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Wednesday, May 17, 2017

Waiting in the Weeds

While last week’s post was a bit dour, this week’s is less so.  Tuesday’s revenue forecast contained mostly good news, but not quite in the way I expected it.  Because of my own confusion about how the revenue forecast(s) [note the plural] work, I underestimated the power of forecasting to turn two different forecasts into winners for everyone.  The forecast for the 2017-19 budget is up by about $200 million over the previous forecast, dropping the shortfall from the last guesstimate of $1.6 billion, to $1.4 billion.  At the same time, the forecast for the 2015-17 biennium ending balance is up by $400 million, which will trigger the “kicker” if the forecast turns to reality when the final budgets are closed out by late August.  If the revenue drops significantly below the $400 million threshold, then the “kicker” won’t be triggered and the excess can be rolled up into the 2017-19 budget to offset the shortfall even further.  In addition, corporate tax revenues for 2015-17 are up, which means the possibility that the corporate “kicker” can be rolled into K-12 budgets on top of any other revenue they might get.

All this combined reduces the pressure on the Legislature to come up with big revenue enhancements, but the Rs in the Legislature have announced that the budget is good enough for them that NO revenue enhancements are needed, since the shortfall can be covered by program cuts.  For PERS members, this means more wheel-spinning.  The Rs are the ones pushing for PERS reform; the Ds are pushing for revenue enhancement, particularly the corporate income tax.  These two forces stand in direct opposition to one another; there is no way the Ds will agree to PERS cuts, or many other cuts, without the Rs agreeing to corporate tax reform.  So, while more draconian PERS cuts *might* be off the table, PERS cuts, in general, remain so long as there is a possibility that the Rs might agree to some revenue increasing measures.

Expect this saga to drag on for awhile, and lead to, possibly, a stalemate that results in the need for a special session after the revenue situation for 2015-17 is sorted out in the latter half of August.  This only pushes the problem for PERS members further into the future, staying the date of execution until later.  There may be some movement before sine die in late June or early July, but I’m growing discouraged that anything will be settled by then.

I wish I could offer something more informative, but, like you, I’m still waiting in the weeds.


Bev said...

One interesting scenario would be if some form of the bills gets through the house and senate and then Gov. Brown refuses to sign them. - JDog

mrfearless47 said...

Nobody has the votes for anything to get through the House or Senate right now. Thus, Gov Brown won't have to veto them. Nothing is solved either, which increases the likelihood that an enforced cooling off period will be needed before bringing the Legislature back into Special Session in late September or early October.

Jan Snyder said...

Well, at least this takes the pressure off folks who had planned to retire July 1st. That looks pretty safe at this point instead of June 1st.

mrfearless47 said...

All signs look pretty decent for a July 1 retirement, especially with a stalemate in the wind on funding of programs vs revenue. Nevertheless, I'd keep my eyes open before passing up June 1, particularly and unless July 1 is the only way you can meet eligibility requirements.

RM said...

How about the decrease in the guaranteed rate of return? That is outside of legislature - a decrease to 7.25 or lower seems highly likely, correct?

mrfearless47 said...

That's a PERS Board Decision, to be discussed at the May 26 PERB meeting, and decided at their July meeting. A decrease is highly likely. 7% or 7.25% seems inevitable. It would take effect on January 1, 2018.

Edgewood said...

Mr Fearless,
I was planning to work two more years, but this uncertainty has me reconsidering that plan. My biggest PERS account is one for an alternate payee, which I got in a divorce settlement. It looks like it will be a money match and I've heard those accounts are at risk of being automatically cut in value at the time the bill is signed- if signed. What's your take on this. I've also heard nothing will take effect until 1/1/18.

mrfearless47 said...

@Edgewood. At this point it is pretty hard to make a compelling case that Money Match accounts are at risk of much of anything except the PERS Board biennial review of the economic assumptions of the plan. This includes a reevaluation of the assumed interest rates (which is your biggest concern), and other factors like mortality that play into the fund's overall valuation for the next budget cycle. These are routine evaluations, not something precipitated by the Legislature.

As far as the Legislature is concerned, the biggest fears are contained in the SB 560-3, and SB 560-10 amendments, which seem to be going nowhere at this point. No bill would cut the VALUE of your account; that is preserved by law. But, what these two amendments would have done was to cut the rate at which a retirement benefit would be computed to a much lower expected earnings rate than the assumed rate. This would have been litigated and the odds were that the court *could* have found it to be a violation of the PERS Contract. Governor Brown has made clear that she doesn't want litigation involving a large budget entry to plague her administration for the next two years, waiting for the Court to issue its decision. That said, I think that there is nothing seriously under consideration that would affect the alternative benefit you are accruing in your divorce account.

This is not to say that there aren't other things that might affect benefits, but it is hard to see how they could really affect your alternative account since that is a Money Match account and isn't likely to change. Nothing even remotely proposed will have an impact until January 1, 2018, assuming the two amendments above are DOA. Thus, while I would keep a close eye on the Legislature, I don't think anything untoward will happen quickly, if anything happens at all. The only thing I would watch closely is the PERS Board, which begins its formal discussions on the new assumed rate at this Friday's meeting.