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Friday, May 31, 2013

Bad Moon Rising - Part II

I wish I had waited an extra couple of hours yesterday before posting my brief message.  By mid-afternoon the Bad Moon had already risen.  The Oregon Republicans in the Legislature used a lazy Thursday afternoon, very late in the month of May to announce their newest "compromise" proposal on PERS Reform.  I'm not going to bore you with too many details; you can read the proposal for yourself here http://oregonpers.info/Library/Download.aspx?docid=1542 .  What's notable about the proposal is that it contains every element of the former SB 754, with just a few of them scaled back in their extent.  From here on out, I will refer to the new proposal as "SB 754 sorta lite".  The hands behind this bill are principally the Oregon School Boards Association (OSBA) and its umbrella group "Fix PERS Now" (see yesterday's post).

The bill is audacious in its scope, revisiting the retiree COLA even more punitively than before, it goes after inactives by proposing a cut to the Money Match annuity rate from the current 8% to 4% (the PERS Board will take up the assumed rate at today's Board meeting and will undoubtedly cut it to 7.5% in July, to be effective for all retirements after December 1, 2013), "fixes" the Judges pension (how isn't clear), ends pension spiking without completely eliminating sick leave (I guess you can have 40 hours) and vacation time, it redirects 1% of the IAP to the PERS fund your own retirement, offers flexibility to employers to renegotiate the 6% pickup, removes Legislators and other statewide elected officials from PERS, and creatively goes after OPSRP members (Tier 3) by reducing the accrual rates by 25 basis points going forward.  It also raises the retirement age for OPSRP by 2 years.

There are a number of things in this bill that are very deeply concerning, not only for their scope, but their sheer chutzpah.  While all of the savings for non-state employers (local governments, school districts, etc) will be sent back to those employers in the form of money they aren't required to spend, the state's share of the "savings" are redirected to pay down the UAL.  In other words, if you state employees thought that somehow this might result in some salary relief for you, a better contract, more employees hired, whatever, fuggetaboutit.  The money state agencies would get is going to PERS to pay down the UAL.  

The second issue is something that isn't there.  Everyone assumes that the Dems will blithely dismiss this as more posturing by the Repubs and relax their guard.  Unfortunately the Rs didn't include the "or else" in their proposal.  It is easy to think that the Rs would cave in to reality that the Dems have the votes to close up and go home.  Actually, the Dems don't.  While they have a majority, they lack two needed votes in the Senate to pass the renewal of the Hospital Provider tax ($1.3 billion and change).  The bill passed in the House 54-5 about two weeks ago, but two additional R votes are needed in the Senate for the bill to pass and go to the Governor for signature.  That's assuming the bill isn't amended and sent back to the House where the Rs would get a chance to revote.  So, there is a very large piece of the 2013-15 budget that needs R approval to finish up.  And the Rs have already said earlier that they were inclined to hold those two votes hostage for more PERS reform.  So, if you think you are out of the woods yet, think again.

The legal issues with the proposal aren't much different than they've been before. The COLA reductions are already approved, so piling on doesn't really change the legal arguments.  The Dems aren't likely to go along, but their is no assurance they won't.

The reduction in the Money Match annuitization rate for inactives probably won't fly legally, but that leaves the Rs with the delicious possibility of trading the retiree COLA (or something else) for adding the actives into the mix.  If you are going to go to court anyway, my motto is "in for a penny, in for a pound."

The anti-spiking measures appear to written to mollify legal concerns by not completely eliminating sick-leave, just reducing its ability to affect FAS by more than a week's worth of salary.  The court may find that satisfies the intent, but hardly the spirit of the law.  Sick leave accruals have already been tested in the Supreme Court, and the court said you can't take them away.  Why the Rs think the court will overrule itself this time is beyond my thinking capacities.

The cuts to OPRSP are a nice touch.  No flies on those Rs.  Everybody gets taken for a fleece.

In the final analysis, this proposal is a calculated bargaining chip in an escalating game of high stakes poker.  The Rs know they can't get everything they want, but they want something significant to crow to their constituents and business patrons and lords.  If they just gave in on the hospital tax and everyone went home, they'd have nothing to say except "we really tried hard but those nasty Dems are beholden to the crooks in the unions and all public employees continue to be greedy, freeloaders".  Where would the fun be in getting to claim the moral high ground?

