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 - 2018 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.

Friday, January 25, 2013

Forget Everything

After more than a month, three of us have deconstructed the figures provided by the PERS actuary and have concluded that the "savings" from the Governor's proposal to cap the retiree COLA to the first $24,000 of benefit, is probably close to being correct.  Although annual savings appear to be small at first, the effect of accumulating the benefit savings over 20 years turns out to be quite a large sum of money - in the billions.  What the actuary did was to sum up all the annual savings, which get greater each year as the COLA base rises less than it would otherwise.  Then, if you look at the AVERAGE annual savings, it works out to something close to $400 million per year.  Keep in mind that in order for these savings to materialize, there are MANY assumptions that have to hold, so the actuarial figures are, at the very best, a good faith estimate of how much savings might be realized.  To explain this fully would require a lengthy post, but suffice it so say that I am no longer as suspicious of the actuarial numbers as I was initially.  Rumor has it that Erik Lukens, of the Oregonian Editorial Board, will attempt to explain the numbers in this coming Monday's edition of the Oregonian.  I have little faith that the mathematically challenged staff of the Oregonian will get things right, and I sincerely doubt that a single phone call to Paul Cleary at PERS could possibly have explained the actuarial math simply.  So beware of Lukens' explanation on Monday.  It may be enough for the 70 IQ point readers of the Oregonian, but it probably won't satisfy the smarter folk who read here.  I just wanted people to know that I've been thinking long and hard, and working with two other smart people to sort out what the numbers really meant.  I don't just publish my feelings; I try to back them up with actual analysis.

During the course of my COLA investigations, I had occasion to go back to the Oregon State Archives to find out for myself what the history of the PERS retiree COLA was.  What I found is important enough to repeat here, because at the end of the game, it is the Legislative History that will matter and will form the basis of a decision whether the Legislature goes forward with an attempt to revise the COLA, or decides that unfavorable litigation would result.

Let me start by saying that ALL elements of the current COLA have been in place, in clear and unambiguous language since 1971, with one notable exception.  In 1971, the legislature passed the COLA statute.  It included an annual COLA linked to the US Bureau of Labor Statistics inflation index, it included the banking of COLA in excess of the maximum rate, it indicated that the COLA would be applied to the entire monthly benefit, and the first annual COLA would be awarded effective July 1, 1972.  The initial rate established in 1971 was 1.5%.  In 1973, the Legislature upped the annual maximum to 2% and made it RETROACTIVE to July 1, 1972.  So, in other words, the current COLA - the one in force today, 40 years after finalizing the statute, is exactly the same as it was in 1973.  But, more significantly, the decision to change the COLA amount retroactively in 1973 indicates that the original 1.5% amount was probably done in haste and it was quickly remedied in the following Legislative session.  

Reading the statutory language from 1971, 1973, or 2012, you find that all essential elements of the COLA are structured in mandatory language.  All elements of the COLA "shall be applied" to the member's monthly benefit, not a part of the benefit, not a capped benefit, but the entire monthly benefit.  The word "shall" is important in litigation, for it is a word that means "promissory".  The COLA represents a legal promise to retirees that their benefit SHALL be adjusted annually by the criteria set out in the statute.  Except for renumbering the statutes themselves (1995), changing the initial percent from 1.5% to 2.0% quickly and retroactively after original implementation, and more clearly identifying the Bureau of Labor Statistics Index used to measure inflation, the statutes have remained virtually identical for 40 (or 42) years.  Anyone who doubts the Legislative intent to make this a promissory benefit need only follow the entire Legislative history to see that this is not the case.  Thus, the Legislature and the Governor change this at their peril.  For if they do, and the court strikes down their effort, there will be a lot of money squandered by employers in the first biennium this affects.  And since employers hate to have their rates raised, and will do nearly anything to avoid paying higher rates, including convincing the PERS Board to empty out its reserves back in the mid 2000s, just before the 2008 crash, it would be imprudent to put 4.4% of their payroll back in their greedy hands to spend willy-nilly and then be forced to pay it back.  If you think they are screaming now, just wait if that happens.


Ilovefilm2 said...

Your numbers look accurate, scary, but accurate. By my calculations someone with a pension of say $48K/yr would see a hit of $480/yr the first year, a hit of $979/yr the second year, and continuing on, a hit of $13,725/yr in year 20, and so on, each year! This will mean a severe reduction of spending ability, even if inflation stays low.

