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Wednesday, May 24, 2017

So Long, So Wrong

As this legislative session has dragged on for what feels like an eternity, we seem no closer to any answers than we had when the session started in February.  The words I’m hearing from Salem suggest that the Ds and the Rs are at an impasse over revenue measures,  with the Ds proposing a gross receipts tax that House Dems want to raise about $2.2 billion, while the Senate Dems want to raise about $800 million.  While the Ds are in general agreement over the need for the gross receipts tax, the the Ds can’t even agree amongst themselves about the amount of revenue that should be raised from this tax.  Obviously, the higher the ask, the harder it is to get agreement from any of the stakeholders.  Similarly, the PERS bills (SB 559 and SB 560) seem to be dead with the Rs pushing for them and the Ds resisting.  This gridlock would suggest that a Special Session is almost inevitable, but …… wait for it.

In the midst of this power vacuum in Salem seems to have stepped some of the unions, so I’ve been told by multiple sources.  The term “cost sharing” is being bandied as a partial panacea by various people without bothering to define what that means.  Here’s what it means.  The unions are floating a trial balloon offering to have active workers (those still working in Tier 1, Tier 2, and OPSRP) provide some of the funds to offset increasing employer costs.  Mind you, this is not to cover the UAL, but employer “normal cost”.  I’ve heard several versions, and parts of SB 560 spell out what the Rs would consider a reasonable deal - to completely capture the employee contribution currently going into the IAP and use it to offset employer costs.  That won’t fly because it probably isn’t legal, regardless of how it would be implemented.  So, in step the unions offering a compromise deal.  As the deal is presently structured, employees will have 4% (of the 6% go into the IAP); however, the remaining 2% would be redirected not to the employers (directly), but to a “risk mitigation” account, which would be reserved to keep employer “normal costs” at a relatively constant rate.  The PERS Board would control the fund and would direct resources from the fund if employer normal costs rise due to changing rate structures.  If employer rates don’t rise before an individual retires, then one presumes that the 2% captured from the employee would be returned to the employee’s IAP (plus interest, one would hope).  While nothing about this is fixed, the floating idea is that it would be phased in over several years, so employees don’t take the hit to their IAP all at once.  

I have many problems with this proposal, not least of which is that the unions (who represent employees) are behind it.  Another critical reason I’m opposed to this is because it penalizes all Tiers equally, even though the retirement benefit structure in the three tiers is different.  Everyone loses the same percentage (which seems fair on the surface), but those closer to retirement not only preserve their existing benefits, but suffer from the cut for a shorter period of time.  On the other end, those furthest away from retirement already have the worst of the three retirement plans, yet have the longest period over which to suffer the cut, but also, the longer period over which their redirected money can be captured because of rising employer costs.  Worse still, this does nothing to force the employers to come to grips with the fact that their own profligacy is a major contributor to systemic problems.  This approach provides employers with a cushion against their own fiscal mismanagement, and gives the PERS Board a new way to mitigate responsibility for the employers to pay the full cost of the system, something the employers have refused to do since 1997.  What is floating also does not address the question of the “pick up” itself (i.e. who pays the employee contribution).  Finally, this approach has another “feature” going for it.  If the unions propose it, you can bet they will not sue the Legislature if they agree to it.  For union members and all active members of PERS, this becomes a lose-lose proposition.  

I realize that everyone is in a pickle this budget year.  It is clear that the state needs more revenue, especially as long as we have the “kicker” still in place.  To get more revenue, the Ds need a couple of Rs to join in.  To “buy” those Rs, the Ds are going to have to give on something, and the Rs want PERS reform.  The union’s proposal may be the least bad of a lot of bad options, but I think that the Unions coming to the Legislature’s rescue won’t gain much respect for labor, and may antagonize members.

It is easy for me to criticize all efforts at PERS reform; none of them affect me.  But I try to look at this in a more long term perspective.  Does this proposal do anything to address the long-term problem with PERS?  Nope.  The UAL will still be there no matter what happens.  Does the proposal offer generational equity?  Nope.  Those with the best benefit structure pay relatively little compared with those who are just starting their careers or are in the first decade of their careers.  Will this help attract the best possible workforce?  Nope.  Every time you take something away from people just coming into the system, it makes it harder to recruit and retain talented and enthusiastic workers.  Finally, we have no clue how much this will actually save, and whether it would be enough to stave off further raids on active worker pension promises in the future.  It seems to me that the primary purpose of this proposal is to insulate employers from the inevitable lowering of the actuarially assumed interest rate by the PERS Board effective January 1, 2018, which will have the effect of raising the employer’s normal cost for the employee’s retirement.  So, in the end, active members will get the shaft from two ends - reducing the amount of money going into their IAP, plus lowering the payout structure for annuitized benefits at retirement.  And, we still don’t know how this affects or doesn’t affect the “pick up” itself.  Logic dictates that it shouldn’t affect the “pick up”, but nothing logical has emerged during this session yet.

