, there is no simple way for individuals to track their cumulative payments as PERS does not send out monthly statements.  Consequently, there is no easy way for an individual to determine how much he/she has repaid, much less what the remaining balance is.  Retirees have asked PERS if this information will show on the 1099R - nope; on the irregular statements - not really.  This means that although we have an obligation to repay a specific amount, PERS does not feel any obligation to provide us with a periodic statement of our residual balance.  For many people this is very disquieting.  PERS has not been a paragon of accuracy over the years, yet they expect us to believe them that they will stop the payments when all our required payments have been made.  It seems to me that PERS should be sending out annual statements of balances remaining.  It isn't as if this information isn't available.  PERS is calculating it in real time, every month, and there is no reason except the small financial hit required to send out an extra piece of paper - possibly with the 1099R - at the beginning of each year.  Supposedly, there are 20,000 retirees paying back amounts monthly under the current plan.  Suppose that the cost of adding one piece of paper to the envelope that already includes the 1099R is 20 cents (that's probably an overestimate, but), we are talking an additional $4000 per year.  Contrast that with the $164 million that PERS is supposed to be collecting.  If everyone pays up in 10 years, PERS will spend an additional $40,000 in ten years to recover $164 million.  That represents 0.002% of the amount collected.  How would that compare with a single piece of litigation to challenge PERS if an individual thinks PERS has miscollected, misapplied payments, or overcharged an individual?  This strikes me as penny wise and pound foolish.

If you think PERS should be required to send you an annual statement of the amount you've repaid and what you still owe for a mistake YOU DIDN'T MAKE, please let them know.