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Monday, February 06, 2017

The Show Must Go On (and on and on, Long Post)

Rumors of my demise, my death, my apathy have been greatly exaggerated since my last update in August 2016.  Fact is, nothing I said in August was ever superseded by later or more informative news, and so I’ve had little to say publicly about PERS (I’ve said lots on the private forum, Pers Oregon Discussion, see link on left).  Now that the political circus is back in town, the tents set up, and all the clowns are meeting with their clown faces on, we have something to discuss.

On Wednesday February 1, the 2017 Oregon Legislature convened for its long session in which thorny issues like the state budget, transportation, health, and, of course, PERS are on the agenda for their needs and for their contribution to the State’s apparent $1.8 billion budget shortfall.  This year, most of the action will take place in the Senate’s Workforce  Committee, chaired by freshman Senator Kathleen Taylor(D, Milwaukee), and vice-Chair, the estimably malign Senator Tim Knopp (R Bend), who is back for is second swing at the piñata, after contributing to the 2003 wreckage.  The Committee is also ably “assisted” by Senator Betsy Johnson (DINO, St Helens), who is not even a member of the committee.  In the opening salvo, the Committee heard a very long presentation from Steve Rodeman, Executive Director of PERS, on the financing of PERS, as well as the demography of its current membership.  At the end of his presentation, Rodeman presciently noted that “…The PERS situation is driven by math; as an agency director, there’s little margin in having an opinion about math”.  Indeed!!!

Prior to convening the Legislature, Senators Tim Knopp and Betsy Johnson convened a “Working Group on PERS”.  Ostensibly it was convened to flesh out ways in which the existing $21 billion unfunded actuarial liability (UAL) might legally be reduced.  The committee, composed of experts and interested volunteers, had two meetings - one in September and one in December.  Members of the group thought that their input would be sought when legal issues and all of the corollary issues related to reforming PERS (“race to the door”, loss of institutional memory, effects on agency recruiting, etc, as well as the actual budget impact)) would be hashed out.  In fact, nothing of the sort occurred, and after the December meeting, Tim Knopp and most of the Republican Senate caucus dropped two bills on the Legislature to be introduced at the beginning of the session.  Those bills, SB 559 and SB 560, cover a fair bit of ground and relate to some, though not all, of the ideas I discussed in my previous post in August.  Let’s go through them seriatim.

SB 559 covers the period of time used to compute the Final Average Salary (FAS) that is the benchmark for Full Formula (FF) retirement.  The bill has an emergency clause* and is set to begin on 1/1/18.   FAS is also the measure against which the Money Match (MM) retirements are compared.  This is the metric used by those hysterical newspaper headlines shrieking about those relatively few members who were able to retire at more than 100% of their final salary.  Currently, FAS is based on the highest three years of a member’s final ten years covered employment.  Usually, but not always, those are the last three years in a member’s career.  SB 559 proposes to change the time period from the  three years to the FIVE years.   It is estimated that this would reduce the UAL by about $700 million and reduce employer rates by about 65 basis points in 2017-19.  This is a tricky proposal.   Its purpose is to dilute the FAS used to calculate the benefit under Full Formula (Tiers 1 and 2, OPSRP).  Recall that the formula involves total years of service, a multiplier for each year of service (1.67% of FAS for Tier 1 and 2; 1.5% for OPSRP), and FAS.  Option 1 (the highest benefit possible without a beneficiary) is the starting point for these calculations.  Thus, a 30 year, Tier 1 member can earn 50% of FAS.  So anything that reduces the FAS will have the attendant effect of reducing the benefit since FAS is the only variable in the equation - years of service being measurable and constant for any individual and the multiplier being set in statute.  Of course, FAS is also influenced by other variables besides how many years the average is computed over.  Adding to FAS for Tier 1 and Tier 2 is accrued sick leave (for participating employers) and the value of accrued vacation time.  Another factor that can drive up FAS is the acquisition of overtime pay for those eligible.  SB 559 ONLY deals with the time period for the multiplier; SB 560 has other interrelated effects.  The bottom line is that spreading the salary over five years has a tendency to lower the FAS since the actuary uses a 3.5% salary multiplier to calculate expected salary.    An example will illustrate.   Suppose a member is earning $50,000 in calendar 2014 and can retire with 30 years at the end of 2018.  Salary in 2015 is $51,750; 2016, $53561; 2017, $55436; 2018, $57376.  Leaving aside other additions to the totals, the basic FAS under the current rules would be based on the sum of the last three years: ( $53561+$55436+$57376)/3 = $55458, with a benefit of $27729 (with rounding).  Under SB 559, note the change.  FAS = ($50,000 + $51750 + $ 53561 + $55436 + $57376)/5 = $53625/2 = $26812.   So by taking the average out over 5 years, the simple FAS is reduced by almost $2000 and the benefit reduced by nearly $1000.   Since the average state and school district employee salary is $56,028 (Rodeman’s presentation on 2/1/17), our example isn’t very far off the mark.  Assuming the salary growth assumptions are correct, this gives a pretty good idea of how much of an impact this could have on all employees retiring under FF and Formula + Annuity (although the effect would be halved for these).  I once thought the salary assumption was way off until I calculated my own average rate of salary growth.  While it didn’t increase linearly with time, the difference between my starting salary and my retirement FAS followed an average 3.5% growth trajectory per year.  However, my final three years’ salary were nearly identical, which illustrates how off this set of assumptions can be if you focus only on a specific group of years.  Many employees reach salary plateaus near the end of their careers and the growth trajectory ceases to follow the normal pattern.  I’d be surprised if the savings from this change are as much as the actuary projects.

