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Friday, February 05, 2016

Ride The Wild Wind

As they like to say on Marketplace, it was another wild week on Wall Street. Up days, down days, spinning half mad days. Generally not terribly helpful to those dependent on the vicissitudes of the stock market. On the other hand, we now know that 2016 official COLA will be between 1.1 and 1.2%, depending on the rounding used in the CPI-U statistic. For retirees prior to May 2013, this will translate into a 2% increase because of excess COLA banked from previous years. Newer retirees have less of a bank, and are subject to the blending provisions ordered by the Oregon Supreme Court. Those COLAs are likely to be less than 2%, but still greater than 1.5%. I was somewhat surprised that the CPI jumped as much as it did in the second half of 2015.

Keeping with the wild wind theme, those denizens of the Salem jungle convened for their even-numbered year 35 day boxing match. Tim Knopp of Bend introduced his "screw all the actives" PERS bill, but as of today the bill hasn't been scheduled for a hearing. According to those who follow the follies in Salem, this means the bill is effectively dead for this session. While I never seriously considered any anti-PERS bill likely in this short session, I do think it instructive for those still toiling in the system to keep a close watch on this because I expect it to be resurrected in the regular 2017 session. I suspect a number of other bills to be introduced then as well, none of them friendly to any member not retired from the system. There are a number of things that haven't been tried yet, all of them fair game for the still working. The Supreme Court has drawn a bright line around those things the Legislature cannot do - anything retroactive, anything to those already retired - but changes going forward are permissible. The only thing that gets dicey is trying to define the point at which something is prospective and when it is retroactive. That is particularly crucial if the Legislature tries to tinker with the annuity assumed rate, and calculations of FAS eligible for PERS benefit. Be particularly mindful of attempts to cap FAS for PERS purposes at any amount under the IRS limit. Current law caps it at the IRS threshold (about $225,000), but that is a recent development. The reason so many have unusually high benefits is because prior to (I believe) 2011, PERS did not need to adhere to the IRS cap. The 2011 legislature quietly changed that rule to avoid the bad publicity associated with benefits such as those of a certain retired UO football coach.

Anyway, this is all the current news relevant to PERS as of today. In the meantime, we continue to follow the late Freddy Mercury and "ride the wild wind".



11 comments:

capeman said...

What do you think of the possible legality of changing the annuity rate for future retirees in Money Match to a lower number than the assumed earnings rate for the trust fund? Knopp is proposing this. It would result in a much lower pension.

Also, how about screwing "inactive" PERS members? That was proposed but not taken up last time around.

Finally, how about "redirecting" the "employee contribution" of 6%?

Any guess how likely that the real legislature would try each of these in 2017, and how likely that each would succeed in court?

capeman said...

What do you think of the possible legality of changing the annuity rate for future retirees in Mondey Match to a lower number than the assumed earnings rate for the trust fund? Knopp is proposing this. It would result in a much lower pension.

Also, how about screwing "inactive" PERS members? That was proposed but not taken up last time around.

Finally, how about "redirecting" the "employee contribution" of 6%?

Any guess how likely that the real legislature would try each of these in 2017, and how likely that each would succeed in court?

mrfearless47 said...

As strange as this sounds, I can find nowhere in statute or in the Administrative rules where it mandates that the assumed rate for annualizing Money Match balances to form a pension has to be the same as that used for crediting Tier 1 member account balances. Moreover, the assumed rate for fund earnings (the basis of employer rate setting), the assumed rate for Tier 1 earnings, and the annuitization rate for all the different pension payout options is not specified in statute or administrative rules. Thus, the question of whether this is legal or not is entirely open.

Inactive members may have some protection because their benefit was frozen at the time they left public service. I think the court would rule that whatever benefits had accrued to them when they last worked, would probably still be valid at the time they retired. But, that does not necessarily include the first point above.

As for "redirecting" the "employee contribution", the answer to that probably lies with "where" they redirect it. Remember that the original "redirection" happened during 2003 effective 1/1/2004. The objective was to stop the growth of Tier 1 and Tier 2 account balances beyond earnings. In retrospect that was an extremely dumb move, for it removed a significant source of money from the PERS Fund, which could have been counted against the UAL and reduced it. So, as far as redirection goes, if they redirected the money (going forward) into the employee Tier 1 account, those accounts would begin to grow again, but the contributions would be on the Fund balance sheet and count in a way that reduces the UAL. On the other hand, it could start the growth of Money Match benefits again. If, however, the plan is simply to "steal" the money from employees and make them pay down the UAL without gaining any benefit from the funds (I suppose that solvency of the fund is a benefit), I'd be surprised if the Supreme Court would allow it.

