[Note: this is a work in progress. Expect some changes over the next day or two, mostly in clarifying language and as I discover more things along the way. Legislative language is torturous to read and decipher.]
As the 2019 Oregon Legislature nears the final month of its session, the biennial hair-on-fire “PERS is going to bankrupt Oregon” faeries are out in full force. The latest attempt to rein in PERS costs has cleared the first committee hurdle. SB 1049 was voted out of Committee and sent on to the Joint Ways and Means Committee for consideration. So, what have our hucksters, tricksters, and scamps cooked up for the Oregon Supreme Court to review this time? Why it is an absolute cornucopia of “fixes” that will, in all probability, spend the next two years being picked apart by the Oregon Supreme Court. (Some of it is so impenetrable that even I don’t have the patience to try to decipher it).
SB 1049 contains a whole passel of changes. It directs proceeds of Sports Betting in the Oregon Lottery to be directed to PERS. Frankly, who cares? This isn’t a huge amount of money, and it is entirely discretionary spending on the part of Oregon citizens; therefore, if you don’t want your Lottery money going to PERS, stop betting on sports.
The second piece is to extend the amortization (payback) schedule of the UAL to 22 years, from 20 years, for the Tier 1 and Tier 2 UAL. The OPSRP UAL would remain at 16 years. This one befuddles me. I doubt it is illegal, since GAAP guidelines permit lengths as long as 40 years. Oregon’s current schedule is comparatively short. Nevertheless, the longer you amortize debt in an uncertain world, the higher the likelihood that your debt will grow rather than shrink. Unlike a fixed-rate mortgage, the UAL is amortized based on assumptions about earnings rate, which change regularly every two years. Currently, the rate is 7.2%, and that is surely to fall to below 7% beginning on January 1, 2020* (but see below). Unfortunately, when the assumed rate falls, the UAL rises because more money is expected to be covered by employer contributions than by earnings. Thus, once the new rate is determined on July 28, 2019, the actuary will revise the existing UAL to the new (2 year) rate assumption. The general direction of assumed rates across the country is down. Every time the assumed rate goes down, the UAL rises. A booming economy may help; a recession would be catastrophic. Despite all the hoopla about the booming stock market, 2018 was really kind of dreadful. The PERS fund missed its 7.2% by 5.8 points, which is why the UAL increased from $22 billion to $27 billion. If you don’t hit your target, the UAL increases. Moreover, the assumed rate is perverse. People think that lowering the assumed rate would cure all problems, but the employers don’t want that to happen; neither do members. The PERS fund is currently funded by Earnings + Contributions. A PERS benefit is constructed from Earnings + Contributions. All things being equal, if earnings are assumed to be lower, then contributions (from the employer) have to increase to make up the difference. Getting the assumed rate correct for the economy is a goal, but an imperfect one. The rate has to be decided in advance; rarely do actuaries, market analysts, investment advisers get it exactly right. A too low rate provides more room to be wrong in a positive direction; a too high rate provides more room to be very wrong in a negative direction. In this context, extending the amortization period of a variable rate UAL simply broadens the horizon over which to be wrong. The principal reason the UAL is so high is that since 1997, employers have used every dodge, every ruse, every possible accounting trick to keep their contribution rates artificially low. If you pay too little for too long, you end up being underwater, which is where the employers are today, in a situation that is mostly of their own making. So why would you want to extend the time over which they can pay too little for a debt that has been accumulating for more than 20 years. The bill says that the amortization rate will be only for 22 years one time, after which it returns to 20 years. Yep, and Bill’s your uncle. Having said that the idea is stupid, I guarantee it isn’t illegal, so the court won’t touch it, and the unions probably won’t litigate. It falls into the “I bet this is a FAIL” category.
