It has been nearly two months since I posted the last entry. Truthfully, nothing much of substance has happened, although the various newspapers around the state, the various anti-public employee organizations (e.g. OSBA, OBA, PBA) are still running around with their hair on fire about the “PERS Problem”. Even national columnists and investment advisors are writing about the impending doom from a public pension debacle. While I agree that the public pension systems around the country are in varying degrees of trouble (how can a state as small as Kentucky for example, have a UAL of $41 billion?), the solutions vary from state to state and from public entity to public entity. One certain thing is that States, by the constitution, cannot go bankrupt. As an extension, a public retirement system run by the State cannot go bankrupt. This point seems to be lost on many (most) of the commentators who pursue the Oregon PERS “problem” as if it were cholera that needs to be eradicated by “whatever means necessary” (including those presently illegal federally or at the state level). Op-Ed writers from around the state seem to think that the City Club’s 2011-12 report contains the solutions to most of Oregon PERS’ problems. So far, I’m completely unpersuaded by this argument. Moreover, the COLA freeze, adopted by the Legislature in 2013, was definitively ruled an illegal breach of contract by the Oregon Supreme Court in 2015. And this was in the City Club’s 2011-12 report. The Moro court made clear that prospective changes would be permissible, but implementation of prospective changes carry with them the problem of how to preserve the accrued benefits protected by the requirement that retroactive changes can’t be made. So, for instance, going to a 5 year averaging for FAS has the problem that the accrued benefit includes the 3 year average for FAS, and so how do you implement this for anyone reasonably close to retirement? Similarly, the $100,000 cap (not indexed for inflation) has multiple problems because of the accrued benefit matter. As long as individuals have access to the 3 year average, it will trump any 5-year average or salary cap for individuals close to retirement. Ditto for sick leave. You can stop further accrual, but you can’t take away what is already accrued. Inactives are protected from any of these rule changes so long as they accrue no service credit after the effective date of the changes. Tier 4? Sure, go ahead and see how that works recruiting for difficult-to-fill positions now.
In short, there is nothing I can see on the near-term horizon that would create the savings that PERS would need to make to pay down the UAL. So, let’s propose something really radical. How about if the damned employers just pay their bills as they have supposed to have been doing since the beginning of the “troubles”. There would be no liability but for employers failing to pay bills when they were due. How about the Board actually growing a spine and simply telling the employers that “…the game is over”. “You’ve played it well, gamed it out beautifully, but your win streak has come to an end.” Of course this will be disruptive to employers, to public employees, and the like. But blaming the public employees for problems over which they’ve had little to no control is giving a complete pass to the real villains in this fiasco (which is far tamer than fiascoes in other states).
18 comments:
Hello, what are your thoughts on the PERS board decision to move to a "age investment" direction the board will implement in January ?
http://www.oregonlive.com/politics/index.ssf/2017/09/pers_shifts_investment_of_memb.html#incart_std
The PERS Board has made no such decision, and hasn’t been much involved in this fecision, made by Treasury and Oregon Investment Council. To me, the decision will make PERS’s life and the Board’s life more difficult. If I were in a position where this affected me, I’d be screaming loudly. Some people can afford more risk than others, and while these might be appropriate default positions, I still think the final decision should rest with the individual. I think there is another reason this is happening. If I understand how with this will work, this will not be acost-free benefit to the individual. Every five years, the individual will incur some hefty fees as the portfolio is churned to me into a new, lesser, risk category. In the end, returns will be lower, costs to individuals higher, and theburden of keeping all this straight will fall to PERS. That type of oversight isn’t without cost.
