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Saturday, June 01, 2013

Who'll Stop the Rain?

I know, I'm on a CCR kick this week.  Can't help it.  The bad news just keeps coming.  Yesterday - a day when I was out of pocket nearly the whole day - PERS posted a FAQ on their web site following yesterday's meeting, which I was unable to attend.  The FAQ pertains to the Assumed Interest Rate change, which we've been assuming, based on past history, to take place on 1/1/14.  Apparently, the statutes give PERS the authority to change the assumed rate any time other than just the timing of the annual valuation and the boys and girls in Tigard have been busy trying to figure out how to avoid a landslide of business on 12/1/2013.  So, they are proposing a new Administrative Rule that gives them some cover to initiate calculations using the new assumed rate in the month following the adoption of the rate change, if any.  So, what that means is that instead of having a leisurely wait until November 30, 2013 to retire effective December 1, 2013, the Board and PERS appear to be trying to avoid all of that hassle by letting the assumed rate take effect as early as August 1, following adoption at the July 26, 2013.  This, in turn means, that if you wish to avoid the double whammy of revised actuarial factors and a lowered earnings crediting, you'll have to be out of the system no later than July 1 - a new drop date.

There is a small sliver of hope here.  From reports I got from the meeting, the Board and PERS may not have the appetite to go all the way to 7.5% in a single pass.  They may, instead, adopt a slightly higher assumption at 7.75% to ease the transition, primarily for employers, but secondarily benefiting members.  The earnings cut would then be relatively insignificant in the larger scheme of things, but there is increasing evidence that longer longevity in the PERS pool may force the actuary to increase mortality factors at the same time they lower the assumed rate.  This would result in a more notable decrease in benefits than would be suggested by the lower assumed rate all by itself.  Since the 7.75% rate only showed up yesterday, the Board instructed the actuary to come back with projections of how this would affect new retirement benefits and employer contribution rates for 2015-17.  The Board is taking the unusual step of adding a second public hearing on the rule change (see PERS website for the Assumed Rate FAQ and new rule), because they know it will be controversial (and certainly a surprise to me!).  The second hearing will be in the Salem office, and I will post the dates as soon as I know them.

Obviously there is enormous political pressure coming from everywhere for the Board and PERS to do something quickly.  I think this rule change, which appears to be allowed by statute, was something the wide boys at PERS thought up over lunch one day when they were thinking about how to avoid the retirement stampede.  Obviously the best way to do it is to move up the effective date from its expected date to 4 days after you approve a brand new rule.  This is, of course, when there are no guidelines or clear policies in place since the last change nearly three decades ago.

A couple of other things.  Two employers complained publicly to the Board about what we've all known for many, many years.  They complained about the Legislative action to push back part of the rate increases into 2015-17.  They argued, what I've been complaining about publicly and privately in every forum I have been allowed to speak, that the reason employer rates are rising is because the employers have never been required to pay their full share.  Most have just been content to push the ball down the road until another day, until that day comes and then they go screaming to places like the OSBA, OBA, and other titans of industry who act like they care (but are in it for purely selfish reasons) that the sky is falling.  Congratulations to the Cities of Roseburg and Corvallis for telling it like it is.  Unfortunately, as the snarky and fairly nasty new Chair of the PERB said, "we can only do what the Legislature instructs us to do".  By the way, if you are looking for a really ugly description of the qualifications of the new PERS Board chair, you might wander over to a site I enjoy a great deal, www.uomatters.com , written by a UO colleague Bill Harbaugh.  Harbaugh minces words even less than I do.  The remark about the PERS Board Chair is in a comment to a Harbaugh post, not from Harbaugh himself and it is pretty savage and at least nominally accurate.

The other takeaway is that IF (and right now, that's a big if) the rate change goes to 7.75% for now, it is destined to go down further, but the Board is considering doing the reductions in stages and letting the market forces inform changes beyond the immediate term.

If you weren't paying attention to the rest of this, the important message is that to avoid any impact by rate changes, the new retirement date would have to be July 1, 2013.  Don't say you weren't informed.

26 comments:

lledzepp10 said...

Marc, thanks for all you do. I just retired effective today in light of the smarmy legislative moves, after 22 years as an HR manager for a large state agency. More than a year ago I steered people to your blog because there is no reliable resource from the employee's perspective. We even started a lunch brownbag and called it the "Persturbed" meeting because so much fractured info was getting passed around at the water cooler. I've told people for decades there are limits to ethics in all organizations. PERS' underhandedness to lower the rate and make it effective four days later is all that and more out in the open.

mrfearless47 said...

Thanks a lot. Your story sounds vaguely familiar and I appreciate your sharing my blog with your colleagues. More readers make more informed employees. I'm waiting for the media to finally tell the story of how unethical the employers have been in all of this, promising employees anything except cold, hard cash, and then starting to renege on obligations when the bill came due. This has been going on for more than 25 years, at least, but only became public starting in 1999 when all of the deferred and pushed back payments started coming due. This led to the City of Eugene case, triggered the 2003 reforms, and the current round of reforms. If employer obligations were payable when due, none of this would be going on.