The third piece is the first to directly affect active workers. In 2003, the Legislature ended Tier 2 (Tier 1 ended in 1995), and froze the principal balances but continued to let them grow by the assumed rate (Tier 1) and by market rates (Tier 2). For employees starting on or after 8/29/2003, the legislature created something called OPSRP (which, for simplicity here is going to be called Tier 3). For Tier 1, Tier 2, and Tier 3, the legislature directed the formation of something called the Individual Account Program (IAP for short) into which the employee contribution (the 6%, regardless of who actually paid it) would go. This money was allowed to earn market rates, but ownership of the account was treated like a 401K. Because of an inability to think outside of the box, the morons of 2003 didn’t really consider the implications of removing a 6% member contribution into a privately owned, but PERS managed, account. As of end 2018, individual IAP accounts hold almost $9 BILLION, not a penny of which contributes to the overall balance of the PERS Fund, which is currently running an approximately $25-$27 Billion Unfunded Actuarial Liability (UAL). So the geniuses of 2003 effectively punched a $9 billion hole in the PERS fund in their effort to stanch the growth of Tier 1 and Tier 2 account balances. The action accomplished one of their intended goals. By 2008, Money Match no longer was the dominant method of retirement for active members; for those inactive members, it changed nothing since no new money was going into their accounts anyway. By today, so few active members retire under Money Match that it is virtually inconsequential in the overall scheme of things. However, there are still many inactive Tier 1 and Tier 2 members whose accounts have continued to grow and for which Money Match is the obvious and only likely method of retirement (more of this below). So, recognizing that the 6% member contribution isn’t helping the fund at all, members have been accused of “having no skin in the game” (which beggars belief since the members didn’t want this in the first place back in 2003). Now, SB 1049 proposes a sort of “give at the office” scenario in which 2.5% of the 6% Tier 1 and Tier 2 member contribution is DIVERTED into an Employee Pension Stability Fund (i.e. other than to the IAP). This isn’t a voluntary contribution and its objective is to create a pseudo-employee account that grows in the same way that the IAP does, except that the member doesn’t really get a dime of the money at retirement as he or she did before. The money is in the employee’s name, but counts as part of the overall PERS Fund. (The fact that it is in the employee’s name is probably because the Legislature didn’t want to get slapped with a “wage theft” claim in the Oregon Supreme Court). The intent of this money is to contribute to the member’s likely Full Formula benefit at retirement. It is often believed that the member account balance is irrelevant to a Full Formula benefit. This is only partly true. If you add together the member’s regular account balance plus the EPSF balance, the Full Formula benefit is funded from these balances plus a contribution from the employer. To the extent that a worker continues for, say, another 10-12 years before retiring, the Employee Pension Stability Fund can knock a big chunk off the employer obligation for the Full Formula Pension. For Tier 3, which has a lower benefit structure, the Legislature only wants a tithe of 0.75% of the 6% member contribution. Again, the idea is to reduce the employer’s obligation to fund the Full Formula benefit. (Whether an involuntary redirection of money you can no longer lay your hands on constitutes “wage theft” or an involuntary “salary reduction” will ultimately rest with the unions and the courts).
There is a “safety valve” in two forms. If you want to fully fund your IAP, you have the option to contribute your own after tax dollars to the IAP to make up for the diversion. The second form is that should the fund reach a 90% funding level, PERS would stop diverting the money (until, of course, the fund dives below 90%). Basically, the diversion is a correction for the monumentally stupid IAP plan created by some of the same people who are still today bemoaning the sorry state of PERS by failing to admit their own complicity in the problem.
The fourth piece of SB 1049 probably affects a relatively small number of individuals in the larger scheme, but will make recruiting even harder at places where high salaries are required to recruit and retain high priced talent. The Legislation calls for a cap of $195,000 on salary earned on or after 1/1/2020 to be included in FAS calculations. This one continues to bewilder me for a variety of reasons. First, it is not problematic for anyone well-below the threshold of $195,000 (subject to adjustment by the same factor used in calculations of the retiree annual COLA). For people already over the threshold, it really isn’t a problem that I can see for retirements occurring before 2023. Currently FAS is calculated by taking your highest 36 month salary total and dividing by 3 to come up with FAS. Included in the salary computation is half the value of accumulated sick leave (if the employer participates), the 6% member contribution (diverted or not), and the value of unused vacation time (Tier 1 and Tier 2 only). Since your highest 36 months is likely to come in the last 10 years, you have a long look back window over which to draw 36 months, which could EXCLUDE** the period after the salary cap goes into effect. So, for members nearing retirement, the practical effects of this are small. Longer term, the picture isn’t quite as rosy. Complicating this is the fact that Tier 2 has a limit at the IRS threshold (currently $280,000) as does Tier 3 (OPSRP). Tier 1 has no such limit, as the limit wasn’t in existence at the time Tier 1 was created. So, this new rule caps the amount of salary that can be credited for FAS purposes after 1/1/2020, but doesn’t affect uncapped salaries prior. (**Do not interpret this to mean that THIS will be the way it is implemented. As I note below, the devil lies in the details or the weeds. Converting statutory language into software is a daunting task when language is ambiguous).
As they always say about legislation, the devil is in the implementation details. Questions: Does the PERS cap (not the IRS cap) prevent employees from contributing past $195,000 of earned salary? Does the employer have to continue contributing once the member has passed $195,000? What happens with any contributions between the PERS cap and the IRS cap for Tier 2 and OPSRP? To put these questions a different way, at what point does the cap come into play - at the time the salary is earned, or at the time of retirement? This distinction is critically important for those small number of members who are already earning over the PERS cap before this change is implemented. It becomes a secondary problem for Tier 2 and 3 members earning over the PERS cap but still under their IRS caps that already exist on their plans. (I have no explanation for why the Legislature decided to set the cap at $195,000. I suppose they did this to make their numbers come out right).