SB 560 is much deeper, more harmful, and worth more detail.  The essence of SB 560 is to redirect employee contributions (the 6% paid currently into the IAP) into a another fund (a second IAP-like fund?) dedicated to the pension costs for the employee (the FF, MM, or F+A) beginning January 1, 2018.  It also forbids employers from paying the “pick up” on or after 1/1/18.  The second piece of SB 560 is to place a cap on salary used to compute FAS at $100,000 beginning 1/1/2018 (see SB 559 also on how this impacts).  This bill also has an emergency clause* that takes effect upon passage.  Both bills are referred directly to the Oregon Supreme Court for adjudication.  

On the face of SB 560, the redirect appears to be “wage theft”, clearly illegal.  On closer inspection, however, the structure of the second “individual” account is such that it still belongs to the employee. If the employee ceases service for a PERS-covered employer before reaching retirement age, the member can go inactive until retirement age and the second “individual” account (the redirected 6% plus earnings and/or losses) will be used to offset the pension costs (i.e. FF or F+A, or conceivably MM in the case of Tier 1 or Tier 2).  The current IAP will be frozen as of 12/31/17 and will only accrue earnings from here on out.  If a member chooses to withdraw completely from the PERS system before retiring, they would be entitled to the balance in their Tier 1 or Tier 2 account, the IAP, and the second individual account.  No employer contribution is made in this case.   In the case of OPSRP members, there is no “member account” in the same sense of there being a Tier 1 or Tier 2 account.  The OPSRP member would have two individual accounts - the IAP (which is supplemental to the pension), and the post 1/1/18 individual account that would be applied toward the cost of the pension portion of the Defined Benefit of OPSRP (a formula-based pension).

The wild card in this portion of SB 560 is the prohibition, beginning 1/1/18, of employers “picking up” the member contribution.  While this certainly could be a negotiating tactic, the “pick-up” itself is a subject of collective bargaining and cannot simply be turned off by legislative fiat.  I presume that the intent of the bill, although this is nowhere clearly stated, is that this becomes the mandatory condition as collective bargaining contracts expire after 1/1/18.  Regardless of its interpretation, the only way this ends up saving employers any money is if all the money contributed is diverted to offset pension costs in the future, and that the employers do not incur offsetting expenses in exchange for having to discontinue the pickup.  To be completely revenue neutral to the member, the 6% member contribution currently paid for by employers would have to be added to the base salary of the member and then deducted, pre-tax, from the employee’s check.  That would be the only way this would not be “wage theft” as far as I can tell.  Of course, my legal opinion is worth what you pay for it - bupkis, nada, nothing - as I am not a lawyer.

