Forget Everything

After more than a month, three of us have deconstructed the figures provided by the PERS actuary and have concluded that the "savings" from the Governor's proposal to cap the retiree COLA to the first $24,000 of benefit, is probably close to being correct.  Although annual savings appear to be small at first, the effect of accumulating the benefit savings over 20 years turns out to be quite a large sum of money - in the billions.  What the actuary did was to sum up all the annual savings, which get greater each year as the COLA base rises less than it would otherwise.  Then, if you look at the AVERAGE annual savings, it works out to something close to $400 million per year.  Keep in mind that in order for these savings to materialize, there are MANY assumptions that have to hold, so the actuarial figures are, at the very best, a good faith estimate of how much savings might be realized.  To explain this fully would require a lengthy post, but suffice it so say that I am no longer as suspicious of the actuarial numbers as I was initially.  Rumor has it that Erik Lukens, of the Oregonian Editorial Board, will attempt to explain the numbers in this coming Monday's edition of the Oregonian.  I have little faith that the mathematically challenged staff of the Oregonian will get things right, and I sincerely doubt that a single phone call to Paul Cleary at PERS could possibly have explained the actuarial math simply.  So beware of Lukens' explanation on Monday.  It may be enough for the 70 IQ point readers of the Oregonian, but it probably won't satisfy the smarter folk who read here.  I just wanted people to know that I've been thinking long and hard, and working with two other smart people to sort out what the numbers really meant.  I don't just publish my feelings; I try to back them up with actual analysis.

During the course of my COLA investigations, I had occasion to go back to the Oregon State Archives to find out for myself what the history of the PERS retiree COLA was.  What I found is important enough to repeat here, because at the end of the game, it is the Legislative History that will matter and will form the basis of a decision whether the Legislature goes forward with an attempt to revise the COLA, or decides that unfavorable litigation would result.

Let me start by saying that ALL elements of the current COLA have been in place, in clear and unambiguous language since 1971, with one notable exception.  In 1971, the legislature passed the COLA statute.  It included an annual COLA linked to the US Bureau of Labor Statistics inflation index, it included the banking of COLA in excess of the maximum rate, it indicated that the COLA would be applied to the entire monthly benefit, and the first annual COLA would be awarded effective July 1, 1972.  The initial rate established in 1971 was 1.5%.  In 1973, the Legislature upped the annual maximum to 2% and made it RETROACTIVE to July 1, 1972.  So, in other words, the current COLA - the one in force today, 40 years after finalizing the statute, is exactly the same as it was in 1973.  But, more significantly, the decision to change the COLA amount retroactively in 1973 indicates that the original 1.5% amount was probably done in haste and it was quickly remedied in the following Legislative session.  

Reading the statutory language from 1971, 1973, or 2012, you find that all essential elements of the COLA are structured in mandatory language.  All elements of the COLA "shall be applied" to the member's monthly benefit, not a part of the benefit, not a capped benefit, but the entire monthly benefit.  The word "shall" is important in litigation, for it is a word that means "promissory".  The COLA represents a legal promise to retirees that their benefit SHALL be adjusted annually by the criteria set out in the statute.  Except for renumbering the statutes themselves (1995), changing the initial percent from 1.5% to 2.0% quickly and retroactively after original implementation, and more clearly identifying the Bureau of Labor Statistics Index used to measure inflation, the statutes have remained virtually identical for 40 (or 42) years.  Anyone who doubts the Legislative intent to make this a promissory benefit need only follow the entire Legislative history to see that this is not the case.  Thus, the Legislature and the Governor change this at their peril.  For if they do, and the court strikes down their effort, there will be a lot of money squandered by employers in the first biennium this affects.  And since employers hate to have their rates raised, and will do nearly anything to avoid paying higher rates, including convincing the PERS Board to empty out its reserves back in the mid 2000s, just before the 2008 crash, it would be imprudent to put 4.4% of their payroll back in their greedy hands to spend willy-nilly and then be forced to pay it back.  If you think they are screaming now, just wait if that happens.

Repo Man

Our Governor Retread keeps popping out with ever more ideas to "help" the PERS system, its members, and its retirees.  Although this is not a new proposal, expect the Legislature to take up the issue of "pension spiking", which is getting a lot of coverage over on the blogs at the Oregonian and the Statesman Journal.  I have no idea where people get their information, but it surely isn't coming from PERS or from fact-based accounts of what really goes on when someone retires.

