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Thursday, February 09, 2017

Walking the DINOsaur

Leave it to the group Was/Was_Not to write my blog title for me today.    Today, my post is about Senator Betsy Johnson’s(DINO, Scappoose) fixation and preoccupation with “inactive” PERS members.  In several hearings before the Senate Workforce Committee, where Johnson has insinuated herself as a non-voting, but vocal, member she has asked both Steve Rodeman and attorneys Greg Hartman and Bill Gary about why “inactives” can’t be paid, what sounds like, zero interest on their “inactive” balances.  Bill Gary wrote an op-ed on something along these lines in the Eugene Register Guard about two years ago.  In Gary’s telling, he was flabbergasted that a 5-year UO Professor who moved on to another position, and then at retirement some 25 or so years later, ended up with a higher benefit than a public school teacher working for 30 years.  In effect, that’s our DINO question, but put more bluntly.  Why do we have to keep paying earnings on these people’s money when they aren’t doing anything to earn it?  Folks, the answer to this question revolves around the concepts of “vesting” and “accrued benefits”.  To understand what these mean, let us compare the circumstances of an “inactive” member with that of a member who didn’t work long enough to be vested.  Currently, and for as long as I can remember, one has to work for 5 years at more than 600 hours per year to be considered vested.  (I don’t know if years are prorated based on time worked during the year; for simplicity, we are going to assume 5 full time years).  An employee who terminates employment (or is terminated) before vesting has NO (zero, none nada, zilch) options about what to do with employee contributions and earnings to PERS.  They cannot keep the money in PERS and they are entitled to no benefits.  The money can be cashed out, subject to a significant tax hit, or rolled over into another qualified plan, including a rollover IRA.  The employee has neither the expectation of, or entitlement to, any employER contributions.  So, at the magic 5 year vesting point, an employee becomes a vested member in the Public Employees Retirement System (PERS).  That vesting entitles them to leave their employee account open, continue to draw earnings on it (because PERS is using the money, and there is a price for that), and to receive benefits that include the employer contribution matched in whatever way the vested Tier requires.  This is a really important concept to grasp.  In order to secure the “accrued benefit”, the member must have a PERS account at the time of retirement.  At retirement age or after, that member is entitled to receive a retirement benefit based on all the contributions in and earnings from his/her account, PLUS the employer contribution that produces the highest legal benefit for that employee.  PERS does not allow an inactive member to “cash out both employee and employer contribution", EXCEPT AT RETIREMENT.  Were this allowed, we wouldn’t be having this discussion.  But Senator Johnson MUST understand that “vesting”, “inactive” and “accrued benefits” are tied together in a neat little Gordian knot that can’t be untied without making some major changes to the plan.  And, the only change that could be made would be to give “inactives” the opportunity to cash out of the system at the FULL VALUE of their benefit at the time of withdrawal (that means the equivalent of a total lump sum settlement that can be rolled into another retirement vehicle and annuitized using whatever rate the individual can secure).  This would have to be optional, not mandatory.  This, folks, is not rocket science but the “accrued benefit” is fully defined in terms of the existing PERS Contract, “vesting” is defined, and the conditions required of an “inactive member” have all been defined in statute.  The only option is to change the statute to allow the full cash out for inactive members at a time of their choosing, or to allow them to continue to accrue earnings on their investment until they decide to retire.  

In 2003, the Legislature tried to incentivize “inactives” to withdraw from the system.  What was offered was a pittance - 150% of their individual account balance.  The offer was open for, at most, 18 months and very few people took advantage of it.  The reason should be obvious.  Why would you willingly sacrifice 50% of your employer match when you could leave the funds in the system and get 100% of the match earning, at that time, 8%?  This tactic was a failure.  Nothing short of a total lump sum settlement would ever satisfy a vested, “inactive”, Tier 1 member, nor is it likely to satisfy a vested, “inactive” Tier 2 member.  Moreover, even if Senator Johnson could suddenly figure out a legal way to implement a rate cut (to zero) for inactives, the savings to the system would be minuscule.  Why?  Because virtually all remaining Tier 1 inactives are probably at or very near retirement age, and they could simply pull the plug before implementation.

So, here’s my message, if it isn’t obvious.  Senator Johnson:  “there is no way to get there from here.”  Walk away from this idea before you look really silly.  Losing in court would be an expensive proposition for the State, and the savings absolutely trivial in the process.  Take this DINOsaur and walk it straight to bed.


Tom Jones said...

Can changes to the assumed rate of return occur at any time, or is there an established interval at which it is reviewed and could be changed?

mrfearless47 said...

There is a statutory schedule. It can be changed during odd numbered years to take effect in even-numbered years. Thus changes will be considered this year that would, if changed, take effect on 1/1/2018.

mrfearless47 said...

To follow up, the statute ties together the assumed rate setting with the system valuation and the setting of employer rates. Those things go together and occur every two years. As it happens, the schedule works that the assumed rate and system valuation occur during the odd numbered years for implementation (and/or setting) in the even-numbered years. The statute could be changed, but there is neither the logic nor a good reason to do so.