I see a couple of sources of cost. One will be a PERS administrative cost of disparate crediting by age cohort; possibly it will at least initially include an increased annual fee to VOYA, but will certainly involve PERS-internal costs as well. The other source will be at OIC/Treasury, and will also come in two forms: first, the management cost of the non-OPERF slices, which according to the consultant will be about 25% averaged across the the cohorts; interestingly though, this cost, initially to state street, normalized, will be vastly less than the ~77 basis points associated with the OPERF slice of each cohort/"target date fund", so will actually reduce the effective expense ratio of the IAP relative to the status quo ante. The second OIC/Treasury cost, the ongoing cost of the glide path manager, is more concerning: there is every indication that Alliance Bernstein is in the process of getting a tick-like beak deep enough into the program that it becomes impossible to detach cleanly. Karl Cheng ball-parked this cost at "low single digit basis points" in the recent OIC meeting; but if denominated by the whole IAP rather than just the portion not pooled with the DB, then when considered properly as an expense layered on the non-OPERF slices it's more like 0.15% just to A-B. A-B claims they are providing a smarter glide path for PERS's demography, but I have not seen mentioned by anyone a comparative return analysis between smart and dumb glide paths when cost of smarts is netted out. Even a dumb glide path satisfies the key objectives of 1) significantly mitigating participant sequence of return risk and 2) reducing the chance of a liquidity crunch to OPERF due to a "run" on IAP assets in a 2008-style downdraft by retirees who did not lump-sum out at PERS retirement. I suspect that institutional risk management dictated at least a pretense, in the form of a consulting contract, that a downsloping crayon line drawn by a 6 year old, at at a cost of two marshmallows, could be materially improved upon.
Is this age-based investment plan change definite, and if so, will it impact the IAP balances significantly? Particularly those of the members nearing retirement? Thanks for any insight.
Yes, almost certainly definite. It won’t affect the balance,but it will affect the growth of the account starting on Jan 1 2018. Target Date Funds are notorioius for growing more conservatively as you get closer to tetirement.
If a huge earthquake hits us, as many predict, and Oregon's economy west of the Cascades is devastated, what legislative actions could Oregon take to limit pers pensions? I understand states can't go bankrupt, but I'm curious to know what they could do that would hold up in court. I appreciate any thoughts you might have. You are more knowledgeable in these things that I ever will be. Thank you.
Interesting question, but without a clear answer. PERS Funds are held in trust for members and retirees and cannot be used for any other purpose. That is an established legal principle, so even in bankruptcy, PERS would still be at the head of the line. Because we would be declared a Federal Disaster Area, some of the rebuilding money would come from the Feds. While I certainly believe a Cascadia quake is likely to occur, perhaps in my lifetime (15 years or so), I don't think it will be as massive as doomsayers predict. i hope we don't have to explore the options, but even if we did, a big earthquake could kill off lots of PERS members, retirees and/or their beneficiaries, and so the problem wouldn't be as bad for PERS. I mean, seriously, a huge earthquake isn't simply going to wreck havoc on the economy, infrastructure, and proprty; it would also kill a lot of people, especially if large urban areas are badly damaged. Why worry about it€? whatever happens, happens but it isn't something you can really plan for, except to become a survivalist.
Not worried as much as curious right now. Good points. Thank you.
Any suggestions on where to find a PERS familiar retirement counselor in the Portland area?
@Kathleen K. There aren't any that I know to recommend. This isn't an indictment of financial planners, but simply a lack of current information. I suggest you post your question on the PERS Oregon Discussion (POD), which can be reached via the first link on my blog page (on the upper left hand side). You have to "join" the group, but joining isn't a big deal. The group is private to all members and you risk nothing by posting there except the possibility of getting a lot of current, informed answers. I commend the group to you.
Ok, I’m 60 years (61 in January) and am to be signing my papers next week to retire Dec 1, but finish as a rehire until June 28th. The whole talk about Pers changes, had me nervous, I feel I’m too young to retire, my monthly will only be just under 1300. Will the 7.2 make much of a difference since I have so little? By the time I pay taxes and district insurance my take home will be 500+. What a useless amount to retire on. I’m so fearful of what I’ll lose if I wait another year or more. Any suggestion? I honestly was planning on working after I retire but by June I will teach my 1039 hours! Therefore July-Dec I have that 500 to live off of! Common sense says wait until the following Dec. maybe. The older and longer the less my district insurance will be. But what are their new plans to screw us in 2018? My biggest concern is I need the highest 3 year calculations vs the last 5 which is much less than the highest 3.