The timing is spectacular.  Today is the last day for anyone hoping to escape any further Legislative tampering to get completely out of the system effective June 1.  Any additional changes to PERS, if they are going to occur, will happen between now and July 1 (or maybe July 13).  The Dems are anxious to get the budget settled and move on.  The OSBA isn't satisfied with anything less than the total annihilation of PERS.  Between those two extremes someone will find the Rosetta Stone that interprets all the differences and bring on sine die.  If not, there's always the possibility the Governor can call the members back for a Special Session about a week after the main session ends.  Or there is next February, or just about anytime in between.  The Rs have not said whether they want an emergency clause, but it would be the icing on the cake by trapping everyone who didn't retire by today between the proverbial rock and a seriously hard place.  It would probably totally trash many people's retirement plans, and it would put a serious damper on contract negotiations.  

This is going to be the first time that Dr. Kitzrobber (aka Dr. No) hasn't gotten his way.

22 comments:

M&S said...

I noticed that the recent proposal from the Guv, as quickly Ok'ed by Cann't-Stand-Pat-On-My-Word Speaker Tina and the Dems, included that the elimination of the Money Match formula for Inactives. But now the Repubs' proposal yesterday showed their "love" for inactives by "only" reducing the MM rate from 8 to 4%. Unlike the Guv & the Dems, the Repubs must have realized that the total elimination of MM for inactives has low-to-no chance of survival when the Supremes feast on the 7-course meal served up by the greedy Legislature. IGJEUP.

mrfearless47 said...

The Governor's proposal offered two options: either an elimination of the Money Match option for inactives, OR a reduction in the annuitization rate. Everyone knows that formally eliminating Money Match just would never fly, but I'm of the opinion (what kind of lawyer am I, asks you?) that singling out the inactives alone would not fly either. I can't see the court permitting that degree of frank discrimination. It would have to be an all or nothing approach - either both actives an inactives, or no change at all. The objective is the same either way.

ORwalker said...

Advice?? I am a PERS inactive member. Just reacently found this site and would like some information. I am 61 years old and have been inactive for 5+ years. I was planning on starting benifites in the next couple of years. Now looking at the changes being proposed this year, should I retire now? Now is relative..today for June or before Dec.31st?

mrfearless47 said...

ORWalker. Do you have a benefit estimate to guide you? Do you know whether you would retire under Money Match? How close is your Money Match benefit to your full formula benefit? Nobody can advise you what to do. Retiring without any formal plan is usually a bad idea, but if you were certain that Money Match was your best Option, you *could* withdraw your entire employee + employer match balances as a complete lump sum as a rollover IRA in something like Vanguard or Fidelity funds. They both are low cost and generally keep pace with other funds. You would lose out on access to a guaranteed pension and anything left of a COLA, but you would safe-harbor your total account balance until you are ready to draw it out.

As for timing, that's extremely tricky and fraught right now. Without any further information I have no clear idea of when these changes, if they occur, might happen.

Good luck.

Unknown said...

I am a little new to this party. I am an inactive (teacher) with 23 years of PERS credible service and 7 years out of state (worth nothing in a purchase.) I terminated in 2008. I appreciate your post of May15 targeted at inactives and the potential changes to the Money Match calculation. I could drive a retirement application to Tigard today, if I need to (May31.) Just trying to figure this all out. In the latest Republican offer on PERS, does the potential change from an 8% to 4% money match annuity calculation affect historical or future growth in my pension... or both? Does the potential action by the PERS Board at today's meeting to reduce the factor from 8% to perhaps 7.5% affect only future growth? Thx Snuzer

mrfearless47 said...

@Unknown. The change proposed by the Rs doesn't affect account growth, but it will affect the a Money Match retirement benefit will be computed. Estimates are that a cut from 8% to 4% will reduce monthly benefits by 37%. Of course, it won't affect your lump sum balance. The changes that will occur to the assumed rate affect both future account growth and, in the absence of any other changes, such as those proposed by the latest R proposal, will affect future benefit payments by slightly reducing the monthly benefit that you would have received under an 8% assumed rate. You could avoid both of those fates by driving your application to Tigard. However, I make no recommendations. IF you do go to Tigard today, I expect it might be a madhouse and you might need to wait well past official closing time.

Unknown said...

Financial decisions made on the spur of the moment are often unwise, so I'll forget the trip to Tigard today... In your answer you said the 8% to 4% MM cut would reduce monthly benefits by 37%. Can you explain why, "Of course, it won't affect your lump sum balance?" I was considering rushing to Tigard today to submit a retirement package with June 1 retirement and "Total Lump Sum" option. But your answer implies the "Total Lump Sum" option would not be affected by the 8% to 4% proposed reduction in MM annuity calculation. FYI the MM calculation is still HUGE for a 24.7 year PERS Oregon teacher. My written estimate from 2011 for a July 2012 retirement was $2973/month for MM and $1531 for FF. My online estimate for July 2013 retirement was $3281 for option 1; but the online method currently doesn't show details on how the MM calculation affects the outcome. I was told the MM calc was still significant by PERS. Also, my Total PERS acct balance is 193k (member contributions plus growth) compared to Total lump sum option of 413k. Also, wouldn't it be more fair to propose a change on MM annuity to actual earnings rather than an arbitrary cut from 8% to 4%? I realize fair has nothing to do with it. The incentive for PERS management to meet or exceed 8% may affect future success, if that incentive is taken away. Thx Snuzer

mrfearless47 said...