The notion of "pension spiking" comes from another planet, not Oregon.  The idea is that people consciously hold on to sick leave, comp time, overtime, and vacation to spike up their final average salaries.  Let's suppose for a moment that this were the case.  What impact would it have on an individual's retirement.  Let me use myself as an example.  When I retired, I had 2500 hours of sick leave on the books, and 30 days of vacation time.  OUS paid out my vacation time and deposited 6% of the payment into my Tier 1 regular account.  The sick leave, which represented almost 17 months of paid time off was reduced to a dollar amount and half of it was added to my 3-year highest salary total and leveraged up my Final Average Salary by about $3000 per year.  Now, here comes the tricky part.  The ignorant would assume that somehow my PERS benefit was affected by that increase in my Final Average Salary by $3000 per month.  And this seems to be the essence of the bitching and moaning about the spiking (I'm sure that overtime and all those others "perks" may raise the FAS by some finite amount).  Somehow people think that everyone who has these benefits uses them to enhance their PERS benefit.  Unfortunately, what you want to believe isn't what really happens.  In reality, I didn't see a dime of my sick leave in my benefit.  My 30 days' vacation time increased my account balance by about $1500.  My benefit ended up being computed using Money Match, which does not bear any relationship whatsoever to all the "spiking" people claim are being taken advantage of.  In fact, I know virtually no one who benefited from a sick leave infusion.  The ONLY way that "spiking" occurs is when an individual retires under Full Formula or Formula + Annuity.  In these cases, the Final Average Salary plays a role in determining the retirement benefit.  But the large question to be asked is "by how much does the retirement benefit increase by 'spiking' up the FAS by, say, $10,000 per year.  If someone has 30 years of general service, the difference between a $50,000 FAS and a $60,000 FAS is approximately $5000 annually.  In other words, under a 30 year career, the dollar increase in FAS increases the retirement benefit by roughly 50 cents on the dollar.  Major problem, right?   You'd think so, but in plain facts, the number of Full Formula retirements from the mid-1990's until the mid 2000's was less than 15% of all retirements.  Only in the past few years with the 2003 reforms finally kicking in have the number of Formula retirements increased to be significant.  Thus, the major hue and cry against pension "spiking" has no basis in fact.  Perhaps it is occurring with more recent retirements, but the impact cannot be very large since, even now, Money Match retirements are the largest percentage of retirements as recently as 2011.

So what's the beef?  There isn't a shred of evidence (or beef) to support the claim that sick leave, vacation, and other forms of compensatory time have had even minor significance on the benefits received by PERS retirees.  This is just another red herring introduced by the main-stream media to inflame the public's ire against PERS and its retirees, but when you look even minimally at the data, the data do not support the claims.  The data are the facts.  The data are the truth tellers, but apparently there is a really strong snow job going on amongst the politicos and third rate journalist who want to become the "Repo Men" for PERS.  Unfortunately, there is nothing to repossess here.  Move along bozos.  You won't save a nickel from taking away non-existent benefits.  

Happy holidays to all my regular PERS friends.  Bite me to the media which continues to totally make up facts to fit their vision of the world.  Unfortunately, reals facts don't lie, but the media lies all the time.

Math Sux

There is a common joke, begun with Mark Twain (I believe) that there are "Lies, Damned Lies, and Statistics".  Around my house lately the common joke has become "Lies, Damned Lies, and Actuaries".  I have been puzzling over an analysis done by Milliman for PERS.  The document, on PERS' web site, evaluates about 20 different proposals for cutting the cost of the PERS system, and reveals the savings.  It frankly states it does not consider the costs of implementation or the legality of doing so.  It only reports the savings.  What it doesn't report is probably more important than what it does, but what it does puzzles the heck out of me.

I confess that I've never studied Actuarial Sciences, although I am pretty facile with math and especially financial math.  But I am befuddled by a couple of numbers that appear and reappear in various publications and reports, including the savings analysis.  Many, including the Governor, propose some sort of cap on the COLA distributed to PERS retirees.  The current cap is 2% of the benefit received each year, further limited by the actual changes in the CPI for the Portland Metro Area.  Current retirees get the lesser of 2% or the actual CPI change in the previous year.  So, no matter how you calculate this, the maximum savings that could be realized from a COLA cap at 0%, for simplicity, would be 2% of the current retiree payroll.  According to the December 4, 2012 document "PERS By The Numbers", total annual payments to retirees are $3.2 billion.  If we assume that all retirees are eligible for 2% COLA increases, each year PERS' payments would increase by $64 million, or $128 million over the biennium.  Of course, each time the benefits increase, the payroll costs increase, the COLAs go on.  But, while this is going on, members and beneficiaries die, new members are added to the retirement rolls, and so the PERS retiree payroll has probably remained within some reasonable bounds over time.  Thus, assuming a COLA cap of 0% (NOT WHAT IS BEING PROPOSED), the most savings that could be realized in a biennium is about $128 million give or take a couple of million.

According to Milliman's analysis, capping the COLA at 2% of the first $24,000 of annual benefits would yield savings for 2013-15 biennium of $810 million.  If you just read the previous paragraph and asked, "What the heck is going on?", you can join me in the confusion.  The COLA is NOT capped at 0%; the savings cannot be the full $128 million over the biennium.  So, how do you get savings of $811 million from capping a benefit that only costs $128 million every two years?  Interesting math wouldn't you say?  Actuarial math has always been a bit fuzzy to me, and this one leaves me more puzzled than is typical.  I suppose the answers lie in that wonderful concept of "time value of money".  I'm guessing that the actuaries calculated the cost of the COLA out over the full amortization period of cost recovery - 20 years, and then discounted the savings back to a net present value.  If you don't understand this, just think about it as taking all the savings you'd generate over 20 years and then reducing them to a single number that reflects the current cost of buying an annuity that would pay out the benefits in slow dribbles.  I'm sure I'll receive a snippy note from an actuary or from PERS explaining actually how they computed the number, but it all boils down to this.  The savings to PERS proposed by capping the COLA at 2% of the first $24,000 depend on front-loading them to the first year and then hoping all the rest of the assumptions work out over the next 20 years.  If any of the assumptions are seriously wrong, the savings will be far less and we could be back at this same point in another couple of years.  Also, the important assumption is that the cap will NOT BE indexed for inflation.

The short message this silly little exercise should provide is that even if this passes and is ruled constitutional, it is doubtful that either it will achieve the savings projected, or that this would be the end of the retiree tithing to pay for their own benefits a second time.  We paid for them once by working for our careers, and now we get to pay for them again by the Legislature slowly unwinding them over our retired lives.  

