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Friday, May 01, 2015

Hold On

Lots and lots of questions, both relevant and irrelevant, about how the Supreme Court’s decision will be implemented by PERS and when.  Let me say that the ink is barely dry on the decision and so it is a bit premature to begin to speculate with too much specificity how the ruling will be implemented, and when.  We do know that the 2015 COLA will be 2%, as stated yesterday by PERS head Steve Rodeman.  The court used a bit of confusing terminology when it described the effects of its ruling as a “blended COLA”.  Blending has turned out to be a confusing word for people.  I think what the Court should have said is that the COLA will be segmented into as many as three pieces depending on the proportion of work performed prior to May 6, 2013 (May 1 for practical purposes), work performed between May 6 (May 1) and October 8, 2013, and work performed after October 8, 2013.  Each of those dates is associated with a different COLA.  Prior to May 6, the old COLA was in effect (that’s the 2% maximum COLA, accrual of a COLA bank, and the use of the Portland CPI as the inflation measure; the second time period reduced the COLA max to 1.5% but left other features in place, while the third segment reduced the COLA to a flat 1.25% without reference to a CPI or a COLA bank.  So, if nothing changes (see below) your revised COLA will be a combination of up to three segments of your working career with the COLA weighted in each segment by the length of time spent in that segment.  For most people, even those retiring today, the dominant piece of the COLA will still be determined by the pre-May 6, 2013 rules (the OLD rules).  The changes the legislature made that are prospective to your working life will dilute the final COLA by some unknown amount from the maximum of 2%.  How this will be implemented remains to be seen.  For people who worked their entire careers prior to May 6, 2013, the old rules govern your COLA, period.  That is probably 85-90% of all current retirees.

There is, of course, a possibility that the Legislature can get involved now or in the 2016 short session and clean up the mess the 2013 Legislature created.  There are lots of ways to do this, but the simplest (though not necessarily the most cost-conscious), would be to say “screw it”, completely repeal all portions of SB 822 and SB 861 relating to the COLA, and just re-do the COLA provision to be effective, say, July 1, 2015 or August 1, 2016 since 2015 is a settled issue from PERS’ standpoint.  Imagine they just decide to start over and revised the COLA to the October 2013 rates and eliminate any reference to the May revision.  This would become effective for only future retirees.  The COLA would still be segmented for those retiring after the effective date of a revised law, but computationally it would make PERS’ life immensely easier by only having to deal with two segments, but would allow them to make a clean adjustment for all current retirees.  Of course, doing this would be slightly more expensive than the present situation, but the extra cost would probably be offset in administrative and clerical savings from having the re-do.

I’m not predicting the above will happen; it is mere speculation that has been tossed around amongst some of us who think about these sorts of things.  I expect the Legislature to do nothing, because that would require them to use less energy than they normally use for coming up with these preposterous plans.  I don’t know if there is enough brain glucose to power the legislature through deep-think right now.

In the meantime, come to our PERS discussion group (see top link on this page), join up, and be welcomed into the discussion.  There are a few of us gas-bags who enjoy speculating and playing armchair (or jailhouse) lawyers.

In the meantime, I wish PERS godspeed as they deal with this hot, steaming turd left in their laps by a group of greedy legislators, even greedier school board officials, and local government officials.  They were warned this wouldn’t fly, and by god the court confirmed that turkeys can’t fly (with apologies to WKRP in Cincinnati).

Peace for another day.

16 comments:

Unknown said...

It seems that time is of the essence in this situation...I want my money...it was illegally taken and now I want it...

mrfearless47 said...

Seems reasonable enough to me. Unfortunately, the legal system moves slowly. I don't see anything that PERS has said that would delay this, but the Legislature is still in session, unfortunately.

mpguy said...

We're not really being made whole on the retroactive COLA adjustments unless we get interest on the back amounts due us. I understand that this will complicate things for PERS, but it's only fair. Interest should be at the statutory rate, which I believe is currently 9%. This is the opposite of not paying taxes when due, and people who do that are required to pay interest at that rate.

Badgergirl said...

is PERS going to try to recover the extra payments made to offset taxes for retirees who moved out of Oregon?

mrfearless47 said...

Badger girl: nothing in the law permits them to collect tax subsidies to out of state residents paid in the past. The law was written to only for future earnings and they have already stopped including those in all cases of which I am aware.

mrfearless47 said...

mpguy: I'm pretty certain there is intent to pay interest on money owed to us in arrears. Steve Rodeman and David Crosley have both made a point that expediting to readjustments is PERS' top priority in order to keep interest costs as low as possible. That, to me, signifies an intent to pay interest on past due amounts.

mrfearless47 said...

And moreover, they have the money already set aside in the contingency reserve for this purpose. They estimate it will cost between $130-$150 million to make us all whole, and the contingency reserve balance is now at $600 million. I'll bet that once they start repaying us, it will go by quickly, and that to diminish the effects on employers in 2017-19, PERS will use the balance of the contingency reserve to reduce the pain for employers, just like they did in 2007.

Mike... said...

Keep in mind as you vote in the future, the Democrats never see a pot of money that they don't want to get their grubby hands on.

mrfearless47 said...

Mike: let's not make this victory into political bashing. There is more than enough blame to go around. It happens that the Ds in the legislature own this mess, but only because the arsenal wanted even more draconian cuts than the Ds were willing to go for. If you think that putting a different political party in power would have improved the situation, you haven't been paying attention to the words coming out of their mouths.