I suspect that the court will have a problem with the salary cap for still-working Tier 1 members. It doesn’t apply to the inactive Tier 1s. The court may be also troubled by the existence of two caps for Tier 2 and Tier 3, and how they will interact.
Collectively, these changes will reduce employer contribution rates by about 5.43%, pretty much the amount that they would go up in 2021, other things being equal.
There is an additional clinker buried deeply in the bowels of SB 1049. The PERS Board will, if SB 1049 passes, be required to report to the Legislature 30 days before they make any changes to the assumed interest rate (and, by inference, the employer contribution rate, the actuarial equivalency factors). Since the assumed interest rate is always adjusted (for the upcoming calendar year) in the summer of an odd-numbered year, this will compel PERS to make decisions about this slightly earlier than usual, and will now subject the decision to political pressures heretofore not required of an independent Board. The reason for this is painfully obvious. Go back to my third paragraph. Raising the assumed rate means lower employer contributions; lowering the assumed rate means HIGHER employer contributions. The stakeholders always had the opportunity to provide input to the process of rate setting, but the Legislature stayed out of the fray. Now, the Legislature will get a voice, and can potentially use its political will to force the PERS Board to make decisions that are not in the Fund’s best interests, thereby exacerbating the problem that SB 1049 attempts to fix.
This is just a first pass through the bigger pieces of SB 1049. The bill has other elements that I haven’t had a chance to study as well. I will follow this post with another if SB 1049 gets any further in the Legislative process.
UPDATE: Not more than 15 minutes after I posted this, the Oregon Senate suspended the rules and voted out this bill in a 16-12 vote. Three D’s voted against the bill. The bill now moves on to the House where it is likely to have few hurdles to clear. I’m happy to report that my Senator, Rob Wagner was one of the No votes. Thanks Rob.
56 comments:
The IAP is taxable income, so if employees contribute after-tax dollars they will need separate accounting for each portion.
Mark, another well reasoned, well written blog. I believe the most effective part of this legislation will be extending the amortization from 20 to 22 years. That is, if the gauge of effectiveness is how to keep employer contributions to PERS from rising. I believe it will be effective enough that 22 years will grow to a much larger number – maybe out to 40 years. As you said in your blog, the UAL is reduced by earnings on the PERS fund and employer contributions. I think it is unlikely that investments earnings will adequate to reduce the UAL significantly. Especially, since the balance in the PERS fund continues to decline (less money to earn against). Based on this legislation, we now know the resolve by our governmental leaders to put more money into PERS is limited. I think they have hit the wall, so to speak. Our economy has been strong for several years. Yet, there has been little resolve to pay down the UAL. I cannot imagine the Legislature will take up paying down the UAL when the economy slows. And even, if the economy never slows (unlikely) there will always be a “critical need” for additional spending that will be more “important” than paying down the UAL. In your blog, you asked the question, “so why would you want to extend the time over which they can pay too little for a debt that has been accumulating for more than 20 years.” I think it’s because the employers have no resolve, intent, whatever word you want to use to pay down the UAL. And the end result of not paying down the UAL will be that PERS runs out of money at some point in the future. Dave Dahlin
Mark, another well reasoned, well written blog. I believe the most effective part of this legislation will be extending the amortization from 20 to 22 years. That is, if the gauge of effectiveness is how to keep employer contributions to PERS from rising. I believe it will be effective enough that 22 years will grow to a much larger number – maybe out to 40 years. As you said in your blog, the UAL is reduced by earnings on the PERS fund and employer contributions. I think it is unlikely that investments earnings will adequate to reduce the UAL significantly. Especially, since the balance in the PERS fund continues to decline (less money to earn against). Based on this legislation, we now know the resolve by our governmental leaders to put more money into PERS is limited. I think they have hit the wall, so to speak. Our economy has been strong for several years. Yet, there has been little resolve to pay down the UAL. I cannot imagine the Legislature will take up paying down the UAL when the economy slows. And even, if the economy never slows (unlikely) there will always be a “critical need” for additional spending that will be more “important” than paying down the UAL. In your blog, you asked the question, “so why would you want to extend the time over which they can pay too little for a debt that has been accumulating for more than 20 years.” I think it’s because the employers have no resolve, intent, whatever word you want to use to pay down the UAL. And the end result of not paying down the UAL will be that PERS runs out of money at some point in the future.
Neal. Such a trivial implementation issue. PERS' problem, not the Legislature's. These issues were able to escape because with a brand new Executive Director, PERS doesn't have adequate push-back with the Legislature. Steve Rodeman would have pushed back on some of this.