Here is another curious number.  The savings to employers from capping the COLA are estimated to be 4.4% of payroll.  So, again, ask yourself how a benefit that costs, at most, 2% of a fraction of the total employer payroll saves them 4.4% of their total payroll.  According to Mercer (Milliman) the total employer payroll for the 2013-15 biennium is estimated at $18.4 billion.  If we take 4.4% of that we get, magically, $810 million.  So again, we are left with the question of how reducing the COLA to 2% of $24,000 could save 4.4% of total PERS employer payroll, when retiree total payments themselves only constitute 18% of total employer payroll, much of which is already safely stored in the Benefits-In-Force reserve, from which retiree benefits come and does not come, in real time, from employers at all.

I write this post not to challenge the savings (actually I do challenge the savings), but to instead point out the curious and fuzzy math used by actuaries and, thence, by legislators to construct budgets built from smoke and mirrors.  

Another number, just for fun.  When the $24,000 first was posted in 2010 as part of a package of legislative concepts for reducing the costs of PERS, the number was announced as an "average" PERS retiree benefit.  While we have taken issue with that number and the derivation in other posts, others seem to be slow to catch on.  In a guest opinion, Tim Nesbitt, a Kitzhaber advisor and former Union honcho, defended the number as reasonable to capture a majority of PERS beneficiaries and prevent them from ever experiencing the cap directly.  When I protested this as inaccurate, Mr. Nesbitt responded to me that the $24,000 was "selected" as an amount that had been determined (by whom?) to be sufficient when combined with Social Security benefits to produce a decent income.  Never mind that on a $24,000 pension the Social Security benefits could vary all over the map.  Never mind that social security benefits can be drawn anywhere from 62 to 70, depending on when a member decides to take the money.  Never mind that it says nothing about how many people have to live on the pension and the social security, and never mind that medical care costs are going up at 4x the rate of inflation.  And never mind that $24,000 covers about 53% of PERS recipients ONLY because it largely excludes anyone who worked more than about 10 years in the system.  It sounds more like the $24,000 figure was selected on the basis of how much savings might result and how loudly they think that PERS recipients are likely to scream.  It is a calculated gamble that says, if we stay away from more than 50% of PERS beneficiaries, the remainder will have a hard time organizing and, even if they do, they'll just sound like a bunch of greedy pigs.

I think what I resent the most about this cynical ploy to deprive career civil servants and public employees - teachers, fireman, policemen, sanitation workers, road workers, and hundreds of other job classifications - of benefits earned, accrued, and promised for a lifetime of work, is the fact that the silly math games are rarely challenged and everyone takes them as an article of faith.  While I don't believe the actuaries are liars, I do believe that actuaries massage numbers to produce results yielding the most confusion, and are unlikely to be challenged.  I watch the PERS Board every other month just accept these numbers as given from God, rarely questioning how they are arrived at and whether they make any sense at all.  This all reminds me of the offensive Barbie doll that announced when you pulled her string:  "Math is hard.  Let's go to the mall."

The Boy In The Bubble (LONG)

Seems to have peeked out of the bubble for a moment.  Groundhog Day?  Or Governor Kitzhaber checking in with the world 6 days after the election handed him complete control over the Legislature.  Oddly, on Saturday, House Majority Leader Tina Kotek announced that the majority would not introduce any PERS legislation that would fall to litigation.  Moreover, Rep. Kotek announced that the priorities in this session would be jobs and education, not PERS.  This was pleasant news coming from the newly appointed leader of the majority caucus.  Imagine their surprise when their titular leader, the Governor gave a speech to the Oregon School Board Association in which he highlighted PERS as one of his major items for the 2013 Legislature.  HELLO?  ANYONE HOME?  Kitz has always been accused of being aloof and standoffish.  This must set a new record for pure lack of ANY communication.

So, what should we do?  Who should we believe?  I can assure my readers that there is not much likelihood that PERS won't be considered this session.  Moreover, Governor Kitzhaber has spelled out the areas that many of us have feared for some time - retiree COLA cap, jettisoning the 6% pickup, and discontinuing the out-of-state income tax remedy for all eligible retirees (not just those retiring after 1/1/12).  So in today's musings we shall review a bit of history and assess the likelihood that Governor Kitzhaber's agenda will meet Representative Kotek's requirements.  Short answer:  unlikely.

Much has been written about the 6% "pickup" so that little review is required.  The very short version is that the 6% pickup was Governor Victor Atiyeh's suggestion of a way out of a salary impasse back in 1979 when inflation was nearing 10% annually.  Prior to 1979, PERS members paid their own contributions to PERS in AFTER TAX dollars.  When the various unions negotiating the contract back in 1979 asked for and fully expected raises that would keep up with inflation - in the vicinity of 10-12%, the state balked and argued that it didn't have that kind of money.  Governor Atiyeh, following on a suggestion from Bob Straub proposed that in lieu of a salary increase, the state would "pickup" (i.e. pay for) the employee's contribution to PERS.  It would still be regarded as the employee's money and would count towards salary at the time of retirement.  After running the numbers, the unions as well as the unrepresented members decided that this was a reasonable trade that would effectively cover the needs of members at the time.  This was not offered as a temporary solution; it was offered as new benefit for all employees.  That subsequent contracts included sizable pay increases did not mitigate the previous replacement of benefits in lieu of salary increases.  Whether this is contractual or not remains to be determined.  It is clear that this is part of collective bargaining and not legislative tampering.

