The 2017 Legislative session began with a bang, and goes out with a whimper. PERS reform was one everyone’s mind as the session began, and we saw at least a dozen bills and amendments that attempted to “reform” PERS. But, from the very beginning, the Democrats made clear that without corporate tax reform, they were not going to be the “bad guys” for more PERS reform. Thus, they presented the Rs in the Legislature with the uncomfortable choice between corporate tax reform and PERS reform. The Rs chose to wimp out on corporate tax reform, and the Ds decided they weren’t going to be on the hook with voters and the unions for any more PERS reform. So, the Legislative session will end sometime soon with neither goal accomplished, and the situation even worse when they return in 2018 for the short session and in 2019 for the long session. Those who hung in and didn’t retire before the Legislature did anything bad are now spared the uncertainty for the future, while those who decided to gamble have bought themselves another 6 months or so before PERS itself makes some crucial changes that will exacerbate the problem statewide, although the change is necessary. Next month (July), the PERS Board will make decisions about the economic assumptions necessary for the next system valuation. These assumptions include the assumed interest rate, salary growth, mortality tables and the all-important actuarial equivalency factors that will take effect on January 1, 2018. Two of these three assumptions are likely to change significantly. The assumed rate is likely to go to 7.25% (or possibly lower, to 7.0% - see California’s recent decision), while the mortality factors are headed to greater longevity per the IRS tables that just changed. In total, a 25 basis point reduction in the assumed rate, coupled with a normal secular growth in mortality should produce a 3 month setback in benefit (you have to work 3 months longer to recover the benefit you’d receive 3 months earlier under a higher assumed rate). People affected by this change are all whose best benefit is “Money Match” retiring on or after January 1, 2018, and all Full Formula retirees who choose an option with a beneficiary. Full Formula retirees who select Option 1 (no beneficiary) are NOT affected by changes in mortality or assumed interest rate, as the benefit is simply the product of the formula itself.
Those of you who are gambling that you can escape without any further pain are, unfortunately, delusional. The situation is likely to get worse in the near future, and the next long Legislative session, if not the 2018 short session, is likely to include some unavoidable changes to future PERS benefits. I don’t see how this can be avoided, and most people “in the know” agree with my assessment. I can’t predict what will fly and what won’t fly. But I expect that desperate times may beget some desperate measures, even those with a slim likelihood of getting through the Courts. Court membership changes with each election and one of these days we may get a court that is not so sympathetic to the plight of active workers. If you are near retirement, I advise you to consider seriously making plans for exiting the system before the 2019 Legislature convenes in early February 2019. The pressure will be excruciating on that body to do something about escalating PERS costs. The Board’s decision on rates might be the trigger to push some reluctant legislators over the edge, and financial exigency might force the Courts to consider some changes that we might not have thought legal in the past. I don’t imagine any cuts to current benefits of the already retired, but if you aren’t retired by the beginning of 2019, I can’t save you from yourself. It is naive to think that the PERS problem is going to go away. I think this year’s Legislature squandered some opportunities to remake the corporate tax structure more equitable for the personal income tax payers in the state. I think the mainstream media squandered its chance to have any influence by its constant drumbeat of bad news that blames “greedy” employees without considering the role of the greedy and irresponsible employers in the current fiscal miasma. I can say “I told you so” only so many times, but until the media examines the role the employers have played in creating the fiscal crisis of PERS (by not paying what they owed, when they owed it), the situation is going to get worse and worse. I don’t have a solution to the problem except to repeal Measure 5, which is the ultimate cause of this problem.
This year, the Legislature had a chance to do something meaningful, but blew it. As Freddie Mercury screams “Another One Bites The Dust”, this Legislature will go down as the least productive, least effective, and most useless in recent memory.
This will probably be my last post for awhile. I’ll be in Iceland for a good part of July (taking pictures and having fun), but will be back in time for the PERS Board Meeting at which the assumed rate change will be announced. I’ll probably post something then after the decision is final. Don’t expect new Actuarial Equivalency Factors to be available to me or to anyone else until the latter part of October, so don’t ask me for specific details about this change until then. I will have no more information at the end of July than I have now. We’ll all have to wait. The actuary doesn’t begin its recalculation of AEFs until after the Board approves the economic assumptions for the next two years.