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Wednesday, May 10, 2017

Way Down In The Hole

PERS members are coming down to the Wire (bad pun for some) to make final retirement decisions.  Nothing of substance has moved in Joint Ways and Means, but broad hints have been dropped about what might await those members near and far from retirement.  The two main areas are for members to pay more for their retirement benefits (redirecting the 6%) and getting less for their money (spreading out the FAS calculation over 5 years instead of 3, disallowing sick leave accrued after 1/1/18, using a first-in-first out method for charging sick leave after 1/1/18).  Not much chatter about all the other “features” of SB 559 and 560 (the $100,000 FAS cap seems to ebb and flow, but its implementation seems problematic, and it doesn’t really save as much money as people thought it might because of its delayed implementation to preserve accrued benefits).  It also seems fairly likely, at this point in time, that June 1 is still a safe date to retire and avoid any possible impact from the legislative changes.  Of course, if none of the changes take effect until January 1, 2018, one could wait to retire as late as the last working of November for a December 1 retirement.  The calculus of choosing that date over June 1 or possibly July 1 is complicated however.  If you are still working for a PERS employer, waiting until a Dec 1, 2017 may make sense because you will continue to get your full salary until November 30, you’ll be 5 or 6 months older in the actuarial tables (this isn’t as significant for younger workers as it is for older workers), and your IAP balance will continue to grow by 6% of your gross salary each additional month you work.  If you are inactive, the calculus is different, especially for Tier 1 members.  While your Tier 1 account balance continues to grow by 7.5% annually (0.625% monthly), and your actuarial factors will be somewhat larger on December 1 as opposed to June 1 or July 1, the former date deprives you of a 2% COLA on your initial benefit that you would get if you retired on either of the latter dates.  In addition, retiring June 1 or July 1 (as well as May 1 or April 1) makes you eligible for the July 1, 2017 2% (assuming you have been inactive since BEFORE October 1, 2013), you also will get 0.14% deposited in your COLA bank to be used in the future if the COLA is less than 2% (remember that the maximum COLA is 2%; it is not a guaranteed rate).  So, when you combine these details for an inactive member, adding in the angst and worry over what the Legislature might still do, you are probably at a near wash between the earlier two dates and the later date.  You have to run your own numbers to see how this works for you (this is why financial calculators and spreadsheets were invented).  [edit 5/12:  I’ve heard an unconfirmed rumor that the PERS bills in Joint Ways and Means are DOA because the Gov doesn’t want litigation uncertainty hanging over budgets for the next two years.  I suspect this is a bit of hyperbole; the real reason may be something more pedestrian like the the two parties can’t come to any agreement over Revenue measures, so PERS cuts are off the table.  What this means is that IF this is a proper rumor with some substantiation [something I’ve not been able to confirm so far], a Special Session is likely to be called once the final revenue information is available in the latter part of summer, long after the Legislature adjourns.  I continue to try to verify the legitimacy of the rumor with multiple sources.]

Next Tuesday, May 16, 2017, at 8:30 a.m., the State Economist will release the final revenue forecast that the Legislature will base its 2017-19 budget allocations on.  This event signals the final push to wrap up budgets, bills that affect the budget, and to enter the glide path towards a desired June 23, 2017 adjournment of the Legislature.  The revenue forecast holds out the prospect of good news, very good news, or good news so good that it turns into bad news.  Everyone knows the economy is up, which thus perplexes people trying to figure out how the state’s revenue is inadequate for the budget needs of agencies in a growing economy.  At last news, the potential budget shortfall ranges between $1.6 and $1.8 billion, depending on who you ask, and what day of the week it is.  The source of the shortfall is unrelated to the economy.  It is result of Legislative stupidity back in 2013 (the COLA legislation that was overturned by the Supreme Court) when the Legislature allocated about ten times more money from the longterm COLA savings, than the short-term savings justified ($60 million in savings vs $885 million allocated).  The court decision didn’t come until late in the 2015-17 Legislature, so the impact of the Court’s ruling was delayed until the 2017-19 session and PERS employer rates rose significantly (because, of course, the employers spent their allocations like drunken sailors on shore leave) for the 2017-19 biennium.  This adds about $400 million or more to the shortfall.  The second factor has to do with the way Medicaid reimbursements changed under the ACA and were reduced under the early days of the current administration.  This is probably about $650 million of the shortfall.  The remainder of the shortfall is largely attributable to inflation that has occurred since the last biennium (about 3.5%) just to maintain current service levels (which should happen minimally in a growing economy).  This accounts for about $500 million or so.  So that explains most of the projected shortfall.  So, in an economy near full employment, with wages and salaries up slightly and tax revenues increasing, what could possibly go wrong?