Bnnymom said...

My question is about the 2% increase for the coming year. If it's figured on the current amount, it will still be short. Will they be required to re-figure the past amounts at the 2% it should have been BEFORE they figure the new amount?

mrfearless47 said...

Bnnymom: they will have to make two passes at 2015. The first is to immediately adjust the COLA to 2% for 2015 on the CURRENT benefit because the law requires that. But, they will have to go back and adjust the COLA and benefit amounts for 2013, 2014, and 2015 so that all of the proper compounding of benefits and restitution is corrected before the 2016 COLA is due and payable. The calculations will be much simpler for those who retired on or before May 1,2013 because all their service, and therefore their entire COLA will be restored under the old rules. Things get more complicated for PERS and retirees with pre-retirement after May 1. 2013 and October 1, 2013. I have no reason to believe thatPERS will do anything contrary to the court ruling. But to expect this to happen before the July 1, 2015 effective date for this year's COLA is to seriously overestimate PERS' ability to come up with a plan and implement it within the next 7 weeks. The restitution portion and the adjustment of the base benefit might occur before July 1, 2016 because PERS will want to minimize the amount of interest they have to pay on restitution balances, but PERS likes to make changes that require the fewest numbers of "touches" to the raw data as possibly, to preserve data integrity. So remember that I've only had about 20 years of following PERS closely, and 13 years as a retiree lobbying to preserve our earned benefits. I know, and have known many senior officials at PERS and have discussed the process of fixing problems like this many times. That said, understanding how they've done it in the past does not give me certainty about how they will do it for this particular circumstance, but I assure you that they WILL make everyone whole in the way the OSC ordered, and they will do it as quickly as is feasible, but with a clear duty to make sure the solution does not produce I wanted side effects that cost time and money to fix.

mpguy said...

I don't understand why repaying the illegally withheld COLAs should take $130+ million from the reserve fund.

Approximately $3.25 billion is paid out in PERS benefits annually. If the ENTIRE 2% COLA had been eliminated, the repayment would be somewhere close to that figure. But that isn't what happened. In 2013-14, the COLA was reduced to 1.5%, if I'm remembering correctly. That's a cut of around 25% of the allocation, or somewhere around $16-$17 million. For 2014-15, let's make a generous estimate and say that the saving was 1/2, or about $32-35 million.

At worst, that's only about $50+ million. I realize that interest needs to be paid, but that doesn't account for the difference. Are my numbers THAT far off, or is there some wild overestimation going on here on the part of the PERS system folks?

mrfearless47 said...

mpguy: I'm not certain where that figure comes from either, except that it will be for 3 years, not 2 because the biennial budget was built on top the expectation that 2015's COLA would be 1.25% or less depending on how much more than $60,000 is earned in benefits annually. I also believe that part of the cost includes adjustments for the fact that employers will not be contributing actual money corresponding to the revised actuarial cost, so to keep the UAL from exploding, there may have to be made some transfers from the Contingency Reserve to the Benefits in Force Reserve. I understand. Using some simple arithmetic, assume that from the reported numbers in Jan 2013, no deaths and no additional retirements occur. Just based on the revised scheme, starting at 3.25 bn annually, 2013 at 1.5%, 2014 at 1.25%, 2015 at 1.25% results in an adjusted outgo of 3.38 bn. Now, going back and redoing the same thing at 2% for 2013, 2014, 2015 (a simplistic approach), the adjusted output should be 3.45 bn. This is a difference of 0.07 bn, which is about $70 million. To that you have to figure how much more will change when all of those making more than $60,000 are factored in because their restorations will be higher than 0.75%, possibly as high as 1.00% or more. I'd estimate that these people may be responsible for an additional $30 million. 9% interest on $100,000,000 is about $9 million and so we are up to $109 million without thinking too hard. There will be programming costs, extra staff to process all the payments, overtime, possibly legal fees thrown into the mix, and the $130 million doesn't seem that far off to me. Maybe I'm just used to the way PERS does these ballpark estimates.

BubbaTime said...

I left education for the private sector in 2001 after 13 years in the PERS system - I have not touched the account since that point. How does the ruling impact my PERS account?

mrfearless47 said...

Bubba. It is when you worked, not when you retire, so all of your work time is covered by the old rules and you will be eligible under the OLD (2% max, COLA bank, Portland CPI).

Kenneth Johnson said...

Greetings from the Lone Star State:

Section 1 - 2015 COLA Factors

Option 1.1 - July 1, 2015 adjusted & compounded COLA formula where annual annuity is equal to or less than $40K = {(1.005 X 1.0075 X 1.02 or approximately 1.032788) X FY15 OPERS Annuity}
Background: FY13 COLA was flat .015 (FY13 variance of .005) FY14 COLA was .0125 on first $40K(variance of .0075) FY14 COLA was .01 on next $20K (variance of .01 - not considered in the above computation) FY14 COLA was .0025 on annuity over $60K (variance .0175 - not considered in the above computation) FY15 COLA (old rate) .02

Option 1.2 - July 1, 2015 adjusted & compounded COLA formula = {(1.02 X 1.02 X 1.02 or approximately 1.061208) X FY13 OPERS Annuity}

Section 2 Complications:

1) tax offset adjustment to FY13 OPERS annuity;
2) graduated FY14 COLA; and
3) calculating the underpaid compounded COLA = variance in COLA paid versus COLA due during the period Aug 2013 through Jul 2015.

Best regards,

Ken