Dave, the title of this piece applies equally to the employers as well as the legislature.
Thanks for this posting. For Tier One/Two employees will the 2.5 contribution to this pension stability account be everything in the current account, or contributions made going forward once it's enacted?
SueB. It only applies to contributions starting on 1/1/2020. It does not, and cannot legally, apply to contribution already made.
Two notes: first, for tier 3 separations, unused vacation payout isn't (has never been) PERS-subject salary. Second, again for tier 3: SB1049's amendment to the pre-existing text excluding salary above a limit, that newly restricts the scope of the old text to pre-2020 years, by its clumsiness invites misinterpretation by PERS at FAS determination for post-2019 (tier 3) retirees...potentially reducing the calculated FAS from pre-2019 service and therefore pension of some high earners. It would have been better for the amending text to clarify that for tier 3 service and salary in those years, "200k" meant and will continue to mean (that is, for FAS determination after 1/1/2020) what it meant for employer contributions in the years through 2019: 200k in 2003, coarsely indexed upward in 5k increments as per the IRS, through 280k in 2019. Given the text as presently amended, who knows what the coders will think the legislature intended.
As someone who has written PERS-related software (the original online calculator is derived from a software program I originally wrote during and after the 2003 Legislative Session), I cannot overstate the importance of clear operational definitions for implementing legislative changes. The best time to get clarity is before the final votes are taken. I suggest that you find a couple of members of the House, quickly, and present your concerns to them so that possible clarifying language can be included in the final bill’s language. I did this back in 2003 and completely altered the operational definition of a critical piece of the legislation. My questions and concerns derived from holding a programmer’s viewpoint and a need for understanding exactly how to operationalize ambiguous concepts in statutory language. Your point is well-taken and deserves a broader airing.
There is a subset of high-earning tier 3 members whose PERS-subject salary will be reduced post-2019 by up to 32%.
There is also a member subset of high post-2013 earners whose eventual benefit will be substantially COLA-impaired relative to those with lower and earlier lifetime earnings. Imposing the COLA restrictions reduced the UAL, so the top part of this subset's PERS-subject payroll effectively does some lifting for the rest of the payroll base; in this sense, the PERS DB acquired a modest progressive/redistributive aspect through the graded COLA.
The intersection of these member subsets may or may not be larger than its disjunction, but one of the effects of SB1049 is that its contribution base will be lower going forward. That is, the lift-assist or redistributive effect of the graded COLA will be reduced. I would not be surprised if the effect of this part of SB1049, if taken in isolation, would be to increase the UAL% slightly.
It's analogous to lowering the SSA wage base/limit relative to average salary, so that the tax slice paid in by those who eventually will be above-the-second-bend OAS beneficiaries is a smaller part of the whole.
I don’t see the logic in your first sentence. The existing Tier 3 is already capped at $200,000 with no built in adjustment that I can find in Chapter 238A. The new language allows the new cap to grow by the same factor that is currently used to determine COLA for preOctober 2013 retirees without the 2% ceiling. I can’t find such indexing for Tier 3, as $200,000 is explicitly stated in the existing statute. Maybe I’m missing a central detail. I have to confess that I retired prior to Tier 3 and have relatively little experience burrowing through its interstices.
Roadman. When did the IRS maximum subject earnings that was part of OPSRP through at least 2014, change to $200,000? I now see that PERS explanatory material published in 2015 gave examples from 2014 and 2011 using subject salaries that exceed the IRS threshold established in their publications about defined benefit plans. I now understand your concern, and the tremendous hit Tier 3 members could take if pre-2020 earnings were retroactively capped at $200,000, when during the period they were earned, the limit was significantly higher. While Tier 3 is not protected by contractual language like Tiers 1 and 2, the Moro Court, and the IRS explicitly prevent retroactive plan changes, and the Moro court as well as the IRS have very strong opinions about accrued benefits. In this regard, while you don’t have the ”breach or impairment of contract defense”, you still have the retroactive change and the failure to preserve accrued benefits defense working in your favor. If the insertion of the pre-2020 cap of $200,000 first appears in 2019 legislation, then it is ripe for litigation. If this change occurred prior to the current session, then the defense collapses because itvwasn’t litigated in a timely manner.
Yes, you've missed a detail, which is central enough for the highest tier 3 earners anyway.
The old text 238A.005 (17)(c)(L) directs the PERS board, in its final sentence, to "adjust this $200k dollar limit to incorporate cost-of-living adjustments authorized by the Internal Revenue Service". {This section is amended in section 40 of SB1049 btw.) And sub(sub?)section 17 defines what is and isn't "salary" for the purposes of 238A. Which means, during a tier 3 member's career, the part of one's compensation that is PERS-subject and determines employee and employer contributions, but which in retirement matters only insofar as FAS is derived from its monthly/annual history.