What, indeed, could go wrong with a growing economy?  Well, for those with short memories, or those who haven’t lived here all that long, a Legislature long ago (1981) passed a monumentally stupid budgeting law.  It is enshrined in the Oregon Constitution as the “kicker” (as in “kick back”).  At a time when property taxes were rising rapidly, Oregon decided it wanted to head off a property tax measure (like Prop 13 in California, passed in 1979-80).  So they created this rule that says, in effect, if the revenue at the end of a biennium exceeds the State Economist’s most recent revenue forecast by more than 2% (e.g. 2.0001%) the ENTIRE surplus revenue is refunded to the taxpayers after the books are closed on the previous biennium (ours will end June 30, 2017).  How this refund occurs has varied over the years, but for at least the past 16 years or so, it has been treated as a tax credit for the following year’s taxes and is based on some fixed percentage of taxes paid in the previous tax year (I would get a huge kicker, but I don’t want it).  So, how does this affect PERS and all the other things mentioned above.  The 2% threshold for 2015-2017 is $336 million.  At the end of the first quarter (Jan-March), the excess in collected revenue over forecast was $206 million.  That leaves, April, May, and June to fill out the remainder of the biennium, and there is an extremely high likelihood that the May forecast (next Tuesday remember) will be forecasting final 2015-17 revenue surplus (and therefore the starting budget for 2017-19) at greater than $336 million.  Of course, the final number won’t be known until all the books are closed on 2015-17 after June 30, 2017 (usually it is late August before all the final accounting and auditing is finished and the budget can be officially closed; this is also the time when the Treasury decides whether the conditions for the “kicker” have been met).  So, if the revenue forecast comes in at $330 million above predictions, the Legislature gets to budget the extra $330 million, which will reduce the amount of shortfall that has to be backfilled, and agencies, and possibly near-term PERS retirees-to-be can breathe a slight sigh of relief because the PERS legislation will be closed out by the time the Legislature adjourns between June 23 and the mandatory July 8, 2017.  But, suppose the revenue forecast comes in at, say, $450 million above final projections.  That ought to be great news but, unfortunately, that’s where the “kicker” comes into play, and the ENTIRE $450 million would have to be refunded (“kicked back”) to income tax payers when they file their 2017 taxes in 2018.  That would mean that the growth of revenue would NOT be available to Legislators to appropriate towards the existing shortfalls.  That could produce an even bigger budget hole, and possibly lead to budget standoffs between the parties who want revenue reform and transportation improvement (the Ds) and the parties that want PERS reform and transportation improvement.  Everything hinges on what kind of deal the parties can make over the contested ground (Ds - revision of corporate taxes; Rs PERS reform).  With less money available, the stress will be greater, and this leads to the possible scenario where neither party wants to budge, and the parties agree to a compromise, temporary budget to start the new biennium, but come back either in a Special Session in the Fall after the final revenue figures are in, or they wait until the even-year session to settle budget details.  Regardless of how they do it, if this happens, it extends the period of uncertainty for PERS members on the cusp of retirement, and with it the anxiety that drives PERS members insane during a legislative year like this.