If I'm right, by the way, I might have had coffee a time or two with one of your close relatives.

lledzepp10 said...

Indeed, it did start 20+ years ago as politicians were galvanizing opinion against public employees with what I call public employee "hate speech". I remember Tiernan and his radio ads brought to you by: "Lets Shine A Little Light On Them and See if They Scamper Committee". I once met with the head of EAP and asked a curious question about mental illness in public employment v. private sector. She said it was 10% higher in public employment. Not crazy, just depression. No surprise there given management by politician.

lledzepp10 said...
This comment has been removed by the author.
mrfearless47 said...

I guess I'd amend my own statement to argue that Tiernan, then a legislator, conspiring with a non politician, a half-baked and unqualified, in my opinion, actuary by the name of Alan Stonewall and the ever-popular and disreputable Bill Sizemore convinced the voters to go after public employees, then all Tier 1, via Ballot Measure 8. That was the defining moment for my interest in PERS and I've been following closely ever since. That's when I realized that even if Ballot Measure 8 was defeated in Court, which it was, that the public and the politicians and the employers were never again going to uphold their full set of promises and that we could expect a decade or more of bad mouthing public employees, unions, and everything else we'd been promised from the start. Ah, such foresight.

M&S said...

Gee, I chose to not retire today because the odds were in my favor of Legis not damaging me in next 6 weeks. Wow, forgot the Board has the power to be uba-diabolical too. Silly naive me. As you noted, the timing of Repub press conference PM of May 30 is no accident --- the timing for the July 1 door nearly closed for June 1 retirements. But funny-timing on how shortly after 5 pm Friday yesterday, press announces Guv calling leaders together a summit. Guv announcement came out 5:something at a time when I could still hear the sound of June 1 door clanging like a jail door inside the closed PERS building. Now, today, just after the June 1door key has been thrown away on all PERS June 1 possibilities, NOW I learn Board gonna ramrod changes and my retire date of 12/1/2013 will disappear faster than a Van Damme new movie. Well wash my mouth out cuz I now am thinking of another DAM word plus more profane salty words I would like to hurl at all Legis, Guv, and the Board. thanks for heads up, IGJEUP. PS-#1 I heard that new/revised administrative rules on state agencies can be slow for their effectiveness, due to required public hearings on the rules, and allowing time for submissio of written comments and then the enactment with a future effective date, unless rule declares emergency. PS-#2 Have you heard any Repub or Dem rumblings about the likelihood of an emergency clause if (or when) the next PERS Bill drops in the next 6 weeks?

mrfearless47 said...

M&S. The rule schedule is clear. PERS is very strict about following protocol and implementing a rule shortly after the required hearing period is almost a formality. No flies grow on PERS staff or the PERS Board. They can't adopt without a public vote, but the public hearing period is set in statute. They COULD delay implementation to deal with all the comments, but I haven't seen that happen before. Once the machinery is in motion, it takes a miracle to stop it. As for your PS 2, the word is "silence" and wait until after the pow wow with the Gov. Nothing on that front.

Bob Frazier said...

"...that the reason employer rates are rising is because the employers have never been required to pay their full share. "

Mark, I'd sure appreciate learning more about this aspect since it really does seem the central issue politically and because, honestly, I ignorantly believed that people on both sides were always paying what they owed to the fund. If there is any righteousness the light needs to be shined right here - we didn't ask for IOU's, and don't deserve them.

Nice blog as always - thanks.

Gcat said...

Marc,
Is there someone who can help a employee calculate the effect of these changes on an individual basis
Thanks
Greg

mrfearless47 said...

@Gcat. Not really yet. The changes approved this far only affect you when you retire and can be figured relatively easily. The other stuff isn't at a point where any exact information is available, just averages. The online PERS calculator will get you to the benefit you'd receive for a July 1, retirement. Beyond that, any estimate you get is likely to be too high by some finite amount. Sorry, but you are really hanging out there right now.

mrfearless47 said...

@Bob Frazier: I've written about this briefly in a number of places and the history is pretty involved. I might write a new post someday this monthly, but I've given Hannah Hoffman at the Statesman Journal some of the information in a blog post on her site and suggested that she follow the trail to where it leads.

PJ said...

Hi Marc and all. I am a 59 year old Tier 1 “inactive” who (thanks to this site ) just woke up to the reality the Oregon legislature could screw me and destroy my retirement. I could retire July 1 and hopefully receive around $1800 a month or gamble; wait until I’m 62 and hope I receive the promised $2,200 a month. Correct me if I’m wrong but I think I could now receive even less than $1800 a month if the legislature enacts an “emergency” clause and makes changes retroactively; lowers the interest rate, or takes away money match. I called PERS last week and asked them if they had consultants who could advise me; they said “no.” I am working full time in Washington and don’t really want to take my retirement now because it may bump me up to a higher tax bracket. My original plan was to take the higher amount later when I needed it. I don’t fully understand how the Oregon Legislature operates and I know the courts will have their say in the end. So, who do I trust? Do the courts have a history of respecting the PERS contracts? If so, why should I believe the courts would change course now and side with an unethical legislature? Do I “hold ‘em” or “fold ‘em?” Thanks for your opinions.

mrfearless47 said...