As this saga continues well into the beginning of summer, it is beginning to look like a case of “so long, so wrong”.  

27 comments:

Unknown said...

That something this harmful to public service workers is actually being proposed by employee unions has me ready to renounce my life long union membership! Joe Hill is turning in his grave.

ingridquirke said...

If I am counting on money match am
I safe to retire December 1? I am needing to use my insurance and having double knee replacements June 30th

mrfearless47 said...

At this point, you are probably safe from any dignificant harm.

Concerned Tier2 said...

mrfearless47: I want to sincerely thank you for your posts and all your hard work keeping us all informed. I can't tell you how many of my PERS coworkers I have referred to your blog to educate themselves about PERS. Although you may not be getting many comments, please know that many, many people are paying close attention to your blog.

Margie Mitchell said...

Hear! Hear! Thank you for keeping us informed!

Thankful! said...

I second that!

Thank you for starting this blog and keeping it up. It has been an invaluable source of information during the past few months.

My glass is raised to you!

Unknown said...

Thank you for all of the informative information. Very much appreciated.

mrfearless47 said...

Thanks all for your kind comments. I know people are reading the blog as the numbers just keep growing. Sometime this year the blog will cross 2 MILLION page views, a staggering figure when you understand the blog's history. Keep referring people. And thanks again.

ingridquirke said...

I was told today that any change they make can happen at any time without our knowledge. They don't want us to know. I went to a PERS education session this week and questions were gloating. He said the same thing each time, someone with ask a question pertaining to the current concerns-We don't know, all it ends up being is speculation!

mrfearless47 said...

They are 100% correct. The outcome is very unlikely this year because of the politics. Nobody has the votes to achieve policy goals.

Jensie said...

I just happened to stumble across your blog and am going to follow religiously! I am Tier 1, with 30 years and 8 months in. And, like you - I've. Earned. Every. Penny. I'm starting to pay attention because suddenly (not so suddenly) it's real and I can walk out the door with my Golden Ticket. So thanks for your past musings and the musings to come. Looking forward to them.

mikewolf911 said...

Concerning SB559, (changing the F.A.S. calculation from 3 years to 5 years) has anyone considered the financial effect this would have with respect to how long people would remain in PERS? I can see people opting to remain in their positions longer becuase a) it would be beneficial to do so per the FAS calculation, (especially if you have just received a promotion), and b) the extra couple of years would also benefit you on the "length of employment" part of the calculation. So there is a doublee incentive to work just a little bit longer. Would this, then, off-set any purpose of this bill? Has anyone looked into that? Thanks

ingridquirke said...

However, does it become last 5 years as supposed to the highest 3? Unfortunately, I made more years ago, then I do now. So for myself, the highest three is in my best interest!

I just visited today with a big PERS retire and they heard that it could happen (as I mentioned before), at anytime and with out very little knowledge to us and before January 1. How on earth can that happen? do do we retire now, or ride it out? My plan was to go December 1.

mrfearless47 said...

Regarding SB 559 (and the corollary parts of the amended SB 560). At this point there is little likelihood of either bill passing in any form. They still float because they haven't been declared dead, but like the parrot in the Monty Python skit, these bills are pushing up daisies.

Right now, you should be focusing on the newly dropped (today) SH 1068, which brings to life the topic of this particular blog post in a particularly perverse way.

I'd save my powder for another day on SB 559 and SB 560. You are all safe until at least November 30. Nothing significant is likely to happen before January 1, 2018, meaning that you can get out, if you want, by December 1 before more significant things start to happen unrelated to the Legislature. (Read the blog post carefully).

ingridquirke said...

How can I find SH 1068? Do you have a link?

mrfearless47 said...

Go to the Legislative information system and search for joint house senate bills. Link for olis is http://0lis.state.or.us. .

Thankful! said...

Just a couple of comments on what's going on with the Union and Legislature especially with this new Senate Bill:

To me it's obvious that both the Union and Legislature cannot be trusted to make decisions based on an individual's career benefits. Similar to healthcare these days, one needs to be keeping a close eye on decisions and deals that are occurring behind closed doors.

Having said that, everyone's situation is different so the variables that may cause one person to retire versus another can vary widely.

I would suggest keeping a close tab on all of the sources that you can so that whether or not one stays in a position, they can at least make an informed decision.