Beyond that it is still a bit hazy. Maybe you can help me. How does the 4.4% savings in the PERS rate constitute $810M in additional money to spend? Are they just taking the money out of the PERS fund?

mrfearless47 said...

The $810 million translates to 4.4% of current payroll. The current payroll is about $18.4 billion per biennium. The $810 million represents money the employers would NOT have to spend for payroll costs. That's where the savings result. No money is being taken from the PERS fund; just less money is going in. Don't spend any time on the numbers except to consider what it would do to you. Focus on the legal question, which is where the action is likely to be.

John said...

Let's say the leg buys the argument a cola cap on current retirees is illegal. I assume they can legally change the current statute and limit or eliminate future cola for future retirees?

Unknown said...

So good to be reminded that the PERS COLA law uses "shall" instead of "may" and that this goes back 40 years of more. Thanks for your post explaining it clearly.

So, for me and many Boomers-now-PERS-retirees, it hardly matters if this benefit starts on our hire date, or the date we started making PERS contributions or the date of our retirement. For many (maybe most) of us all of these apply.

Of course, if the PERB principal that changes/'remedies' need to apply to all members equally, then we are all covered by the mandatory language of the ORS. This seems like a very good time to contact our state representatives, leaders of the Oregon House and Senate and our state senators and let them know that we are well aware of this language. And that we are completely willing to fight to protect our legal, contract rights to the full retirement benefit that we were promised, worked for, earned and deserve.

What is that old saw? Lack of planning and foresight on your part does *not* constitute an emergency on my part. I think it applies here big time.


mrfearless47 said...

@John. The devil will be in the details of when the benefit accrues to the member/retiree. There are three possible ways the Court could rule. First, the benefit accrues from the date of hire. That protects everyone, except possibly those not yet hired. The second interpretation is that it becomes accrued/established at the time of retirement. That would protect all current retirees and anyone who retired before the change date. Finally, they could theoretically rule that the benefit is accrued annually on July 1 for retirees, in which case they could change it "prospectively" as the Governor has proposed.

Having said all that, the language and the history of the statute says, in English, that minimally the benefit is accrued at retirement. Of course, I am not a lawyer and so my opinion is worth exactly what you pay for it.

John said...

Thanks (I think). I'm currently an active. 33 years tier 1. Took a 30% reduction in future benefits due to the 2003 changes. The thought that for as long as I live i have to worry the legislature will try and reach in to my account and steal my money is very distressing.
The take home lesson is don't believe any promise from a politician that you will be rewarded at the end of your career. Insist on the compensation now---not at some mythical date in the future.

mpguy said...

I understand the 4.4% of payroll calculation that results in $400 million a year in savings. However, when we looked at it based on the actual savings in benefits paid out (increasing current payouts by 2%), the amount was in the range of $60 million a year.

My question is this: How does saving $60 million a year allow employers to save $400 million a year? It doesn't take $400 million in additional assessments each year to pay the small additional amount that results from the 2% COLA.

mrfearless47 said...

@mpguy. We were all thinking at the micro level, while the actuary thinks in macro levels. While it is true that the savings are small initially, the fact is that each successive year widens the gap between what would have been paid with what is actually paid. And those savings annually are additive over the lifetime of retirees, future retirees, and beneficiaries. Because the savings accumulate rather quickly, to total saving over 20 years just of limiting current retirees is in the billions, not counting the assessments for future retirees, now lowered significantly, it isn't hard to see how the $800 million per biennium arises from leveling out the savings on a per biennium basis. There should be a document on the PERS Cola Cap savings on the PERS Website now, explaining this. We had figured it out before the actuary put together his little explanation sheet.

Zachary Meiling said...

Mr Fearless,

I am new to state employment and am in the position of choosing a retirement plan at this time. The current version of PERS is an option. Is it worth it? Where can I read about whether to choose the PERS option or the other option offered to me? Thank you!

mrfearless47 said...

@Zachary. Do you work for higher Education? If so, then your choice is between PERS and the ORP. Given all the attempts to alter PERS, to change rules on people after they've retired, the tempting answer is to go for the ORP. The advantage is that one plan is entirely portable and completely (for better or worse) under your control, while PERS is not portable and, therefore, subject to the whims, caprices, and arbitrariness of the Legislature. There are benefits to both, and each approach has different deficiencies. Tell me more about your long term employment objectives with the State.

Marie Bastian said...

Thank you so much for this article! I have been trying to find good information on an attorney in Salem Oregon and this has given me a lot of information! Thanks!