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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.

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