At the moment I can't hazard any guess as to the likelihood that this combo proposal or something like it, or anything else, will get a hearing in 2017. I can be certain that these and other bills will be introduced, as PERS is yet again becoming an extremely hot button item in some camps. But, merely introducing a bill doesn't measure at all the likelihood of its being considered seriously by the Legislature. As I said in my post, elections matter, and at least one-third of the Legislative seats are up for election. Some incumbents will retire; others may decide not to run; others still may have strong opposition opponents. Once I have a better sense of the composition of the class of 2017 (after early November), I'll be in a better position to try to handicap what the Legislature might try, and what it might not try.

Juneau62 said...

Do you think that if changes are made in the 2017 session would the changes follow the usual practice of being implemented starting on January 1st, 2018 as past practice has
dictated? I'm eligible to retire at the end of June, 2017 so I'm concerned they will steal more of my promised retirement as I get to the finish line. Thanks.

mrfearless47 said...

@Juneau62. I really don't know because so much depends on WHAT changes they make. There is no USUAL practice with the Legislature. Some bills have emergency clauses so that they take effect upon passage; others provide more lead time. PERS itself often counsels against emergency clauses because they need time to phase in and test changes to their computer system. That usually requires 6 months advance notice, at least. That said, there is no way to predict what the 2017 Legislature will do until we have a better idea what it will look like after the November elections.

capeman said...

Your reply re the assumed rate is disturbing. I had always assumed that the annuity rate and the trust fund assumed rate were mandated by law to be the same. And wondered how people like Knopp could come up with such a harebrained idea as setting them on divergent paths. But if my assumption is wrong, perhaps what they propose is not so harebrained, legally.

My guess is the other two possibilities would clearly be found illegal. The "redirection" of the 6% would only make much sense if they could "steal" the money. But I don't think the court would allow that.

But if anyone made a serious move in 2017 on the annuity rate, and it had a serious chance of standing, there would be a lot of early retirements.

mrfearless47 said...

I invite you to scour all of Chapter 238, where the PERS statutes are laid out. If you can find any place where the assumed rate is defined to be the same for all three categories, I would be quite surprised. The decoupling of those rates has long been a worry of mine but it seemed that past-practice might rule the day. But not having it coupled in statute is quite disturbing. If you go back through the POD group (the online discussion group) and search this topic out, you'll see that I've been worried about that decoupling occurring for a very long time, at least since 2005. I don't know how the Supreme Court would see it, since PERS practice has always been to couple them without protest from anyone. But absent a statute requiring it, it is anyone's guess how the Court might view its continuation. In the best of circumstances, I could see them ruling that going forward, the rate could be decoupled, but for the vast majority of earnings and service, it will still have to be done the old way. That would be a nightmare for PERS and the actuaries, but that wouldn't be your problem.

I agree that if you were intending to flush the system of all remaining Tier 1 members, and Tier 2 members, changing the annuity rate and changing how the 6% were directed would probably guarantee a mass exodus from the system. Maybe that's the goal.

capeman said...

I'll take your word for it that there is nothing in the statutes about the rates being "coupled."

Do you think there is any chance they could decouple the rates for those already retired? I would think not.

I would think that the court would view having one rate for the annuity, and a higher rate for the assumed return on PERS investments, as depriving members of the right to their "property" in the PERS fund.

mrfearless47 said...

I think the combination of rulings in Strunk and the more recent Moro cases leaves no ambiguity that retiree benefits are off-limits for legislative take backs. The theory is simple. Benefits, once accrued, cannot be changed. The moment you retire, all of your service, your accrued benefits, and your pension is considered accrued, done, and untouchable. That is why the latest gambit, which died without a hearing, focused only on actives and, by inference, in actives, but not retirees. There is no blood in the retiree turnip. They won't goe there again because the court, in their UNANIMOUSLY decision nixed their attempt to change the COLA for retirees, arguing that the benefit became fixed when the signed on, and was bilaterally accepted at the time all the retirement figures were offered and accepted.

dear freind said...

What do you mean by "inactive members may have some protection because their benefit was frozen at the time they left public service." I am currently working but was thinking about going inactive from July 1 2016 to June 30 2017. I would assume my monthly benefit would continue to grow for the year I am inactive and not be "frozen". What are the risks to going inactive during this time pweriod.

thanks

mrfearless47 said...

By "frozen", I mean that your benefit array and choices were locked in at the time you left service. It has nothing to do with accruing earnings on balances not yet liquidated. Beyond this, I'm not prepared to say any more. There is more going on behind the scenes, but prudence dictates that I say no more. Hope you understand.