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Friday, January 02, 2015

On The Outside Looking In

Welcome to 2015, goodbye to 2014.  The new year promises to be interesting for PERS retirees.  Hopefully the interest will be positive, not negative.  Early next month the Legislature convenes for its biennial long session, the one where bad things happen to PERS members and retirees.   So far, nothing bad has been proposed, and very few leaves are rustling in the wilderness.  

One thing certain to happen in 2015, probably within the next three months, is the Oregon Supreme Court ruling in the consolidated Moro et al cases, which pits PERS retirees against public employers, the State, and PERS.  At issue is the formulation of the retiree cost-of-living-increase, which changed dramatically under SB 822 and SB 861 during the 2013 regular and special sessions.  Also at issue is the “income tax subsidy” formed from SB 646 (1991) and HB 3349 (1995).  All cases raise the question of whether the legislature can change the terms of a retirement contract after a member has retired.  This raises the larger question of when contract rights to a particular form of a retirement system vest - at system entry, at the time one is fully vested in the retirement system (5 years presently), or at the time of retirement.  Also at issue is whether the Oregon Supreme Court’s ruling in the Strunk et al case in 2005 remains in force, or whether the current court believes the ruling was incorrect.  For one court to overturn a previous court’s ruling is unusual, and is embodied in the expression stare decisis, which means that the previous decision should stand.  In any case, the time frame for the court’s ruling, following previous history, as well as more recent court history, is 4-6 months from the time of oral argument.  The oral arguments in these cases were held in early October, which suggests a ruling anytime between now and mid-March.

With the Legislature convening in early February, the timing of the Court’s decision in Moro could have an impact of the budgeting process for 2015-17.  I believe that the preliminary budgets, both the Governor’s budget and the Chairs’ budget, were built on the expectation that the Court would uphold the cuts to retiree benefits.  If not, Governor Kitzrobber, now on round 4 of his administration, has vowed that no further PERS cuts would come from his office (no one knows what might come from the “first lady’s office”).  The Dems have also generally promised that they will leave PERS alone this session regardless of the Court ruling.  With stronger majorities in both houses of the Legislature, this makes further PERS changes unlikely.  Note, I did not say impossible.  I expect ferocious lobbying from any number of sources, Oregonian, OSBA, OBA, COSA, AOI, whining and sniveling over school budgets if the Court overturns the Legislative changes in 2013.  Thus, depending on the nastiness of the lobbying, the ugliness of public outrage, and any number of other factors, I am going to assume that something will be done in the Legislature to some groups of PERS members - new hires, hires within the last 5 years, unvested members, all members, retirees, active members, inactive members.  One of the strategies the Legislature has learned over the 10 years intervening between 2003 and 2013 is the “divide and conquer”.  So carving up PERS members into more and more discrete groups will lead to more attempts to “pick off” one group at the expense of some other group.  They tried in 2013 to limit their exposure to retirees, until actives realized that anything affecting retirees will eventually affect them.  That is one of the reason that the PERS Coalition engaged so fiercely in this legal battle.

So, keep your browser pointed in this direction.  We remain on the outside looking in, but the more of us start looking, especially with bright flashlights, the more we will illuminate the world that operates as much as possible in the dark.

Here’s hoping for a good year for all PERS members and retirees.  A victory in the court, and no action from the Legislature would meet my definition for a good year.


tredway said...

Thank you for your comments and update. It is much appreciated from this far-away retiree and look forward, hopefully, to some good news in the upcoming months. Happy New Year and thank you for all of your hard work.

Unknown said...

Oregon legislature leaders propose to increase the education budget, 9% over current spending, and 5% over Kitzhaber's budget plan. Would these plans be partly preparation in case the Supreme Court decides in favor of retirees? http://www.katu.com/politics/Oregon-legislative-leaders-propose-boost-in-education-budget--288629181.html

As for the court case, I took a "written request" to the court building addressed to Hon. Judge Balmer, the chief judge. My request said that targeting the small groupof PERS retirees to ease the education budget was unfair taxation. Such a "tax" should be spread over a state-wide base of people. I also wrote that lumping all retirees into one group as in SB 861 was also unfair taxation, as fair tax rates vary per income group.

The clerk at the court building read my request and said she would make sure it got to the judge.

Unknown said...

I'm not sure if my first comment went through, due to I think I typed in my Google password wrong, and it "shut me out." So here it is again, sorry if it is a repeat, if repeat, just ignore this one.

I posted that the Oregon legislature leaders are proposing to raise the education budget by 5% more than Kitzhaber's plan. Might that be an indication that they are preparing plans in case the court rules in favor of retirees?


I took a "written request" to the court building addressed to Hon. Judge Balmer, the Ore. Supreme Ct. Chief Justice. My request said that the SB 822 and SB 861 were unfair taxation, because they target a small group of elderly retirees to balance the education budget, rather than a statewide tax. I also wrote that lumping the retirees into one group as in SB 861 was unfair taxation, because most taxes have graduated levels of taxation per income, as they put into SB 861.

mrfearless47 said...

As far as I know, the increase for education comes from increased revenue expected in 15-17. Of course, the cuts to retirees in 2013 may play a role in that increase because I assuming that both the Governors budget and the co-chairs budget assume the court will uphold the 2013 changes.

paul holbo said...

