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Friday, May 10, 2013

Nightmares

With little notice, Governor KitzRobber quietly signed SB 822 into law late last week.  It takes effect immediately, which means that this year's COLA will be 1.5% and the graduated COLA will go into effect with the COLA for 2014, effective July 1, 2014 (payable August 1, 2014).  The legal process is gearing up and the PERS Coalition and, presumably OPRI, will be seeking appropriate plaintiffs for filing litigation.  There hasn't been any litigation filed yet, but it will happen in due course.  I believe the legislation requires that any litigation must be filed within 60 days of the law's passage, which means that any relevant litigation will be filed by very early in July.  The unions and OPRI will put out calls for plaintiffs and they will describe the general category of people who would make good plaintiffs.  Watch this space for further information as soon as it is available.

The original plan was for the budget shortfalls to be made up of savings from SB 822, a further collaring of employer rate increases until 2015-17, and $275 million in revenue increases.  The first two made it through without too much difficulty, but the revenue increases failed to get the required 60% majority in the Oregon House and would have died in the Oregon Senate no matter what.  So, the situation right now is that the budget remains $275 million short of the Co-Chairs approved budget.  This means that addition revenue will have to come from a combination of revenue increases and further PERS cuts that the Republicans and the Governor insist upon.  And it is here where the nightmares begin.

If we assume that further cuts to PERS will come, there are only three places those cuts could come from and have a remotely legal chance of surviving.  The first pertains to the 6% "pickup".  Currently, the law requires that employee contributions shall be 6% of pay per month.  It doesn't matter who pays; it only matters that the employee must contribute 6%.  One option would be to provide some statutory flexibility on how much the employee must contribute, which will, in turn, open the matter up to collective bargaining negotiations and possibly free up some revenue that employers who "pick up" the 6% currently pay (note:  the largest employer "picking up" the 6% is the State of Oregon).  Another possibility is to eliminate the requirement for employees to contribute anything.  This would also permit the subject to be part of collective bargaining with some of the 6% going to employees as possible pay increases and the employees having to pay whatever voluntary contributions they might want to make.  Neither of these approaches actually saves that much money, except possibly for the State of Oregon, because there is no likelihood that the unions would agree to a complete loss of the employee contribution without some compensatory salary increases.  This has proven to be difficult for the actuaries to even figure out because there are so many different scenarios that could alter the savings landscape.  Moreover, the pickup is already part of collective bargaining agreements and so this would have to wait until contracts are negotiated before the actual savings can be calculated.

The second place money might come from is the quiet firestorm that has been building over the benefits being earned by inactive PERS members who worked long ago, became vested in Tier 1, and are starting to retire at astronomical multiples of their final average salaries.  I've heard of cases where retirees of this category are earning as much as 15x their FAS just from the accumulation of earnings over 20 or more years of inactivity in the system.  There are probably a fair number of inactives in this category, and terminating Money Match for them is an area that may be ripe for savings.  But, alas, things are not that simple because Tier 1 members are legally entitled to have the benefit that pays the most be their received benefit.  So, terminating Money Match for some subclass of inactive members would trigger another round of litigation and would probably end up being tossed out of court.

So that leaves the nightmare scenario.  Although comparatively few Tier 1 members are retiring today under Full Formula or Formula plus Annuity, the number is increasing significantly as Money Match ceases to be the "best" method for many after 10 years of no employee contributions.  What is significant about Full Formula and Formula plus Annuity?  The issue for Legislators and the hate mongers in the mainstream media see "pension spiking" as a real issue here.  In Oregon, the "pension spiking" is tied to the use of sick leave, overtime, and accrued vacation time in leveraging up the Final Average Salary.  Many in the Police and Fire realm work mandatory overtime because of staffing shortages and the unpredictability of demand and specific times and days of the week.  In some instances, overtime can increase a member's salary by a substantial about and there is no question that during the final three years of employment, many members will take advantage of covering as much overtime as is available.  Similarly, the employers who permit employees to take advantage of accumulated sick leave in the calculation of Final Average Salary often face literally years worth of accumulated sick leave (I had 15 months' worth of sick leave when I retired, but didn't use it because I am a Money Match retiree).  These longstanding and legal methods of increasing one's final salary at retirement has become a mythological beast in the eyes of the media and some Legislators and the City Club, OSBA, etc.  Somehow, the belief exists that this a major problem that must be addressed to save PERS.  There are probably a fair number of people whose final average salary will be increased by a few thousand dollars annually by the use of these legal methods, but the fear is that unless this is stopped now, PERS will drop into a hole from which there is no return.  The hysteria over pension spiking would be LOL humorous if it weren't an issue in so many people's current plans to retire.