The $100,000 cap on FAS beginning on 1/1/18 will end up saving money only for those employees who are slightly over the $100,000 FAS near retirement.  Those who are significantly over the $100,000 FAS after 1/1/18 still have either the 3 highest or 5 highest (see SB 559) years to use in computing their FAS.  The bill only says that the FAS will be limited to $100,000 for years beginning on or after 1/1/18, so members in the higher salary brackets will simply end up using other years for their FAS calculations.  Once out beyond 5 years or so from 1/1/2018, this bill will start to have a serious impact.  It will have an immediate impact on recruiting high-salaried professional into management positions, into Professorial and Administrative ranks in Higher Education, and in recruiting for positions at OHSU’s Medical School and Dental School.  Worse still, however, is that $100,000 is an unrealistically low threshold with neither an inflation adjustment, nor a recognition that the current average salary in the PERS system is approximately $56,000 per year.  Since the actuary uses a 3.5% per year salary multiplier, it would take the average member who receives no other adjustment other than the multiplier per year, less than 18 years for the average salary to be over $100,000.  This comports with Steve Rodeman’s testimony on 2/6/16 to the Senate Workforce Committee that a potential “unintended consequence” of this legislation, for example, would be to push the average salary over $100,000 in 20-25 years.  

Needless to say, both of these bills contain plenty to piss active members off.  Public testimony opens on these bills on February 13, 2017, and I expect there to be considerable argument both for and against them. I urge readers who can attend to do so.  Testimony on real impacts of these bills would also help. [Added 2/7].

One other feature of these pieces of legislation.  While both refer any legal challenges directly to the Oregon Supreme Court, which makes the resolution doable in about two years rather than four, both bills prohibit the Supreme Court from awarding legal fees to the winner.  This is a direct fiscal challenge to the PERS Coalition and any individuals seeking to challenge separately.  In the past, attorney fees have been awarded to the winners (i.e. PERS Coalition through Bennett, Hartman, Morris and Kaplan LLC).  This served to offset legal expenses of the PERS Coalition acting on behalf of all of its participant members.  Under these new wrinkles in the bill’s initial language, win or lose, the expenses will be borne by each party to the case, with no chance of recovering them in the event of a win.  This is both diabolical, and probably (at least in my opinion) illegal.

As more information about these and other proposals emerge, I will update this post, or post a new one.

 

*Emergency Clause does not affect the implementation date of either bill.  That is firmly established at 1/1/2018.  However, by making the bill effective on passage, the legal process or sorting out whether the bill(s) violate contracts, the Oregon Constitution, or the US Constitution, as well as collective bargaining agreements (???), can start immediately after the bill is effective, not on its implementation date.  

24 comments:

Unknown said...

Great analysis of some complex proposals, as I've come to expect from you Marc. Having sat in on the two recent PERS hearings (2/1 & 2/6) it's clear to me that changes to PERS benefits, per the OSC Moro ruling, can only impact future benefits. What this means in reality is that changes proposed will mostly impact Tier 3 and (if it happens) Tier 4 folks. This is a group so small and so far away from retirement that any savings generated are minuscule compared to the debt the Legislature is trying to address and any attempt to reduce the employer rate hikes coming over the next several Biennium budgets. Bottom line, it just won't work. And it's grossly unfair.

peg

mrfearless47 said...

I wish I agreed with you about the unfair impact on OPSRP members. While they will bear the long-range brunt of these changes, that was written into the 2003 Legislation that established OPSRP (thanks to Tim, Greg, and Ted). OPSRP specifically have no contract protection at all. The reason these bills are so complex is that they bent over backwards to find some diabolical ways to still hammer those Tier 1 and Tier 2 members close to retirement but not ready to go in the next couple of years. These bills are evil to the core, and will take recruiting and retention a nightmare.

mrfearless47 said...

Just a further FYI. As you may recall, OPSRP was the work of an unholy quarter of miscreants from both partiesb- Tim Knopp and Dennis Richardson, both RS and both still very active in politics and leadership on Oregon, while Greg MacPherson and Ted Kulongoski, both Democrats, exited the political stage - Kulo by being term-limited out and age, and MacPherson being thoroughly punished for his role and unable to win any political races for any office he's run for since. The funding problems of today have their roots in some serious miscalculations made in constructing the IAP in 2003. Moreover, the vulnerability of OPSRP members is a direct result of the Legislature offering no contract safeguards (in fact, explicitly removing them from members enrolled under the OPSRP program. Sad.

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

It will be an interesting legislative year. When you have one party in control that has been pushing some really bad bills on Oregonians, that same party is being heavily criticized by every newspaper in the state, and that party is owned by the very Unions influencing the process. Oregon's budget increases by Billions but the legislature continues to overspend helped by their archaic budget process. It is anybody's guess but the end result will not be good.

mrfearless47 said...