Anyway, I agree that at first blush it might appear that the existing statute (from 2003) limited the subject salary of a tier 3 member to 200k period...but that has definitely not been the case. Here at my desk are annual member statements from a post-2003 hire, on which the listed subject salary is over 200k for 2012 and 2013; and while the salary is not explicitly printed on the 2014 and 2015 statements, their listed IAP contributions divided by 0.06 also turn out to be well over 200k - and the PERS numbers are consistent with the years' contemporaneous final payroll statements and W2s, all of which I also have on file. I contend that the employer and PERS were in sync and that the Tier 3 PERS-subject salary limits for those years 2012-2015 were 250k/255k/260k/265k, in concord with IRS compensation limits for those years. Actually it should be possible to find in the minutes of PERS board meetings their annual amendments, after 2003, to this limit where found in their administrative rule set. And I am pretty darned sure that for 2019, that number is 280k. And the same definition of "salary", on an annual basis, should be used in FAS as was used year by year during service.
So, your programmer's eye did not pick up on the clues to (what PERS administration determined to be) the intent of the 2003 statute. I used the word clumsiness in an earlier comment but really a better word would have been brevity: the brevity of the amending text, failing to throw more light on the admittedly occulted 2003 directive to index the salary limit from 2003 through 2019, is the problem.
It would be a big problem for lots of 21st century OHSU docs to have the definition of salary used yearwise for FAS calculation not match what was used during their employment, because many have been paid to a total compensation model wherein, on departmental spreadsheets, their salary is netted down from a total compensation number (by cell formulae the salary, CRP, IAP, and employer contribution which comprise their compensation would all be mutually consistent). So their nominal salary would have been higher if the spreadsheet-deduction for PERS DB contributions were capped at 200k of salary credit toward eventual benefit, rather than the annually IRS-indexed limit that was used in the spreadsheets and in payroll.
I think PERS has routinely interpreted the compensation limit in the way you would have expected, not the way the law is written. Check this out. https://www.oregon.gov/pers/EMP/Documents/Employer-Publications/Employer-Announcements/2014/Employer-Announcement-89.pdf . The confusion stems from conflicting statements in the language of the original HB 2020, the bill creating OPSRP back in 2003. In one place they use the figure specifically of $200,000 as the FAS max salary. Later, in a different section discussing calculation of benefits and they reference 26 USC 415a, where the caps are discussed. So, the original law contains conflicting information, and PERS’ implementation favors the IRS cap, which rose in $5 K increments from 2003 to the present. I understand now why there is confusion, and the new bill creates even more and a potential for a lot of litigation over just that one line in SB 1049.
The language of HB 2003, adopted and signed by the legislatire and the governor is explicit in its directive to adjust the 200,000 initial salary limit by the inflation amountvauthorized by the IRs. Between the bill’s adoption and 2019, the language is unchanged. The language in SB 1049 invites litigation because or absolutely violates the preserving accrued benefits, and no retroactive changes of both the Moro ruling, and IRS Rrequirements for plan qualification by undoing accrued benefits (I.e. Retroactive). That change won’t survive a court challenge. The House has the opportunity to fix this before it passes and save both the state and PERS some legal headaches.
My programmers eye wasn’t focused on Tier 3 at all in 2003. Nevertheless, rereading the text of the 2003 bill as it passed would not have given me can't pause, since the indexing was part and parcel of the full definition that included the initial $200,000 figure, which I have subsequently verified as the maximum compensation eligible for employer contribution in 2003. And both your experience and PERS’ own literature confirmed the only interpretation possible from the statutory language.
The language of HB 2003, adopted and signed by the legislatire and the governor is explicit in its directive to adjust the 200,000 initial salary limit by the inflation amountvauthorized by the IRs. Between the bill’s adoption and 2019, the language is unchanged. The language in SB 1049 invites litigation because or absolutely violates the preserving accrued benefits, and no retroactive changes of both the Moro ruling, and IRS Rrequirements for plan qualification by undoing accrued benefits (I.e. Retroactive). That change won’t survive a court challenge. The House has the opportunity to fix this before it passes and save both the state and PERS some legal headaches. The section you are seeking is Oregon Administrative Rule 459-005-0525, which can be found online. The pertinent section is 4a, which gets modified everytime the upper limit gets changed.
Yes, it looks as though you got completely up to speed last night on history of tier 3 salary limit and the defective pertaining/amending text in SB1049.