Nothing going on right now is likely to have a huge impact on your retirement benefit. However, it is what the legislature is up to that should concern you. Both the Dems and the Rs have proposed some punitive changes to inactives. The proposal would be to drop the annuitization rate for Money Match retirements of inactives from 8% to 4%. That would reduce your benefit by roughly 37% according to what I've read. Will they do it? Is it legal? Will there be lawsuits if they do? The answers are: I don't know, some say yes, others No, absolutely. So nothing is known right now. The odds seem to favor some cut to benefits of inactives, but there is a lot of concern now that this not seem punitive. Fat chance it won't be but it largely depends on political factors outside of anyone's control. Sorry, I just report what I know and try to give my take. Right now the decision is in your hands.

Gcat said...

Marc,
I really appreciate your blog. If you retire under formula plus annuity is there a general percentage reduction range you could estimate that would result from the combined assumed rate and actuarial change?
Gcat

mrfearless47 said...

@gcat. The wild card in the equation isn't the small percentage change in the assumed rate, but what might happen to the mortality factors that accompany the rate change. There are strong indications that the PERS retiree pool is having some significantly longer life expectancies than would be expected by general information. Thus, when the PERS retirre actual life expectancies are blended with whatever other mortality tables are used by actuaries, it is apt to lower mortality probabilities at a given age. And the assumed rate could go to 7.5 or 7.75, but there is only information the 7.5 rate so far. The consensus is that the rate would lead to about a 3 month shift in benefits equivalence. Wait until October and get the same benefit you would have gotten in July. That's the best I can do right now without seeing the tables.

M&S said...

If the new rules are in fact adopted by the Board despite a ton of negative comments, the impact could/will start on August 1. If willing, pleas give your best guestimate on the chance of the new reductions being imposed by the Board. E.g., 80%? 90%? 99.9%? Will a member know before July 1 what the new mortality tables will be? I am trying to get a precise amount of the percentage of reduction from the rate decrease and the new life expectancy factor under MM. My guess is that, before July 1st, the online calculator will NOT be able by then to give me the newly reduced benefit for Aug 1, so I can make an intellegent decision to stay or go before the July 1st trigger. Thanks for any opinion.

Unknown said...

You can google a querry for an immediate annuity estimate for web based calculators to help assess the impact of a change from 8% to 4% on the money match annuity calculation. One website http://www.miniwebtool.com/immediate-annuity-calculator/ came up with a change from $3338/month to $2360 for an investment of $414,060 (total lump sum) for 22 years for an 8% annuity interest rate reduction to 4%. Marc, is this a reasonable estimate for the change in money match annuity rate being considered? It's probably better to spend an hour with a financial advisor than doing our own annuity estimates to make a decision. It might be better yet, if the PERS website pension estimator provided an input for the annuity interest rate. Thx Snuzer

mrfearless47 said...

It is a rough approximation, but (a) the PERS plan, depending of survivorship options. Has a joint mortality component built in, and the mortality factors make a difference in the annuitization rate (b) depending on distribution choice, with PERS, it continues to pay long past your actuarial pull-date - a perpetuity, like social security, so you never have to worry about running out of money. I don't think a financial adviser can help until the underlying mortality factors are released, and regardless of annuitization rate, the mortality (life expectancy rates are going to be changing because of unexpected longevity in the PERS pool.

Befuddled said...

Is anyone even remotely cognizant that a number of inactives (perhaps 1500) still work for the state in higher education? If the total of inactives is 30,000, this is only 5%. Further, has anyone factored into the equation the brain drain this will cause, and the additional costs to the state of replacing faculty paid below market rates with new employees?

mrfearless47 said...

@befuddled. Are you talking about the ORP members who moved from Tier 1 in 1996? If so, I think that is a special case that will probably (but not assuredly) be specifically excluded from any final legislation, should it occur. I can't promise this, but I know that the parties to the legislative discussions are aware of that particular problem.

Douglas Cook said...

I thought actuaries were supposed to concern themselves with real data concerning survival rates and not be "forced" to make determinations based on the money and politics of the pension fund itself.

mrfearless47 said...

What's not real about a system that has three times as many living members over 100 years than expected by any dynamic model of life histories? I'm not defending actuaries, but I think your comment misses an important point. There are other reasons as well, all quite based on factual experience data.

rkgernhart said...

Do the proposed changes in the assumed rate and/or the mortality rates have any affect if a person retires under full formula?

mrfearless47 said...

The mortality rate changes COULD (not sure) affect survivorship options, but not the base benefit. This isn't entirely clear right now. Suggest you call PERS for that answer.

Befuddled said...

Marc,

Yes, I was talking about the ORP folks that "left" in 1996. Thanks for the info. It ain't over till it's over, of course. I just don't see how you can treat people working side by side under the same system differently.

mrfearless47 said...

OK. See subsequent post for some additional clarification of the implementation dates. Things are not as awful as they first seemed, unless you can't retire until next year or thereafter.