I also wouldn't be at all surprised that a 'Special Session' is announced close to the end of June. This is pure speculation, but has precedent.

Anyway, that's my take on what's happening now.

Debbie said...

Thank you for keeping this blog updated. This is by far the best place to come for updated information regarding PERS proposed changes.

So I keep hearing about changes to the assumed earnings rate, which should be determined by the end of July. We also have the update of the actuarial tables in Jan to keep in mind. Everywhere that I have seen these two things mentioned it will say that you only need to be concerned about them if you are retiring under Money Match.

Is that really a true statement if you retire under the Full Formula method but choose any benefit annuity option besides Option 1? It seems to me that if you choose an option that has survivor benefits or a payout to a beneficiary at death that these two things would have to be used in the calculation. Do you know?

mrfearless47 said...

Debbie: the assumed rate change announced in July is unrelated to anything the Legislature is doing. It is the PERS Board and they will change the assumed rate and mortality tables to TAKE EFFECT for all retirements taking place on or after 1/1/2018. This is part of the biennial process that PERS uses with the Actuary to perform the even-numbered years system valuations, which are, in turn, used to establish employer rates. Changes to the assumed rate affect account earnings in Tier 1, as well as monthly benefits for ALL Money Match retirees, and Full Formula retirees who choose any option OTHER THAN THE NO Beneficiary Option (Option 1).

To clarify something you may have confused, the actuarial tables are built from two primary assumptions (and several less obvious assumptions): 1) the assumed rate; and 2) mortality tables reflecting both PERS' actual experience as well as the IRS tables used for calculating other forms of annualized payments. So, I do know that the assumed rate WILL change (either to 7.25 or possible 7.0% on January 1, 2018_ and I know that mortality assumptions will be updated based on the most current data available.

mrs

Debbie said...

Thank you! Just the information I was looking for. I appreciate the actuarial explanation, I had no idea how that was derived.

It would be interesting to ask PERS for a benefit estimate for a date after Jan 1 now, and then again after the rates are adjusted to get a clearer picture on how it would effect the benefit.

mrfearless47 said...

You can ask for one now, but it might take awhile since they are deeply backed up and are prioritizing them by the earliest date of expected retirement. Even though the new assumed rate will be known in late July, the actuary doesn't develop the new actuarial tables until later in the year. The rule of thumb that gets applied is that - other things being approximately equal - a 25 basis point reduction in the assumed rate (0.25%) requires a 3 month setback to get to the point where you would have been at the higher rate. Thus, a 50 basis point reduction (0.5%) would take approximately 6 months to recover from. So, with those guides, you can assume that your benefit will be lower if you choose to retire between the time the rate change occurs and less than 3 months later, or less than 6 months if they cut the rate more substantially. Once you cross over that point, your benefit will be larger but it will change in smaller increments.

Debbie said...

Yes, I am currently waiting for estimates of March 1 (sent Feb 15) and Dec 1 (sent May 12). Wonder if I will get the Dec one first.

Thanks again for all this great information, it is super helpful in the decision making process!

Thankful! said...

Debbie, the big glut for PERS estimates is July 1st so after that passes they will be prioritizing by the next biggest group.

It's hard to say when you will get the December 1st estimate, but I would guess it won't be until sometime in September.

ingridquirke said...

Sorry if I am not understanding, so if they change the 7.75 to 7.50 or 7.00, this could go into effect July 1? or will that begin January 1?

mrfearless47 said...

The current rate svalready 7.5%. The change will be to 7.25% or to 7.0% EFFECTIVE with retirements taking lace ON OR AFER JANUARY 1, 2018. Don’t know how much clearer I can be?

Stinek said...

Thank you for the service you are providing with this blog. For everyone's convenience, I am posting the link to SH 1068. It doesn't give much information but does show the official wording. Unexpectedly contemplating a 12/01/2017 retirement after 33 years 9 months of service on Marquam Hill.
My understanding, though, is that none of this has been decided for certain and won't be until perhaps this fall. Is it likely the Governor will veto any bills that might get passed? Thanks again!

https://www.oregonlegislature.gov/AutoPubs/Sen1st201706050930AM.pdf

Stinek said...

Thank you for the service you are providing with this blog. For everyone's convenience, I am posting the link to SH 1068. It doesn't give much information but does show the official wording. Unexpectedly contemplating a 12/01/2017 retirement after 33 years 9 months of service on Marquam Hill.
My understanding, though, is that none of this has been decided for certain and won't be until perhaps this fall. Is it likely the Governor will veto any bills that might get passed? Thanks again!

https://www.oregonlegislature.gov/AutoPubs/Sen1st201706050930AM.pdf