I am still amused to realize that lowering the salary cap trajectory for post-2019 earning years will likely increase the normal OPSRP cost slightly rather than lowering it....because on average, (since 2013) unit salary just under the existing cap earns a unit benefit with the lowest PV at retirement - of all OPSRP benefit units, these are the most likely (depending on years of service) to have the most stunted COLA growth trajectory. Because of the deviation from strict proportionality introduced by the graduated COLA, these earnings (post 2013) are relative givers to the normal cost system, and those concerned with its welfare ought actually to embrace them (as subject salary) rather than running them out of town.
The ONLY change to existing language for 238A.005 pertaining to salary prior to 2020 is the insertion of two words ”Pre 2020” in the section defining salary subject to the cap. The language is otherwise the same as it was in 2003, which set out the base IRS maximum, then $200,000 and later directed this number to be adjusted going forward (from 2003) by the IRS-approved factors. Currently, for 2019, the indexed (from any starting point, but $200,000 in 2003), is at $280,000 and PERS has an administrative rule clearly outlining how this indexing is to take place. I realize that stranger things have happened, but I fail to see how PERS could possibly change the implementation of SB 1049 to deliberately undermine their own administrative rule and standard operating procedure for pre-2020 earnings that would be in direct violation of the qualification document required by the IRS and used by the courts to assume that no accrued benefits are affected by legislation going forward. They didn’t have to insert those two words, but it clarifies the prospective nature of the changed cap and underscores the fact that nearly a third of the current cap has been lopped off going forward, which will result in significant benefit cuts for highly compensated Tier 2 and Tier 3 individuals who are already over, at, or close to current IRS cap of $280,000. This also effects Tier 1 individuals still working but in an even more profound way since they currently are not subject to any earnings cap. There are relatively few Tier 1 members still working who fall into this category, but still enough that this can hurt.
I appreciate your optimism; but the fate of post-2019 high-earner OPSRP FAS determinations that hinge on pre-2020 annual earnings will still be in the hands of the coders and their project managers; and the level of attention they will devote to study of the old implementation is unclear. Your initial misconception about the significance of that last sentence of 238A.005(17)(c)(L) only illustrates how easily an intelligent person considering the text for the first time might anchor on the $200k dollar figure remaining in place from the original 2003 legislation; that tendency will be even worse IMO with the two words added by SB1049 in place. For this reason (notwithstanding the addition of new (M) for post-2019), limiting the amending text of (L) to those two words was too parsimonious.
My optimism is based on a cardinal rule that PERS uses when implementing any changes. They want to touch a member's account ONLY ONCE. PERS has a whole Policy and Planning Office staffed by legal experts who comb these changes and draft the implementing language in the form of Administrative Rules. Since there is already an administrative rule in place for OPSRP earnings to date, and the amending language only specifies the part of the original plan language that is changed (pre 2020 earnings), I remain convinced that any changes that affect benefits that have already accrued before the effective date of this bill will not, and legally cannot be changed. I suspect the reason for the parsimony is to leave the original language in tact to avoid additional confusion, and to clarify that the changes apply only prospectively to earnings accrued on or after 1/1/2020.
My original understanding of HB 2020 (the bill implementing OPSRP and the IAP back in 2003) was that the income cap was, in fact, indexed to the IRS limits. Somewhere between an iteration of the bill and the Engrossed version, a member of the Legislative Counsel staff changed the wording to be less ambiguous by placing the actual value - $200,000 - of the indexed IRS salary maximum at the time of the bill instead of leaving the language vaguely attached to something referred to as the "IRS inflation adjusted salary maximum", which we all knew was $200,000 in 2003. I didn't see the change until I went back yesterday and read the final language of the original bill. It was at that point that I realized it had been changed from its final amended form to the Engrossed Bill that was signed into law. It confused me at first because I had never seen the $200,000 figure in print in statute before. But, then tracing the implementing language codified in the OAR as 459-005-0525, reassured me that nothing had actually changed. And PERS' own explanatory documents, found on its website, also reflect the current reality.
Thus, against that background, I don't see it as likely that the Policy and Planning People, who have to devise the implementing language and operationalize key pieces of new legislation will see this as anything other than codifying that there is now a split between pre-2020 and post-2019 salary considerations that have to be taken into their implementation and calculating scheme for coming up with FAS for post-2019 retirements. Since they want to touch a member account only once, it is hard to imagine them changing what has already been programmed for pre-2020 OPSRP (and Tier 2) members, instead of just putting in a branch of logic to deal with post-2019 salary records.
I have more faith in PERS than I do the Legislature, and PERS often works with the Legislative Counsel to get words correct in statute that make them easier to implement in policy. I'm not sure what additional explanation would have been necessary to guarantee what seems pretty clear to me with those additional words. It remains absolutely faithful to the original language of the statute, with the except of the initial two words (For Pre-2020).