PERS investments in 2014 badly lagged the Dow (up 11.86%), the S&P (up 14.88%) and the NASD (up18.14%). PERS must also have earned something from fixed investments and dividends, There is no sign of that. As a result, for example, the group retiring 1992-2013 will get an increase of only 0.08 % after the 8% assumed interest rate and administrative costs are deducted.That leaves only a few cents a month for the retirees.Where did the Investment Council go astray, and how are they accountable?

mrfearless47 said...

You should clarify your comments. The numbers you are talking about are for those retirees who left money in the Variable account after retirement. That is only about 5% of all retirees. The rest of us get our 8% or 7.75% depending on cohort, and are satisfied.

But, to try to answer your questions. There are two major things that happened in 2014. First, the actual investments in the PERS Fund were no longer farmed out to investment bankers. Instead, the Legislature, convinced by the State Treasurer, decided to repatriate either all or most of the investment decisions on a granular scale to newly hired investment bankers WITHIN the treasury. The presumption was that they could do as well as the higher paid bankers and cost far less. (That has always been debatable, and 2014 may cause some rethinking of that position). The OIC sets overall investment policy, but they don't invest the money. The second major policy change was advocated by the Oregbon Investment Council to de-risk the PERF by getting out of hedge fund and alternative and difficult to price and sell equities. These have generated some fairly high returns, but carry enormous risk. After 2008, PERS has gone to a much more conservative investment strategy.

The reason why you don't see fixed investments and dividends is that the variable fund is 100% equities, no bonds or cash. What they earn is what they earn. The overall PERS fund is a mix of bonds and equities and a few remaining alternative investments Also, one other thing. The period for the earnings you talk about is from November 1 to October 31 - that is what the variable earning is based on. The rest of the fund runs from January 1 to December 31. Be sure you are talking about the right periods of time.

I hope

paul holbo said...

I was discussing the Variable. There are 11,000 PERS members in the Variable. Many equities earn dividends. Variable members are also in Fixed accounts, some of which also should earn interest, etc.

Since 2008 Variable returns have done better than they did in 2014 in years when the market rose, as it did in 2014.

I know that the Variable runs to Oct 31, which is the date for the figures I cited.

I appreciate your comments about the new internal bankers--a useful reminder. Thank you. In the private sector they would be fired after a year like this.

mrfearless47 said...

Don't also forget the impact of the de-risking strategy. The PERS Fund has been more heavily invested in alternative investments in the past. In 2014 the OIC decided to unload most of those investments, which could have produced the mismatch between overall market performance and the performances of the regular and variable PERS funds. While I've never been a fan of in house investing, I think 2014 May have been anomalous. If they don't have this all sorted out by the end of 2015, I would also agree with a decision to fire the in house management of the fund and return it to Wall Street.

mrfearless47 said...

Or simply go with passive investment and stick with index funds. Of course, they'd have to fire about 2/3 of the staff in Treasury if that happened. Quelle dommage.

mpguy said...

Any thoughts about the Kitzhaber mess vis-a-vis PERS?

mrfearless47 said...

mpguy: I don't have any thoughts about Kitzhaber vis-a-vis PERS. Kate Brown is a strong supporter of public employee unions, especially SEIU. I don't think she'll be a problem. That said, you might want to read this week's Willamette Week article on her, especially in regards to the 2003 Legislative session and bills related to PERS proposed by then-Gov Kulo. It isn't flattering, but reassuring from my perspective.

Unknown said...

Have you compared the recent Colorado Supreme Court ruling on COLA cuts ( holding for the state)with the changes being challenged and awaiting decision in Oregon pursuant to the 2013 changes limiting the COLA? Any similarities? It appears there is more precedent in Oregon for overturning the changes.

mrfearless47 said...

The Colorado case involves a reduction to the COLA from something in excess of 2% to 2%. Complicating the Colorado situation is that their system has not required payments from employers for more than 13 years. Basically the reason for reducing the COLA was to allow employers to continue to pay nothing into the system.

kneedferspeed said...

Does anyone have any idea what the hold up is on the Supreme court decision? Is this extended period of time being taken to come out with a decision good or bad for PERS members? All conjecture, I know.

mrfearless47 said...

The TYPICAL timing for a Supreme Court decision on a PERS case has been 4-6 months from the date of the oral arguments. Oral arguments in the current cases regarding the COLA and income tax remedy were heard before the Supreme Court in mid-October (IIRC). This would put a decision out to sometime between mid-February and mid-April. At this point, we are still within the longer end of the normal window with several weeks to go. I don't think we can draw any inferences yet from a non-delay.

Unknown said...

I worked for the Oregon Judicial Department for 10 year...1990-2000

The Supreme Court literally travels to the beat of it's own drummer.I wouldn't be surprised if they already have the decision in hand and are just timing the release. They might be waiting on one or two slow pokes to finish...or their staff to finish drafting, editing and reviewing their reasoning. They may be sensitive to the fiscal impact of overturning their decision but that doesn't drive the release of the decision...as a separate branch of government they answer only to themselves and the Chief Justice...if he is a smart guy he'll expedite the thing...But he may not care. He might slow it down. There are many agenda's at work here. The least of all is getting the retirees their back COLA...I bet the decision comes out with the next 45 days..giving the leg more than enough time to cook uo a response..