It is easy to blame the Legislature because they have a big target on their back saying "blame me", but reality makes it a bit harder. The Legislature has to appropriate money for citizen-passed initiatives referenda - $380 million in the current biennium. They also have to deal with actions of previous legislatures, which may have been heavily lobbied by special interest groups on issues whose financial ramifications may not have been thoroughly vetted. I refer here to the 2013 "Grand Bargain" that cut PERS retirees COLAs, but also cut some business taxes in exchange for R support. These two alone probably represent more than a billion of 2017-19 budget shortfall.. It is estimated that the 2017-19 budget will e short about $1.8 billion, of which at least $1.4 billion can be laid at the feet of heavy lobbying in 2013 and citizen's initiatives in 2016. I rarely give the Legislature a pass on anything; howeverm, there are more Gillian's in this story than just the Legislature.

imretired said...

imdone said...

So unless things change in the wording of SB559 and SB560, it looks like I am safe to retire anytime before 12-1-2017, right? It looks like the effective date of 1-1-18 is some protection for those of us planning to retire before 12-1-17.

mrfearless47 said...

That's true for SB 550 and SB 560; however, I don't think we've seen the end of PERS-related bills in the Legislature. Sen Taylor has given until 2/28/17 for any other bills to be introduced, and that's just guidance from A committee chair. The official date for introducing new bills is actually not until the end of March, and after that If someone wants a new bill, they can take an existing bill, strip it of all content, and refill in with new content. This procedure is known as "gut and stuff.". The day you can rest easy will be some time around mid-May to late-May when the committee have stopped hearing on bills. If a bill has not been introduced, or hasnt gotten a hearing, or lacks the votes to be referred out to either the house or Senate for a final vote on their respective floors is the time when those bills are dead. In the meantime, bills likebSB 559 and SB 560 will have gone through at least a half-size or more restore and new text, deleting text, and rewriting or clarifying areas of inartful, vague, or ambiguous wording. So, as long as these two bills, plus any subsequent bills stick to an implementation schedule of 1/1/2018, then you will probably be safe waiting as late asbDecember 1, 2017 to retire. Just remember to count all the "ifs" in my answer.

JB said...

I'd say that potential retIrees need to keep their guard up until they gavel down sine die. The late spring requirement for a bill to have had a hearing doesn't apply to either the Rules Committees or to the Revenue Committees. A bill can simply be re-referred to either of those committees and still be considered viable even without a prior hearing. You also mentioned the "gut and stuff" procedure which can happen late in a session. The bottom line is, there are rules but there are also ways around those rules if legislative leadership wants something to happen. Best to be diligent all the way to the end of the session.

treehugger1 said...

The IAP is a real problem for the UAL. I will retire April 1, 2017, and I have decided to roll over my IAP into an IRA. How many retirees pull their IAP's upon retirement rather than take a 10, 15, 20, or lifetime disbursement? The funded IAP account has grown quite large, and I can see how it makes sense to get the actuarial support by getting the employee contributions back into PERS. However, this would not be retrospective and I fail to see any real gains for the present.

If one goes to the PERS site you can find a list of PERS cost by agency, county, city, school district, etc. While I realize this has been said before, there was significant breakdown in financial responsibility of some cities, counties and school districts to their PERS payments for the future. The bill keeps coming due. Why doesn't the press report these past failures to act? I imagine that some public entities are already behind in their contributions to Tier II and the OPSRP.

mrfearless47 said...

Yes, the IAP is a problem that several of us noted during our days in the trenches back in 2003. We predicted (publicly) that while it seemed like a good idea with time, the fact that it would not be part of the fund for valuation purposes, that failing to understand the demography of Tier 1 and the then relatively new Tier 2 was going to lead to a crisis about 10-20 years out as account balances grew larger. Alas, it started being a problem in 2013 and remains a problem in 2017. But it is now entrenched enough that any attempt to redirect the funds to an account that untimely directly and tangibly benefits the member will be viewed through then lens as "wage theft". Calling it another name and essentially laundering it through a shell account that facially appears to benefit the individual, is nothing but 1984-like double speak.

Bill Haugen said...
This comment has been removed by the author.
mrfearless47 said...