@Unknown. The reason it won't affect the lump sum balance is that they retain Money Match itself. Only the underlying rate of annuitization would change, specifically for monthly benefits. As for your "fairness" question. The court has already ruled on that matter in the Measure 8 case in 1996. The said that they had to pay the guarantee, not actual earnings. So, what the Rs are doing is trying to thread the needle between the OSC's ruling in 1996, and a way to decouple the rate guarantee from the "assumed interest rate", which will be lowered anyway beginning January 1, 2014. There is no incentive for the Oregon Investment Council to target a lower rate of earnings; in fact, it helps the fund greatly if they earn greater than 8% and only have to pay out a guarantee of 7.5%, which is what the new rate will be for retirements after December 1, 2013. The question is whether that rate will apply to the actuarial tables used to calculate monthly benefits and survivor options. That's where the R proposal comes into play.

Maygin58 said...

Thanks for again wading through the complexities and writing a clear synopsis. I still have not found anyone who can show me that figuring in accrued vacation or lump-sum payouts for accumulated vacation for FAS for full-formula (except for legislators) is part of the statutes. I know Sick leave is if the employer participates in the sick leave program. So when you say they have been overturned about eliminating sick leave as part of the calculation in the past - do you know if vacation time has ever been challenged? At one point the DOJ's opinion (I think that's who it was) indicated that they also believed the vacation was not a part of the "contract" and not in statute. Just wondering your take on that. VM

mrfearless47 said...

Vacation time is salary earned. If you include in a final check you get paid for it and the employer has to contribute 6% of the value of vacation time into your account, and match. This was unclear in the past but the issue was settled sometime in the early aughts. Don't recall the case but it didn't stir up too much notice. I've never been sure what the issue is with vacation time. At least as a state employee we were limited to accruing no more than 250 hours before it just started falling off the other end. I took all but 8 hours of vacation time and left it on the table because it wasn't enough to fuss about. I was never short of off time.

Maygin58 said...

That is true of State employees but in my job I was allowed to accrue 2 years worth - quite a bit more than 250 hours..... For me because of longevity it was 600+ hours. Plus I could sell up to 280 hours per year in my final 3 years.... (which I did) so when I said that not allowing lump-sum payments for vacation would have a large effect for me - twas true. The issue, I believe, came up in California when they addressed the "pension spiking" issue and I believe their courts ruled that vacation was not salary but a benefit, hence they were able to exclude the lump-sum payouts or accumulated hours. Salary for Oregon is roughly defined as money earned for work performed. So I didn't know if they ever disected how vacation pay fit into that. It's good to know that possibly Oregon saw it a different way than my understanding of California's ruling- Thanks. (For me, as you know, today is my last day so it is not a moot point... but was causing some lack of sleep there for a while until I decided to leave.) VM

Dave Conine said...

Marc, this is my attempt at repost, but I have to admit things change so fast I feel perplexed. When I read this “Money Match annuity rate from the current 8% to 4% (the PERS Board will take up the assumed rate at today's Board meeting and will undoubtedly cut it to 7.5% in July” from your last post I am confused. Too me this implies that the PERS Board moves the assumed rate up and down once in a while, so why then does it take a legislative act to move the rate from 8% to 4%, can’t the Board just do that? Obviously I am missing something. If I am interpreting the assume rate reduction to 7.5% correctly, the benefit estimate I received recently for my retirement date of 1/1/2014 is too high? If yes, can you guess the approximate % reduction of monthly amount? If I choose to pull all my PERS account out as a lump sum, will it essentially be my member balanced doubled? Or has that been spanked too? Lastly if you could, can you please explain what this means: “it redirects 1% of the IAP to the PERS fund your own retirement.” Thanks for the clarification and insight you provide. Many of us teachers are totally irritated with the lack thereof from our Unions, both local and regional. Thanks again

Unknown said...

After sitting through the PERS Board meeting today, I am more angry than ever over further capping of my PERS COLA. In their presentation today Milliman noted that the cost of living, on average, rises 2.75%/year. I always knew that the old 2% cap didn't keep up with inflation. Then came SB 822 with the 1.5% cap this year and more reductions to come. And now the Rs want to cut further? Phooey!

peg

Unknown said...