Please pay attention to the following.  The Legislature has been completely, utterly, totally silent on what further actions to take with PERS.  This has more than a few of us concerned that a "Saturday night massacre" may be silently brewing in the Legislature.  This could take one of two forms, although the latter is more likely than the former.  In the first scenario, the Legislature is planning to pass legislation to terminate the use of sick leave, overtime, vacation and comp time in the calculation of final average salary.  I think that is the likely form, but the timing is crucial.  Imagine if the Legislature could organize itself so that between now and Memorial Day they could completely sweep through with legislation that would end up on the Governor's desk before June 1.  If the bill has an emergency clause, the moment the Governor signs it, it becomes law.  So, if this happens, what about people who've been preparing or considering retirement on June 1 with the expectation that the current rules apply?  By how much would someone's FAS change if they were suddenly, literally, unable to utilize all the various factors that make up the Final Average Salary?  For some people I know, this could make a difference of possibly $25-$35,000 per year in benefits.  Talk about a nightmare.  But more likely, the Legislature will not have enough time to draft a bill, get it through all of the committees, both chambers and the Governor's office before June 1 (this is a guess, hardly a certainty).  So that leaves option 2, which is basically the same strategy with two non-trivial exceptions.  First, the effective date would be essentially affect July 1 retirements.  But the sneaker wave, massacre approach would be to maintain the silence for the rest of May, and only introduce the Legislation on or quickly after June 1 for a July 1 implementation.  The scenario thickens if the Legislature agrees to keep the lid on this until after June 1 deliberately to prevent members from being able to jump on the retirement bandwagon for June 1.  If you wait until after June 1, you may have no opportunity to retire before the implementation of this measure.  If this is the case, I see this as callous, unethical, unconscionable, and, hopefully, illegal.  But in the meantime, what would you do?

So, there is a wicked landscape to my nightmares and many others as well.  As one of my friend's put it so ably:  "the silence is deafening."  For people on the cusp of retiring and who know that they will retire under FF or F+A it is time to take serious stock, especially if you are in the category that will benefit from the very things the legislature may be considering removing from retirement factors in calculating Final Average Salary.  The challenge is what to do if the silence continues past about May 20.  You could put in your papers for a June 1 retirement, knowing that you can withdraw the papers if nothing happens during June and sine die.  But, in order to retire, you have to totally separate from your employer.  What if your employer won't hire you back?  Similarly, what do you do during June if nothing happens before May 31?  The one thing to keep in mind clearly is that PERS has repeatedly asked the Legislature not to take actions that would trigger a huge wave of retirements.  If a measure has a date certain for implementation, this is a signal to members that if they want to preserve certain rights, they must retire before that date.  That sets up the avalanche scenario that PERS has been asking the legislature to not do.  So, this leaves the Legislature with only one alternative to avoid that consequence - a swift passage of a measure that does not give enough advanced warning to people to submit retirement applications.  Either of the situations I described above would do exactly that.

Consider yourself informed.  You're on your own to figure out what is best for you.  I don't have any really good or safe advice to give.  Welcome to my nightmares (and I'm already retired).

 

10 comments:

Ilovefilm2 said...