The big ticket item in Kitz's quiver is the retiree cost of living increase.  The retiree COLA provision was enacted in statute in 1971 (before collective bargaining was prominent).  The statute stated that retirees would receive the lesser of 2% or the actual CPI-W (Portland/Salem Metropolitan Cost of Living Adjustment).  The 2% would be applied to the received benefit.  In the event the CPI-W exceeded 2%, the overage would be "banked" and the bank drawn on in years when the CPI-W was less than 2%.  There is nothing in statute that says the COLA will be applied to only part of the benefit, as Kitzhaber would like to have happen.   The idea of that cutting the Cost of Living to retirees is acceptable to retirees is simply hogwash.  Retirees did NOT create the funding problem and so it is questionable that the lion's share of any savings.  Let's analyze the math.  Presumably, capping the COLA at $24,000 (an amount that we shall question later) will save about $1.1 billion over the biennium.  This will save employers about 4.4% of payroll if estimates are to be believed.  But let's stop for a minute and examine the $24,000 figure.  Where did it come from?  It originated in 2010 with the Portland City Club's report suggesting that the PERS average salary, which was then about $24,000, be used as the cap.  Today, the average PERS benefit is $25,500, not hugely higher.  But let's look at who gets it.  PERS publishes a document entitled PERS BY THE NUMBERS twice annually.  The latest came out on 9/20/2012 - two months ago.  If you look closely at the document, you will observe that approximately 33% of all PERS retirees receive a benefit of $25,500 or less.  This is nowhere near the 50% that Ted Sickinger wrote about in his latest series of hit pieces on PERS published this past weekend in the Oregonian.  The fact is that examining the same tables that accompany the number Ted doesn't use show that about half of PERS retirees receive benefits below $40,000 and half above.  The problem with using the average or mean benefit level is that it is unduly influenced by part-time employees and a rather large number of retirees who worked between 5 and 10 years prior to retirement.  It is typically not possible to accumulate a reasonable benefit in that period of time unless you start out in a very high paying position and retire under the formula.  That isn't the case for most people and so we have a left-skew to the distribution (it isn't a normal distribution) in which 67% of benefit recipients are to the right of the average benefit.  Consequently, picking any number to the left of the 50th percentile will insure that far more people are hit by the cap than would be hit if this distribution were normal.  Career employees average closer to $48,000 in benefits, not $24,000.  So any plan proposed by the legislature to cap the COLA immediately puts far more people in jeopardy than one that truly affects "about half" of PERS retirees.  Finally, we should note that the Washington judiciary has just turned down the Washington Legislature's attempt to eliminate their COLA for certain groups of retirees (they have 7 different retirement systems for public employees so it is a bit harder to compare theirs with ours, but the principle still holds).  In Washington, the decision is only at the Circuit Court level and has a long way to go before it is final and our brethren in Washington see their COLA reinstated, but the decision should give our Legislature some pause before it launches into its apparent plans.

Lastly, we have the income tax subsidy for residents of states other than Oregon.  This issue is much more tricky than it appears on first blush.  The subsidy traces to a US Supreme Court decision rendered in 1988.  The case, Davis v Michigan, centered on the question of whether Michigan could give its state retirees tax treatments it did not offer those Federal retirees living in Michigan.  The Supreme Court held that Michigan was wrong and had to treat both groups of retirees identically - either tax both or tax neither.  Federal retirees followed suit in Oregon, objecting to the fact that they were subject to Oregon tax while PERS retirees were not.  Their suit, Hughes v Oregon, prevailed in the Oregon Supreme Court in 1991.  In 1989, the Oregon Legislature passed legislation to start taxing PERS retirees rather than remove the tax on Federal retirees.  By 1991, the Oregon Supreme Court ruled on the Legislature's decision in Hughes, explaining that Oregon had to comply with Federal law and thus were correct in their decision to tax PERS retirees, but then they explained that the income tax exclusion for PERS retirees was part of the PERS Contract; therefore, the state had to come up with a remedy for the breach of PERS' contract.  Eventually, this resulted in two different Legislative solutions in different sessions.  The 1991 Legislative session passed a small subsidy to offset the taxation.  This remedy was SB 750.  This turned out to be insufficient and another bill eventually made it through the Legislature in 1995.  This bill, captioned HB 3349, attempted to remedy the shortcomings of SB 750.  Principally, SB 750, did not fully remedy for the breach and didn't satisfy the Oregon Supreme Court's original ruling in Hughes.  Instead of repealing SB 750, however, the Legislature adopted HB 3349 with implementation on January 1997.  At the same time the Legislature passed HB 3349, it adopted many other changes to the PERS system, including terminating Tier 1 with its guaranteed rate of return.  It created Tier 2 with language that stated that their benefits were explicitly NOT CONTRACTUAL.  Moreover HB 3349 passed with language stating that it, too, was not a contractual right.  Sometime during the early 1990s another Federal law changed stating that retirement income would be taxed in the state of residence, not from the source state if the two were different.  Prior to this change, all PERS income was subject to Oregon Income tax no matter where retirees lived.  Because of this, the earlier SB 750 had been part of the PERS contract, but by 1995 PERS income was only subject to Oregon Income Tax if the retiree lived in Oregon, not elsewhere.  When HB 3349 was considered, the issue of residency came up in the discussions.  Both PERS and the Oregon Department of Revenue objected strenuously to having to check residence of recipients and so the Legislature decided to pass HB 3349 without a residency requirement.  HB 3349 applies ONLY TO TIER 1 MEMBERS WHO WORKED ANY PART OF THEIR CAREER BEFORE OCTOBER 1, 1991.  The benefit was computed by determining the amount of time worked prior to 10/1/1991 as a percentage of total work time.  The resulting fraction was multiplied by 9.9% and the result determine what income tax subsidy an employee was eligible for.  As an example, I began my career in 1970 and retired completely in 2002.  Thus, in simple math, I worked roughly 67% of my career before 1991 and my tax subsidy is roughly 6.2% of my benefit.  

