Shake, Rattle, and Roll

I've been meaning to write something for quite awhile now, but the Covid-19 pandemic has wreaked havoc on all of us. I'm going to dispense with my usual blather about how badly the financial markets have done during this unbelievable moment in history. The bottom line is that the bottom just dropped out of the market and all of us who are invested directly, or indirectly have suffered losses (some real, some maybe recoverable) that are going to have an impact on our lifestyles and standard of living for sometime to come.

Since my traveling plans have been completely disrupted for the remainder of the year, I've had the opportunity to correspond with a fair number of PERS members and retirees. There are two questions that come up in one form or another in every one of these emails. For non-retirees, the common question is "should I get out now?". For retirees, "...can they reduce my benefit after I've retired?" There are no simple answers to either question, although the second one has a legal answer that is current today. So, let's get to the second question first. Two Oregon Supreme Court decisions since the beginning of the new century prevail on the answer to this question. Both the Strunk et al case (2005), and the Moro et al case (2015) have provided clear guidance that benefits of retirees cannot be reduced retroactively. In other words, once you've retired and are receiving a benefit, there is nothing permissible that PERS or the Legislature can do to reduce your present or future benefit beyond what was in force at the time of your retirement. So, at first glance, it appears that there is nothing that can be done to adversely impair benefits of those already retired. That drives the first question, and is the reason why people are asking whether it is time to jump ship.

The two questions turn out to be interlinked in curious ways. For people still in the system and not retired, the fear is that the Legislature and/or PERS could make changes that would affect benefits before individuals retire. That Governor Brown is planning to call a special session of the Oregon Legislature to address the fallout of the Covid-19 pandemic on the state's economy has people justifiably worried. My first, and foremost, piece of advice to people on the cusp of retirement is to pay close attention to the news of such special session. Special Sessions are not that common, usually deal with items that can be managed in a one or two day session, and whose agenda depends on bills drafted before the session and upon which agreement among the participants has largely been sorted out before the session begins. Under those circumstances, I can say reasonably confidently that PERS is just too complex for a Special Session to deal with. Experience has taught Legislators that PERS bills hastily drafted have unintended consequences and legal barriers that often prevent them from being implemented, or force them to be unwound. While I would never say that action on PERS was impossible during a special session, I do regard it as a low yield action with a high probability of expensive litigation. As I've advised others, watch for the Special Session agenda and if you see PERS on it, then it is time to bail if you can. If it isn't on the agenda, it doesn't mean it won't appear from nowhere, but that is unlikely. So that leaves a second, much more critical question hanging out there. On the assumption that nothing happens during a special session, what then?

The massive elephant in the room is the 2021 Legislature, which convenes in late January or early February and runs until the early part of July. These are the sessions in which all of the major changes to PERS have taken place. By the time of the 2021 Legislature, we should have a pretty good idea of how much financial disruption Covid-19 has caused in Oregon, in the US, and worldwide. We might also have some idea of how well or poorly the PERS Fund has weathered everything that has happened. The PERS chaos reported in the news is based on incomplete information and hearsay at this point. PERS doesn't track the S&P or the Russell 5000. It tries, but the de-risking strategy of the past few years by the Oregon Investment Council, has lowered both the alpha and beta of the fund, resulting in it trailing some of the major indices, but also being less volatile. PERS holds a lot of financial instruments in Alternative equities which don't get priced daily, weekly, or even monthly. Some are priced quarterly, some semi-annually. Common sense says that PERS has not done much better than many other pension funds during this volatile 2+ months of chaos. Nevertheless, with all that as background, I would still expect the 2021 Legislature to roll out bills targeting PERS and certainly trying to reduce benefits for members not yet retired. It is hard to predict what these bills might be, but whatever they are, expect litigation. So, for those people verging on retirement and can do so in 2020 (by November 30, 2020), if the Special Session produces nothing, I'd want to be gone by the end of November 2020. I wouldn't want to still be in the system unretired before the Legislature convenes in 2021. That is tempting fate more than I'd be willing to tempt.

Finally, the $64 billion dollar question. Could the Legislature enact changes to benefits already being paid? While they would be advised in the strongest possible terms not to go there, they might still go there. The Supreme Court has ruled, and this would be illegal you say. Well, the answer to that question is "maybe". Yes, two previous courts have ruled that this can't be done, and is an impairment of the PERS contract. The 2015, 2017, and 2019 Legislatures chose not to go near anything that would affect benefits of the already retired. Things may be different now, and the Legislature may decide that the "third time is the charm." The point of me saying this is that while Supreme Courts, in particular, like to adhere to the principle of stare decisis (upholding previous court decisions), it isn't a mandate or requirement to do so. Consequently, a future court could choose a different legal path and permit something previous courts have found impermissible.

I don't write this to worry people as I still think it unlikely; however, I also am realistic enough to know that what is unlikely isn't necessarily impossible. The US Supreme Court is a classic example of how previous court decisions can be overturned by future courts.

I am not predicting anything here. I'm also not offering much in the way of advice to people because events of today have upended a great deal of what we thought may have been the case three months ago. I have neither comfort to offer those on the cusp of retirement, nor reassurance to offer to those of us already retired. We've entered another dimension of time and space where all bets seem to be off, and we are at the mercy of Covid-19 and forces outside our control.