Also during the PERB meeting a high ranking PERS staffer was presented with his final check. Clearly he was choosing to get while the getting was good, effective 6-1-13. Makes you wonder what he is basing his decision on. He had worked well over 30 years, so I find his timing informative.

peg

All PERS W said...

Hey, you said "the PERS Board will take up the assumed rate at today's Board meeting and will undoubtedly cut it to 7.5% in July, to be effective for all retirements after December 1, 2013". But the rule as drafted actually provides for the latest year to date calculation to be effective on August 1, 2013. This means that for retirements with effective dates of August 1, 2013 and beyond, the lower assumed rate would apply to their calculation. So that means that to avoid that, Tier 1s need an effective retirement date of no later than July 1. That means they need to leave their jobs next month.

mrfearless47 said...

All PERS W. there may be some semantic confusion here. The assumed rate may change earlier than January 1, but the actuarial factors on which retirement benefit calculations are based expire on Dec31, 2013 and the new mortality factors, recognizing the rate change will take effect then. So the practical effect is that IF you are retiring and want to avoid the implementation of the new mortality factors, you can wait until December 1. The only practical effect of the changed assumed rate is earnings on account balances for aug, sep, oct, and, nov, which would still result in a much higher benefit on Dec 1 than on July 1. This is one of those implementation issues that arises when something happens so rarely (last change in 1988 for 89) that no one really knows the nuances until they research administrative rules and history. Sorry if you feel that my answer was misleading. I hadn't seen the full implementation plan until late today. As a practical matter, it probably doesn't make a whole lot of difference until the actuarial factors are revised.

mrfearless47 said...

@dave. These are two separate issues. Right now, the PERS Board decides on the assumed rate, which is the basis of calculating expected system earnings, calculating employer contribution rates, the tier 1 rate guarantee, and the rate factored into the mortality table factors when determining how to annuitize your benefit when you retire. All of that is already in the purview of the Board. What the Rs in the Legislature want to do is to DECOUPLE the actuarial annuitization rate from the other calculation. That must be done at the legislative level because the PERS Board doesn't appear to either have statutory authority to decouple the rates, or doesn't think it advise able, or doesn't want to.

As for you jan 1 estimate, it is probably slightly too high, although there appears to be some backpedaling by the board on the 7.5% rate. It might end up at 7.75% when all is said and done.

In the meantime there is no predicting what the legislature will do next, if at all.

Chas. Jones said...

Thank you Mr. Feldesman. A friend informed me of your blog Thursday morning. I read your latest few postings. Shortly thereafter I called PERS, and after a bit of a wait (they're understandably swamped) talked to a very helpful and professional staffer. Then I kissed my wife good-bye and drove the 5 hrs from NE Oregon to Portland Thursday night, drove to the Tigard Friday morning, and "retired" effective June 1. You may have saved me thousands upon thousands. I'm 65, taught 32 years, retired from the classroom in 2008, but let my PERS account grow, hoping to get it back up to a reasonable retirement after divorce in 2001 had cut it in half (well, 51%-49%).

So with my June 1 PERS retirement, I think I'm covered should legislative evil come to pass.

Anyway, on the chance that PERS escapes hits in the next month or two, PERS said I can cancel anytime before my first check -- so then I could postpone tapping my account a few more months. Is there a chance such a strategy would grow my account (and monthly payout) a little more? Any further risk after the legislative session is adjourned? Thanks again for a superb blog. Outstanding!

Eric Dziura said...

Is it true that an application to retire (Tier 2 + IAP) can be withdrawn prior to receipt of first check? Sure wish I knew that yesterday...

mrfearless47 said...

@Eric. Since Tier 2 retirements work pretty much the same as Tier 1 retirements, the answer is yes. The problem is that to be absolutely certain of withdrawing in a timely manner, you probably need to do it within 45 days after the effective date of your retirement. After that there is no certainty when your check will arrive and, once it does, you lose that right. You have options to change your benefit payout option for up to 60 days after receipt of your first check, but that doesn't seem to be the issue here. Sorry.

mrfearless47 said...

@Charles. Ordinarily I would have said yes to your question that waiting a few extra months IF no changes were to happen, then it might have been worthwhile. However, if you read my post today "Who'll Stop the Rain?", you'll see that it probably doesn't matter much anymore. You could end up with more money but a lower benefit. So, I think that waiting a few extra months probably wouldn't provide you with enough of a difference to warrant a change.

Jvdpdx said...

Thanks Marc. I talked to PERS this morning. Supervisors are asking reps not to add to what's been posted online. However they did say that mortality tables will not change until January 1st. I asked them to put that online as well. Clearly stff is caught in an awkward position. I have written the Board and emailed my state rep and state senator.