Nearly every year since about 2001 one or more legislators introduced a bill trying to clarify HB 3349 to indicate that it was only intended for retirees living in Oregon.  And from 2001 to 2010 the bills died without a hearing.  In 2011, the Legislature got more serious about PERS and again introduced a bill to limit the tax subsidy only to Oregon residents.  This time the bill got traction and after ferocious lobbying ended up passing.  However, the revised bill was not the bonanza anyone expected because it only applied to members retiring on or after 1/1/2012.  The mainstream media were livid because the whole point of the bill was to recapture revenue that escaped Oregon for, in their opinion, no good reason.  Because the Legislative Counsel was concerned about the legality of the move, the Legislature backed off on going after all out of state residents receiving the tax subsidy.  This year, however, the calls for repatriating that income have gotten louder and more shrill.  Moreover, because the HB 3349 language explicitly states that this isn't a contract right, it is unlikely that the Legislature will avoid trying to recapture the subsidy from members living out of state.  This would not be a retroactive capture; it would be simply cutting off that portion of the benefit in the future.  For out of state retirees, this would result in an approximately 5-10% benefit reduction; however still looming is the fate of SB 750 which was passed before the state started inserting "no contract right" provisions into changes to PERS.  Moreover, SB 750 passed before the source tax was eliminated.  So it is far from clear what impact a change to HB 3349 would have on out of state retirees, especially if SB 750 is viewed as a contract right.

Needless to say, these are but a few of the possible changes to PERS to look for in the 2013 Legislature.  I expect an attempt to put new PERS employees in a pure 401K type plan (a Tier 4 if you will).   No doubt other changes will be sought, including a change to the way retiree benefits are computed - an attempt to decouple the actuarial assumed interest rate from the assumed earnings rate on the fund.  

This is the year where PERS members near retirement and all retirees need to become politically active.  Truly draconian bills are unlikely, but draconian is still in the eyes of the beholder.  It is time to write your legislator, starting with your House representative and then to your Senate representative.   Silence is not golden.  Make your letters or emails short and to the point.  For the COLA, it is a CONTRACTUAL MATTER with more than 40 years of documented history, no caps, and already ruled on once by the Oregon Supreme Court.  If you were a union member during your working career, make sure you contact your union and ask how you can contribute to their political action fund.  The PERS Coalition is a group of unions that handles legal, political, and lobbying duties for the member unions.  If your group is a member of the PERS Coalition, emphasize to them how important some or all of these issues are to you personally.  Offer to help in any way you can.  If help isn't needed, send money.  This is going to be an expensive battle both politically and legally.  It is your (and my) retirement income at stake.  

If In Money We Trust

But not necessarily PERS.  The PERS Strunk/Eugene recovery is in full swing now.  I got my repayment letter while I was gone on vacation.  Both the amount owed and the repayment amount were correct (good news), but that's not the story with many people I've heard from.  We have instances of people being asked to repay more than the law compels (10%), and people asked to repay amounts they claim not to owe.  I trust that PERS will get these issues sorted out.

Unfortunately, a much larger problem remains.  The new method compels retirees to repay ONLY what they owe, not a penny more.  Since the payment amount adjusts annually with any COLA, there is no simple way for individuals to track their cumulative payments as PERS does not send out monthly statements.  Consequently, there is no easy way for an individual to determine how much he/she has repaid, much less what the remaining balance is.  Retirees have asked PERS if this information will show on the 1099R - nope; on the irregular statements - not really.  This means that although we have an obligation to repay a specific amount, PERS does not feel any obligation to provide us with a periodic statement of our residual balance.  For many people this is very disquieting.  PERS has not been a paragon of accuracy over the years, yet they expect us to believe them that they will stop the payments when all our required payments have been made.  It seems to me that PERS should be sending out annual statements of balances remaining.  It isn't as if this information isn't available.  PERS is calculating it in real time, every month, and there is no reason except the small financial hit required to send out an extra piece of paper - possibly with the 1099R - at the beginning of each year.  Supposedly, there are 20,000 retirees paying back amounts monthly under the current plan.  Suppose that the cost of adding one piece of paper to the envelope that already includes the 1099R is 20 cents (that's probably an overestimate, but), we are talking an additional $4000 per year.  Contrast that with the $164 million that PERS is supposed to be collecting.  If everyone pays up in 10 years, PERS will spend an additional $40,000 in ten years to recover $164 million.  That represents 0.002% of the amount collected.  How would that compare with a single piece of litigation to challenge PERS if an individual thinks PERS has miscollected, misapplied payments, or overcharged an individual?  This strikes me as penny wise and pound foolish.

If you think PERS should be required to send you an annual statement of the amount you've repaid and what you still owe for a mistake YOU DIDN'T MAKE, please let them know.  