Great job of keeping us informed! Do you see any chance of the Legislature trying to redirect the 6% employee contribution from the IAP to the general PERS fund?

mrfearless47 said...

Do also keep in mind that July 1 is the date that more than half of all retirees pick for retirement, so a sneak attack aimed at a July 1 retirement date would yield much fruit for employers.

mrfearless47 said...

@ilovefilm2. I suppose this might be an option but taking away money that legally belongs to employees as part of their compensation has a certain illegal odor to it. If they do this prospectively they might get away with it for it diverts employee future contributions to offset any future costs to their retirement. For members paying their own 6% directly out of their salaries, this presents an even trickier issue. I see this fraught with legal minefields and don't place much stock in the legalized (?) theft of employee contributions.

mrf

Done with that! said...

Heres a quick question, Marc. With the new computations being forced on PERS for the "new" COLA, and the removal of the "bump" for out of state retirees, I don't have a lot of faith in PERS to compute the numbers in a timely fashion. Should they be late in the determination of how much the "bump" is, say, like August, would they have legal standing to retroactively ask for May, June and July's "bump"? Or could they just take a lump sum to cover the 4 months?

mrfearless47 said...

@Done. The changes to the tax subsidy will occupy either when you retire, or January 2014 if you are already retired. As I understand it, the loss of the subsidy is prospective, not retroactive. Thus, if you are already retired, receive the subsidy, and reside out of state, the implementation calls for you to declare your residency and requirement (or not) to pay Oregon income taxes by October 31. If you are no longer eligible, your benefit would be adjusted going forward from January 1, 2014 on.

bruce powers said...

Great post Marc. I am a real case study regarding worrying about anti spiking legislation.

I retired February 2013 under the full formula option. I had exactly 30 years With the State of Oregon. I loved my job, but could not take a chance of losing close to $9000 a year if the legislature took away sick leave and vacation from calculating benefits under full formula.

When I was hired back in 1983 the rules were spelled out regarding PERS retirement options and I saved my sick time month to month knowing that would help my final salary. When I was sick I took time off but did not abuse the system by taking time off when I wasn't sick.

I am so glad I pulled the trigger in February this year and am really enjoying my new way of life, worry free.

I recommend Oregon public employees that have their 25-30 pus years in and plan to go out with full formula or full formula plus annuity to seriously consider getting their retirement paperwork in ASAP.

Bruce P

Bob Smith said...

Thankyou so much for this informative blog. A question. I thought that the issue of "pension spiking", at least as it pertains to the use of unused sick leave, had already been addressed by the OSC in the OSPOA decision. As I recall, the court unanimously agreed that the State had a contractual obligation to continue to use sick leave that had already been accrued in the FAS calculation. There was some debate regarding whether the statute could be changed prospectively, affecting benefits that had not yet been accrued. Givn the previous ruling, it's hard to imagine either the DOJ or legislative counsel providing supportive guidance on this proposal. What am I missing here?

mrfearless47 said...

@Bob. I don't recall that issue being part of OSPOA, but I confess to having not read the decision awhile. Measure 8 - the foundation of OSPOA - was, as I recall, aimed at the 8% guarantee and the 6% "pickup". It would be nice if OSPOA really did address sick leave so that a legal framework already existed to prevent the Lege from stopping the use at any point.

Bob Smith said...

Regarding Measure 8: The text of the initiative was, "Amends Oregon Constitution. State government, some local governments now pay full cost of employee pensions. Law now permits pension increase from unused sick leave. Measure requires employees to pay six percent of salary toward pension. Bars government on, after January 1, 1995, from contracting to relieve employees of contribution duty or to increase salary, benefits as offset. Bars government contracts to guarantee interest rate on public pension funds. Prohibits raising pension benefits from unused sick leave for employees retiring on, after January 1, 1995."

mrfearless47 said...

I have now briefly reread the OSPOA decision and conclude that @Bob Smith is 100% correct. Even the dissent is OSPOA agrees that there is no way to retroactively remove this benefit, only prospectively.