Thank you for the great analysis and clarifying comments. I believe I already know the answer, but for everyone’s sake, have to ask: will this proposed / in process legislation affect those already retired and drawing benefits? (I believe the answer is no.) But if I’m wrong, how would it affect those already retired? Thank you again for your service.
No impact on anyone already retired.
Are we safe to assume that the AER and amortization changes will take effect on 1/1/2020 and not before? I plan to retire before that time, and am one of the few Money Matches left.
I see nothing that changes the timetable for the change to the Assumed Interest Rate and the associated actuarial equivalency factors. The new rate is scheduled to be discussed and voted on at the 7/28/19 PERS Board meeting and ticketed for implementation on 1/1/2020.
The question is whether the Legislature will let PERS lower the assumed rate. SB 1049 contains the proviso that PERS has to present the new rate and justify it before the Legislature 30 days before approving it. One curious thing is that in reading the actuarial analysis of SB 1049, they were asked to assume the savings predicated on a 7.2% assumed interest rate. That suggests to me that PERS may be thwarted if it attempts to lower the rate. I'm just speculating based on reading between the lines. Nevertheless, you don't seem to be in any danger of an earlier change in the rates.
The title of your blog should have included whores but admittedly that's assumed of the MonkeyWenchsters. To boil this all down it still is the same concept; there's gonna be a screwin' and public employees will be the ones getting screwed. After 31 plus years of trench/stench warfare I keep myself on the Hockey Roster for insurance purposes. But if the Wenchers in Salem think the PERS deficit is a problem, then they obviously (by the way they try to fix this)aren't recognizing the Titanic's Voyage ahead. Going forward that is, what person of competence will ever choose to be a public employee in this State? Agencies used to be able to recruit a few Guys & Dolls with the 'ol "our wages aren't as high but our benefit package makes up for it". That doesn't mean anything now, tradesmen making six figures aren't going to trade their coveralls for a hot Beaver Suit at half the wages and a dwindling benefits package. The iceberg will rip through the hull when the combination of low paid incompetent public employees (because that's all they'll be able to recruit)and contracting out services collides.
Until then I'm going to milk these utters for all they are still worth. Many thanks sir for you're informative blog and it is a big help for those of us still on The Stool.
@Tier 1 Terror. I apologize for not including ”whores” in my title. As you may not have noticed, my titles are titles of songs from my massive contemporary music libraries. Were I using book titles instead, I could have used Parliament of Whores instead. That said, you are correct about the caliber of future public employees in the well-paid trades.
The Republicans simply hate government and government workers. There has been a campaign to discredit Oregon public employees that was a broken record, much emanating from Bend and The Snoregonian. We know that this is a political argument, not based in reality. Since when has government had a balanced budget? According to CNN in January 2019, Trump had increased the federal deficit 2 trillion dollars since taking office, another record broken.
Thank you for your very informative writing. I have been following SB 1049 on my own, but lack the analytical skills that you bring to the table. My biggest fear is the possible impact on my own retirement next year. It is my plan to retire on July 1, 2020, after 30 years at Southern Oregon University. If need be, I will jump ship in December of this year. It all depends on whether there will be a significant financial impact on someone like me with only about a year to go. Would any changes be implemented January 1, 2020, or the next biennium on January 1, 2021?
Kevin
Kevin. As written some parts of the bill take effect on 1/1/2020 and some on 7/1/2020.
I know this isn't a hot topic but I am curious if this language is still included in SB 1049A or has it been stripped.
It stated intent to eliminate restrictions on reemployment of retired members of system until December 31, 2024. Requires employer of retired member to make additional employer contribution to system.
Meaning the 1,040 hours is lifted? It seemed to be stuck in the middle of other language and not sure if my interpretation is correct.
Thank you.
Yes. It is still there. 1039 hour requirement lifted, unless you are under full retirement age for Social, Security and are drawing SS benefits.
So retirees can now work more than 1039 hours or is it just those who retire after 1/1/2020?
It is not clear whether this only applies to retirements beginning 1/1/2020 or globally. If you are already Full Social Security Age, drawing SS or not, you have no work restrictions returning to a PERS employer now.
Will this affect you if you are state employee who opted out of PERS/OPSRP altogether and is instead contributing only to a 401k? Like, will I need to start contributing to PERS as well?
t. The answer depends on whether you work you work for OHSU or the Oregon University system. There are some complicated changes to those systems as well. If you never belonged to PERS, you may be OK.
t. The answer depends on whether you work you work for OHSU or the Oregon University system. There are some complicated changes to those systems as well. If you never belonged to PERS, you may be OK.
Hm. I am an OSU employee; I was hired in 2016, and I have never been part of PERS (I saw that the system was untenable from the first moment and started a 401k instead). If I need to divert my savings to pay for the Tier-1 and Tier-2 baby boomers who are already getting a bigger payout than I will ever see -- I'm never, ever going to be able to retire -- I will set something on fire.