Hang Loose

Very tittle is happening in the world of PERS these days.  The election is just two weeks away and many elements of the PERS agenda will be established after we know who will control the Oregon House and the Oregon Senate.  If the Democrats take both houses, the PERS bills are likely to be less draconian than if the Republicans control the Legislature.  Dr. No is still Governor and so a veto of any anti-PERS bill is still possible.  On balance I expect a number of major PERS bills to be introduced into the Legislature but have no idea which will pass and which will not see the light of day.  I'm hard at work gathering information, but I am not in a position to report anything because the election will determine many things about the likelihood of major PERS reform.  There WILL be a change to the assumed rate decided during 2013 for implementation on January 1, 2014.  Both employers and PERS members are likely to oppose this change since it will mean higher employer rates and lower employee benefits.  However, PERS has some latitude to reduce the employer impact, while still socking it to members on the verge of retirement.  The Legislature convenes in late January, with the first bills likely to be passed in late March or early April.  The courts have consistently ruled that the Legislature cannot change PERS retroactively, but the definition of retroactivity has not be firmly defined.

Right now, I am far away from Portland and do not expect to be back until the early part of November, before the elections.  Although I continue to get information, I'm not in a place where it is simple for me to just pick up the phone and gab with people about the perceived impact any particular action might have.

Please stay tuned as once the election is over, the serious business of figuring out what the Legislature might have planned for PERS will become clearer.  The 2013 session is likely to be as volatile as 2003, but the courts have made the boundaries of legislative action more marked.  In actuality, there aren't many bad things that can happen to people on the contingent edge of retiring.  Even a reduction in the assumed rate will have little impact on members retiring through 2013.  But there are other changes that will have direr consequences for members further away from retirement, and several changes that *could* have a significant impact on members already retired.  This is where the definition of "retroactive" becomes crucial and will be, most likely, up to the courts to determine.  The Legislature has an unfortunatete habit of shooting first and worrying about the consequences later.  Happily, if this occurs, every legislative bill on PErS has a clause that directs resolution immediately to the Oregon Supreme Court.  This means that the time between a law passing and the law's legality being determined is typically two years or less.  There are no civil actions extant, and so any litigation that arises to PERS will be of the sort that goes directly to the OSC for immediate resolution.

My advice to those anxious about this is to hang loose until after the election.  You can help the situation out by voting against any candidate twho has expressed any negative opinion of PERS.  If you don't know about your own legislator, write the candidates and ask them their position on PERS.  Most will answer honestly, or at least in a way that clues you in to how they might vote on prospective PERS legislation.  Support those candidates with established records on PERS issues or those who have taken a stand that indicates that they would be inclined to give some leeway to PERS members.  If not, then any negative results are on you, not me.

Keep your eyes and ears open, and seek information wherever you can.  The vote you use may be to your benefit if exercised properly.  I'll be back after the election to handicap the outcome of certain likely PERS bills to appear before the Legislature.

 

 

Slip Sliding Away

I've just run across a PERS horror story that tops almost every single one I've read about.  I now have first hand information from the affected party so I feel confident that I understand what happened.  Doris (a pseudonym) retired from her employer in 2002 on a disability.  The disability was because of a brain injury.  She hadn't been working all that long and I don't know how old she was at retirement.  Nevertheless, the story goes like this.  Doris' initial computed benefit was $3500 per month.  Because Doris was unaware of how PERS really worked, she didn't think anything about the benefit.  Fast forward 5 years to 2007.  Doris gets her repayment/adjustment letter, but doesn't understand it and doesn't ask about it (remember the brain injury?).  PERS discovers that Doris not only had been over credited by $2000 for 1999, but also that they has miscomputed her benefit by more than $2000 per month.  So Doris' benefit is adjusted downward to $1400 per month, leaving a balance due of $59,000 resulting NOT from the 1999 over credit, but from the computational error PERS made in 2002.  PERS decides not to collect starting in 2007; I'm not clear why but they seem to apply the Circuit Court's ruling to ALL collections, not just those due to the 1999 over credit.  Of course, you can guess what has now happened.  If you guessed that PERS wants its $59,000 you would be absolutely correct.  But, PERS has decided, at least initially, to take a hard line and insist that all repayments be recovered in 10 years or less.  There is, to the best of my knowledge, no statutory requirement that PERS collect in 10 years or less.  It is simply a policy that the Board has adopted to collect the 1999 over credit.  However, in its usual inflexible, hidebound system, it has determined that Doris must suffer the additional indignity to repay her "owings" in about 10 years.  They are proposing that her current $1500 monthly benefit be REDUCED BY $500 per MONTH, leaving Doris nearly destitute.  While I have written to PERS about this case and am doing everything I can to help Doris, I'm afraid she has been a victim of a very cruel and cynical ploy by PERS to hew to an inflexible and irrelevant standard.  My reading of ORS 238.715 indicates that PERS must get permission from a beneficiary to reduce benefits by more than 10% due to a recovery action.  This reduction is 33% of Doris' monthly benefit.  Moreover, she suffered an initial 60% reduction in benefit due to PERS original error.  Now to add insult to injury, Doris is expected to repay an unseemly amount to liquidate an overpayment that occurred 10 years ago, and had nothing to do the PERB error in 1999.  PERS' fundamental error here is to confound two different issues and expect a single solution to both for their convenience, without regard to its effect on the payee.  PERS should have begun collecting the mistaken amount (about $57,000) in 2007, rather than let it continue to ride another 5 years.  Now Doris is 10 years older than when she was when she retired.  PERS squandered an opportunity to begin the repayment without court injunction 5 years ago.  While it wouldn't have been any fairer to Doris, PERS wasn't overrun with the idea that payments had to be collected in 10 years or less.  PERS totally misinterpreted the Court's injunction and applied it to a clerical error unrelated to the error under litigation.  Totally screwed up.