And, if this isn’t enough to drive people even deeper down in the hole, there is the fact that the PERS Board (very independent of the Legislature) is currently conducting its biennial review of the economic assumptions that underpin the formal system valuation that will occur next year.  This process (required in statute) means that the assumed rate gets revisited, mortality rates get revisited, and after the PERS Board hears from the actuaries and other experts, it will decide to lower the system assumed rate, update mortality tables, and both of those figure into the Actuarial Equivalency Factors (AEF) that convert account balances into streams of payments for retirees and beneficiaries.  The experts have already weighed in on the assumed rate (with forecasts ranging from the high 5% range to slightly below the current 7.5% rate), while the IRS is in the process of updating its recommended mortality tables that are partly incorporated into PERS’ final mortality figures and AEF.  If you look at all the expert opinions, you have to be willing to consider that PERS could drop its assumed rate to 7%, and extend out mortality tables beyond what might have been done in the past.  The bottom line is that if you are Money Match retiree, or a Full Formula retiree with a beneficiary, your monthly benefit will be lower beginning January 1, 2018 even if the Legislature does nothing.  (Do note, that this only applies to people who retire on or after 1/1/18; nothing changes if you are retired before then).

So, there you have the most current update of what is going on now.  There are an incredible number of variables in play, and no clear schedule (except PERS’ own timetable) for when major decisions will be made.  If you thought “you wanted it darker” was dark, now you are way down in a hole, where only math, personal considerations, and external life events can possibly help you with your decision.  Your only question happens to be the title of another song “should I stay or should I go?”.  




oregontrailster said...

Mr Fearless, Your political assessment is spot on. My sources largely agree. The Kicker possibility adds another dimension to this budget dilemma. Waiting for the outcome next week is not fun. At least we will have some clarity after the forecast.


mrfearless47 said...

Thanks SB. It all seems so obvious to me, but many don't think strategically about how all the moving parts fit (or don't fit) together and how they might impact a decision to retire. I try very hard to give people the information that will be useful in their decision-making process. This year offers one of the most complex decision matrices I've ever encountered and I'm always reluctant to make any recommendations because everyones' situations are different. That's one of the reason I boiled everything down at the end to the simple question of "should I stay or should I go?". In the end, it is all about one's comfort level with the circumstances that people are being forced to contemplate, often very much against their will or their instincts. Life is a risk, but this is a risk that few should have to participate in. Retirement should be a joyous and liberating experience. Getting there is hard, but I don't want anyone second guessing their decision after the fact. That's a fool's errand.

54andout said...

Hi Mr. Fearless, thank you for all the great information. I am tier 1 31.4 years in PERS but only 54. Because of personal circumstances I need to retire now. I have given my employer a June 30 retirement date but now I'm wondering if I should make it May 31 to be on the safe side? I am going out with money match.

mrfearless47 said...

@54andout. The difference in benefit between May 31 (June 1st retirement) and June 30 (July 1) is probably trivial for a Money Match retiree. I can't tell you what to do, and I don't think that waiting until July 1 is *that* risky, but if it were me, I'd probably go June 1 to play it absolutely safe.

54andout said...

Thank you, that is the way I am leaning.


I am in a "Wait & React" mode. Looking at Buying back my military time and start my PERS retirement a lot sooner than I wanted to just to save 15 % plus annually.. I know of about a dozen folks pulling that action to protect themselves... Digging into the PERS pot sooner and hopefully living over the life expectancy is a figure more difficult to calculate.

Unknown said...

I'm looking forward to today's state revenue estimate, and any new thinking it might spark in your ever questing mind!


.:kel:. said...

I second Peg!

mrfearless47 said...

So far, the forecast has been a puzzler. I can't figure out how the revenue forecast can simultaneously lead to a $400 million kicker, while also reducing the amount of the deficit by $200 million. It suggests that the fuzzy math used in the Legislature to talk up shortfalls far exceeds the reality of the shortfalls. While I'm not unhappy to see the shortfall drop from $1.8 billion, to $1.6 billion, to $1.4 billion, I am puzzled by the mechanism that leads to this circumstance. I'm not sure if the revenue forecasts are cumulative, or total. Either the budget is $400 million over projections (which accounts for all of the kicker), or the real budget is $600 million over an earlier pre-legislative forecast, or maybe even $800 million, but only the amount of the second quarter forecast is what is required to be returned. I've never delved deeply into the kicker statutes or the constitutional amendment that enshrined it. Maybe it is time for a peek into that black hole.