@ingridquirke. Your situation is a difficult one to evaluate. The 7.2% change would leave you in the same benefit position on April 1, 2018 as you were in on December 1, 2017. It is unlikely that anything will happen in the short legislative session, but certainty is hard to come by these days. Your common sense would be my initial thinking, that you could wait until the following December 2018, finish out the 2017-18 academic year, start to the 2018-19 academic year and retire on Nov 30, 2018 and finish out the school year on a retire-rehire contract (if you district is willing to do that). I think PERS will be a significant issue in the Nov 2018 elections for Governor and for many Legislative seats up for reconsideration. That will inform the 2019 Legislative session, which is where I think the big changes will occur. I don't do advice, but you may want to explore your common sense alternative with a bit more care. Your benefit won't be very much higher by waiting another year, but that additional year means full income, as well as full health benefits, as well as being closer to the SS minimum age. I'm afraid that I can't do much better than this. My crystal ball is failing me right now, as many of my sources around the state are retiring themselves and can't offer much useful scuttlebutt.
You say April 2018, how do we figure what the 7.2 compared to the 7.5 means to us? I called PERS yesterday, he said the online calculation will only do it at the 7.5 and the 7.2 table wont be out until 2018-well that helps! So my trying to do a calculation for April was not worthless. Even if a person sends out a requested estimate, it will still do a 7.5 calculations. And how on earth do they figure our life expectancy? Is there an age they have determined to use?
You are missing my point. While it is yrue that exact actuarial tables taking the 7.2% rate will not be available until later this month or early next month. If you go back and read my July 28th post, you notice that I chatted with the actuaries after that meeting. They told me that the “setback” would be four months for most potential retirees. So, what that means is that a reduction of 30 basis points in the assumed rate, coupled with roughly no changes in life expectancy at any given age, means that your Dec 1 benefit, computed at 7.5%, would be actuarial equivalent to your benefit retiring on April 1 at an assumed rate of 7.2%. There are other variables involved, and you haven’t said whether you are a Money Match retiree, or a Full Formula retiree, and whether you plan to choose a beneficiary option.
To clarify further, if you were earning an estimated $1000 per month based on 7.5% retiring on Dec 1, 2017, you'd receive $1000 per month based on 7.2% retiring on April 1, 2018. That's what the "setback" means. As I said earlier, there are other considerations, but the basic calculation still remains the same, all other things being equal. If you are Full Formula, your Option 1 (no beneficiary) benefit is unaffected by assumed rate or mortality; it is only when you add a beneficiary that the calculus of all this changes and the mortality tables and assumed rate come into play.
Hope this helps. If you want a more detailed discussion and analysis, please post your question on the PERS Oregon Discussion Group (POD), which can be reached by clicking on the first link to the left of my blog page, under "Useful Links".
Money match no beneficiaries
Then you're in the simple situation comparatively speaking. Your April 2018 benefit will be approximately the same as your December 1, 2017 benefit. The major difference is that your benefit will continue grow the longer you work past April 1, 2018 until December 2018, and you will have the additional income from working that time as well as the benefits that go with working. It is always a balancing act between preserving your benefit versus preserving income from current sources. I have no advice to give other than to say that your particular situation deserves more careful consideration over the next month. The new actuarial tables should be available by early in November, in sufficient time for you to make an informed decision about December 1, 2017 vs December 1, 2018. I will post a link as soon as PERS makes the tables available to me. And, I can help you interpret them for your particular case.
Thank you for your time of information. I look forward to that table, but probably will wait until Dec. 2018, not rehire, but just sub. And again possibly April 2018-My main reason for planing to retire with my original plan is I have two kinder grandchildren entering fall of 2018.would like to volunteer, go on field trips be available when they are sick and the parents don't have to miss work. I will expect them to have some of the responsibility, but I don't mind helping and I will be working here and there, so...... I can't do it all.
Hopefully they will still be doing the highest three and not the last 5, as that will make a "BIG" difference for me.
Thank you again for your time and especially your patience with me as I am so easily confused about all this. Never did I think I was going to be single raising three daughters. Educate my girls to not do what mom did?
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