I don't understand PERS' inflexibility in this case.  Post your comments and thoughts in the comment section.  I'm sure Doris would appreciate your sentiment, positive or negative.  I hope that PERS gets a heart and a brain and decides to give Doris a much longer payment schedule so that she doesn't risk slip sliding away.    

September

The heat of the summer is winding down a bit, the days are getting shorter, and the nights are cooler.  The Anna's hummingbirds are engaged in aerial acrobatics over our feeders and are getting short tempered with each other.  It is also the month in which many of the retirees from the period 2000 - 2004 are starting to see their bills from PERS for the 1999 overcredit.  PERS retirees have discovered my blog and those who have been regular readers are nearly as startled as the "newbies" that PERS is billing them for something that happened over a decade ago.

Let's review.  In March 2000, the PERS Board, then composed of 12 people, decided to credit 20% earnings (out of 25%) to the Tier 1 Regular accounts for 1999.  Employers, still stinging from being stuck paying for the income tax remedy, were mad at the increasing rates that started right after the tax remedy began.  They decided to challenge the 1999 earnings crediting decision.  In early April 2000, they filed an administrative lawsuit alleging that the PERS Board had abused its discretion in awarding 20% without putting some of the surplus (over 8%) into the various reserves statutorily required.  Right here, at this point in time, the 1999 earnings crediting was suspended, leaving it in limbo until the Marion County Circuit Court (Judge Lipscomb) vacated the 20% in 2002.  Those members and retirees who benefited from the 20% decision were immediately at risk, but PERS failed to tell anyone in an obvious way what this meant.  Of course, years later, we know what it meant.  It meant that we had been overpaid by 8.67% on our Tier 1 regular account balances.  That overpayment continued to compound at 8% per year for every year it wasn't corrected.  Members retired with 20% credits on their records.  Lawsuits were filed, legislative actions taken, and throughout it was clear that PERS would eventually be moved to collect on the overpayments.  

The first phase of the collection effort was to stop the continuing overpayment of benefits, or the continued compounding of the 8.67%.  So, in the period between 2006 and 2008, PERS adjusted the benefits of the retired who received 20% by recalculating their base benefit using 11.33% as the 1999 earnings rate.  This resulted in an immediate drop in the base benefit.  They then added back all the COLA increases that should have been made, but had been withheld pending resolution of the cases, and most retirees barely noticed a change in benefits.  This led to some confusion because many members did not realize that they HAD received the withheld COLA.  PERS didn't do a very good job of explaining why, even after receiving all the withheld COLA increases, that benefits didn't change much.  At the same time, PERS invoiced members for the amount they had already been overpaid - money that was owed.  PERS sent out a lame collection letter, which was followed by a detailed accounting of what was actually owed.  The accounting was done very well and it allowed those interested to verify their own numbers quite easily.  Unfortunately, that letter was ignored by most PERS retirees because the Multnomah County Circuit Court had enjoined PERS from collecting that debt until higher courts could rule on the legality of the original collection letter.  So most people just filed their letters away or, worse, threw them away.  Finally, in early 2012, the Oregon Supreme Court, ruled that the Circuit Court had erred and remanded the case back.  In effect, this pulled the injunction and permitted PERS to move forward again with collections.  By this time, PERS had enough experience and heard enough complaints about the previous method of collection that they changed approaches completely.

Fast forward to today.  On the last Friday of August 2012, the first of the collection letters went out.  Once again, PERS has erred by NOT sending the detailed accounting of the balance due.  Retirees have been presented with just a bill for a dollar amount and are given 30 days to decide which of three methods they want PERS to start using to collect the debt.  People receiving a monthly benefit have been prepared for the collection by quarterly newsletters from PERS, but retirees who took a lump sum and have had no ongoing relationship with PERS haven't been so lucky.  Many of them, according to dozens of emails I've received, claim to have never received the original collection letter back in 2006-2007 when they were sent.  I don't know whether this is true or not, but judging from the number of emails I'd say that at least some of these individuals are correct.  PERS initially wasn't going to provide a copy of the original collection letter, but now I've learned that people who call the special PERS line are receiving what should have been included in the first place.

Now, for the issues that have arisen.  Monthly benefit people haven't complained much except for the lack of documentation.  But those who have and who've received the documentation seem satisfied that PERS' calculations are correct and unchanged from the 2006/2007 letter.  On the other hand, the lump sum people are completely taken aback by the size of their bills.  I've heard from people who received bills for as much as $61,000.  So, in an effort to explain what *might* be going on, I'm going to share some insight into how those numbers are computed.  First, and probably the most important piece, is the original error.  All regular Tier 1 accounts were credited with 20% for 1999.  This is 8.67% higher than amount ultimately authorized.  So, if you have your 1999 member statement (mailed in May 2000), you can compute the original overpayment quite easily in dollars.  Then, for each year you worked after the March 2000 crediting, the 8.67% grew by 8% compounded.  So if you retired in January 2003, your balance grew by 1.0867 x 1.08 x 1.08 x 1.08 = 1.37 (37%).  So, this answers the first part of the question of how much you were actually overpaid.  But, there is a second part that most people forget about.  Since you removed both the employee balance (yours) and the employer match (which is dollar for dollar in regular accounts), you also owe the same amount for the employer match.  Once you compute how much you owe from your own account, you then double that because the employer match was equally affected.  Monthly benefit recipients have already started to repay this because their total benefit (employee and employer match) has been adjusted downward.

So for those lump sum people, the pain is twice as large as you might have figured it to be because you've, undoubtedly, forgotten the employer piece of the equation.  You may also have forgotten about the time value of money.  PERS isn't charging you interest or penalties or anything else.  They are merely charging you for exactly what your overpayment was to the day you retired.  Once you took all your money, you stopped owing any more money, but the amount that you did owe was fixed at that point.