Not that I read, or that I have heard from the Committee. The 6% would go somewhere to an account separate from the IAP, possibly from he member account (but possibly not) that will NOT benefit you in any direct or indirect way at retirement. It will, instead, but used to defray costs incurred by the employers for the pension portion of your retirement (MM, FF, or F+A). In other words, it is going to be used to offset some of the employer cost of your retirement. The reason it is likely to fail is that if YOU are paying for it (one way or another) but you receive no benefit from it, that is basically wage theft, which is illegal and unconstitutional. They could remediate this condition y giving you a 6% salary increase, but that would negate any savings this bill would create. And let's face it, if the bill doesn't save money, there is no value in risking a losing Supreme Court case with nothing substantive at stake. I think the bill won't make it out of committee in its current form, but that is no reason to be complacent.

mpguy said...

I'm not completely familiar with how the IAP works. Are the IAP contributions currently in before-tax dollars? Because if they're not, it would take a salary increase of somewhere around 9.5% to leave the employee with 6% after Federal income taxes, state income taxes and FICA.

mrfearless47 said...

IAP dollars are currently pre-tax. You can't tax money directly deposited by the employers and that do not show on your gross earnings. If the employees have to pay it completely from gross salary, it would HAVE to be pre-tax or else not only would it cost the individual much more in net income, but it also increases the employer cost as well. You are absolutely correct that the correct compensatory increase for after tax contributions would have to be near 10%, which is the reason the pick-up proposed in the first place - to avoid all of the OPE associated with a raise. I don't think this has a chance realistically, especially since it does nothing to reduce the UAL, which is the real problem. It would only lower the employer contribution to normal cost, and only if the employer doesn't have to compensate for the wage theft.

IPS said...

Hi Marc,
You have said that SB559 and SB560 stick to implementation date of 1/1/2018... but that we have likely not seen the end of introduction of PERS bills (and some of these may use the emergency clause.. and thus take effect on Gov signature). And while I expect you will discuss here, I feel responsible to monitor myself, so my question is what is the best place (website) for us to monitor for new PERS bills introduced in committee or to legislature?

Thanks,

Paul

mrfearless47 said...

The Legislature has a web site called OLIS where everything going on is listed in near real time. That's where I get my information.

IPS said...

Based on the catchline/summary (see below), it seems 559 does not affect inactives since it only affects salary paid on or after January 1, 2018.

SB559 Catchline/Summary: Changes calculation of final average salary for purposes of Public Employees Retirement System to use five years of salary instead of three years, for salary paid on and after January 1, 2018.
Directs Public Employees Retirement Board to recalculate employer contribution rates to reflect savings attributable to Act. Provides for expedited review of Act by Supreme Court upon petition by adversely affected party. Declares emergency, effective on passage.

Thank

Paul

mrfearless47 said...

Yes, that is correct. SB is intended only for those still working. There are other bills that could catch inactive and snare them, including HB3103, which I haven't discussed on here yet. Needless to say, I wouldn't be overconfident, that inactives will escape the snare of the fouler this session..

IPS said...

Marc,
I don't see anything on OLIS about HB3103. Can you confirm this is the bill. Why don't I discover it on OLIS? What is it about.
Thanks,
Paul

mrfearless47 said...

HB 3103 hasn't been assigned to a committee. It decouples the annuity payout rate for all retirement methods from the assumed rate to the Pension Benefit Guarantee Corp's current (or future) rate, which is roughly 55% less than the current assumed rate. It would affect anyone who retires after its effective date, regardless of what method you retire under.

mrfearless47 said...

It is bill 3013, found here https://olis.leg.state.or.us/liz/2017R1/Measures/Overview/HB3013

IPS said...

Yes, I found HB3013.
"The assumed interest rate used for tables adopted under this section must be the lesser of the assumed interest rate for the system determined by the board or the current rate, at the time of adoption, for valuing annuity benefits as published from time to time by the federal Pension Benefit Guaranty Corporation".


mrfearless47 said...

Just an FYI on this post. SB 560 is effectively DOA as the geniuses who wrote it didn't bother to notice that there are collective bargaining agreements place, which I did note in this post, that have language requiring the employers to offset any loss of the pickup with a commensurate salary increase, thus saving the employers nothing and possibly costing them additional money because of payroll expenses associated with increases to salary. That's why the pickup began in the first place, to save the cost of those payroll expenses.

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