I *think* if you’ve never belonged to PERS, no changes should effect you. There are changes to the ORP, but they aren’t significant to you. You can read the bill online.
FYI, the A-engrossed version has an EMERGENCY CLAUSE, indicating the new provisions will take effect upon passage.
Thanks for your info, and I await eagerly your next post after passage of this beast.
The emergency clause is necessary to allow the legal proceedings to begin. It allows the PERS Coalition and any other affected party to file legal objections within a 60 day window following effective date of the bill. The harmful parts won’t be implemented until 2020.
I am a 20-year Tier 2 PERS member with 10 years left until I can retire. I currently earn about $200K and I could make much more in the private sector. If I stay in my PERS job, I don't foresee ever making more than the $280K IRS cap. This new legislation makes me seriously question whether I should quit my job that I otherwise enjoy. Complicating this decision is not knowing whether SB 1049 will withstand legal scrutiny.
A couple of questions related to calculating my FAS: 1) Do you agree that the $195K cap (plus COLA) would not include the 6% PERS pick up paid by my employer? 2) Do you agree that I would still get to include 50% of my accrued sick leave at my ACTUAL final hourly rate?
Thanks for your excellent analysis and your thoughts on my situation.
Concerned Tier2. You raise questions I ask myself every time I read the version of the bill passed and sent on for the Governor’s signature. I honestly don’t know the answer to any of your questions. The devil will lie in how PERS Legal people read the statutory language and how PERS implements the different features of the bill. Unfortunately, it isn’t possible to know this until PERS begins its formal rulemaking after the bill officially becomes law, later in 2019 and early 2020. As for the court, the layout of the case against the Legislature will need to be filed within 60 days after the bill is signed by the Governor, so before the end of 2019. I see a number of pieces that will get the court’s attention (diversion of IAP money, and the reduction in the salary cap for members already over the cap, or pushing against the new cap), but each Court is different and only two members remain from the Moro Court, and only one from Strunk. This, trying to handicap the current court is kind of like picking favorites in the current NBA finals - about even odds on both teams.
If your skill is portable and you can remain in the area, moving on wouldn’t be the worst option. Because court rulings hold that accrued benefits can’t be diminished, you could freeze existing PERS benefits at their current level and move on without most penalty, although the value of dick leave would be an issue.
I wish the answers to all the questions were simple, but PERS answersvnever are, and the Legislature never thinks far enough outside the box to see either unintended consequences or edge cases.
I am still trying to calculate the value of dick leave. Does size come into play?
I think it's value is measured in birth control units. LOL I hate auto-correct.
LOL We need humor once in a while!
You state, "the layout of the case against the Legislature will need to be filed within 60 days after the bill is signed by the Governor, so before the end of 2019." Do you know who plans to file a lawsuit?
Almost certainly the PERS Coalition, which is a coalition of most of the major employee unions.
Thank you.
The best part of the deal was how Democrats stuck it to the very Unions who own them with their massive contributions. Brown is a lame duck but many of them will have to answer to both the Unions who fund their campaigns and voters who will eventually realize they were had with numerous tax and fee increases. The one party Oregon legislature is out of control.
I'm a Tier 1, P&F Unit Member. I'll be retiring soon at 50 years of age with 26.6 years. question...
What RATES are used to calc FAS for Vacation, Comp and Unused Sick?
I get FAS x 2% x Service time... But I've heard too many versions of what the RATES are.
Thanks
PS. great blog
since all three variables are accruals over time, PERS will first figure your preliminary FAS by determining your three highest salary years, adding them together, and then diving them into your average monthly salary. They will then divide it again to find your average hourly rate. Once they have that, they will determine the value of vacation time and comp time, and 1/2 the value of sick leave. They add those values to your 36 month total used for calculating the preliminary FAS to come up with a new total. They then redivide the adjusted total by 12 (annual) and 36 (monthly) final FAS. This, then, becomes the overall FAS used in all Full Formula calculations.
Why only half the sick leave? Because the employer has to match it in its portion of the calculation.
Kate Brown signed the bill there trying to keep it quiet till past the dead line. I was told by someone in the know that works at PERS. and another at AIG Valic
re:"Kate Brown signed the bill there trying to keep it quiet till past the dead line. I was told by someone in the know that works at PERS. and another at AIG Valic"
Which bill is being referred to? Thank you.
SB 1049 (referred to in the bblog post).
To Kevin
If you retire any later than November 30 this year (translation: any day in December), you will have a 1/1/2020 retirement date. So to avoid any 2020 changes and work as long as you can this year, make November 30 your retirement date.
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