Hopefully this short explanation will help people better understand the balances they find themselves owing PERS.

The High Road

As expected, the item in the PERS Board agenda on the assumed interest rate was in response to Ted Wheeler, State Treasurer, letter to Paul Cleary. In Mr. Cleary's response to Mr. Wheeler, included in the PERS Board packet for next Tuesday's meeting, is a detailed schedule of the NORMAL cycle for considering an adjustment to the assumed interest rate. As predicted, Cleary is simply informing Mr. Wheeler and the Board of what the process is and how the statutes compel compliance. According to the schedule, the rate considerations will take place next Spring with a target date of adopting whatever assumed rate is appropriate at the July 2013 Board meeting. This means, as I predicted, that PERS intends to follow the statutes and any changes in the assumed rate will occur normally and go into effect on January 1, 2014 for members and will make up the new employer rates calculated for the 2015-17 biennium.

Cleary also infers that this would also allow PERS time to figure out how to implement any plan changes that MIGHT be adopted by the Legislature as well.

I think that, for now, this should give members some breathing room to make intelligent decisions about when or if to retire.

Since we don't know what the Legislature is planning to do, that is still an open question and affected members should be watching closely for any changes introduced during the 2013 Legislative session.

P.S. The Board packet is posted on the regular PERS web site under "Board". You can download a copy of the entire packet for your own reading pleasure. It is a 138 page pdf file.

First Taste of Hurt

It has been awhile.  PERS news has been sparse except for the occasional snarky screed by some print media journalists who continue to hammer on the libertarian theme of drowning government in the bathtub.  The local rag continues its rapid descent into irrelevance by continuing to harp on the cost of PERS and ways to reign in the costs.  The usual spate of lies continue - get rid of the 6% pickup and cut the 8% assumed rate.  In the meantime, the IRS just published its new interest rate assumptions for private sector employers on defined benefit plans, that lets them assume a roughly 7.5% rate of return.  Perversely, the rate had been in the 5% region for quite some time.  This means that the private sector employers can assume interest rates of 7.5% and contribute less, while public sector employers will be required to assume lower rates (less than 8%) and pay more.  The media's continue harangue on the 8% assumed rate has pressured PERS into considering when to consider the "assumed rate" at its next Board meeting on August 28th.  This meeting is out of sync in both month and day of week.  PERS cancelled the July meeting, and rescheduled it for August 28th, which happens to be a Tuesday.  Normally Board meetings are on Fridays. There is probably nothing sinister in the change of meeting days and months; summer travel plans interfere with everyone.

The discussion of when to discuss the assumed rate is interesting for its timing.  Normally, assumed rate discussions take place in the spring of odd numbered years as they are part of the overall set of assumptions that go into the biennial system valuation and employer rate setting for the next biennium.   So, routinely PERS would take up this question in March or May of 2013, and the effective date of any changes would be January 1, 2014 for members, and July 1, 2015 for employer rates.   The fact that PERS is raising the timing of the overall decision suggests that there is pressure being brought to bear from somewhere or everywhere.   I think it is fair to say that a change in the assumed rate is inevitable.  The 8% rate has been in effect since 1989, and the past decade has been a particularly volatile period in which the 10 year average return is well-less than the 8% assumption.  So the question really is when PERS will change rate and by how much, not IF they will change the assumption.   Anyone who is at or near retirement needs to keep this fact in mind.   Anyone unconvinced that PERS will change the assumed rate is delusional at this point.  Every public employee retirement system is either considering reductions or already making reductions (CalPERS has reduced twice in the past two years).  The 8% assumption is no longer sustainable for future retirements, for employer rate calculations, or for Tier 1 earnings guarantee.  Some have suggested that PERS drop its assumed rate to 6%.  It is unlikely to go that low, for PERS would be completely out of phase with every retirement system, public and private, in the country.  But I don't think 7% is out of the question.  Just remember that the assumed rate affects not only the Tier 1 earnings rate; it also affects the mortality and annuity factors computed for retirees.  Last year when PERS discussed the assumed rate, the actuary reported that a 50 basis point reduction in the assumed rate (to 7.5%) would result in about a 6 month shift forward in the tables.  Logically, a 100 basis point reduction would likely shift the tables by 12 months.  In other words, this would mean that the difference between an 8% assumption and a 7% assumption would require a retiree to work an additional 12 months to achieve the same benefit of the higher rate.  This is figuring in the reduction in earnings on the Tier 1 corpus, as well as the reduction in the base benefit amount.

I don't want to be a prophet of doom and gloom, but I think it only fair to warn people, especially Tier 1 members, that changes are afoot.  It is no longer likely that 8% will be the guaranteed rate of return.  The only question is whether PERS will succumb to public pressure and accelerate the schedule for changing it, or whether they will hold firm and change it in the timely and orderly manner prescribed in Chapter 238 of the Oregon Revised Statutes.  For many people who are eligible for retirement now, this may be the first taste of the hurt to be delivered from PERS, notwithstanding any changes the Legislature may prescribe as well.  This is no time to be complacent.  If you are even remotely thinking about retiring soon, pay very close attention to what is going on.  I will try to keep people apprised of what PERS decides to do at the August 28th meeting.  I am hoping they will stand their ground against the idiocy of proposing a change in the middle of a biennium and foul up every member's and agency's financial plans.  This is a change that is likely to please no one, except for the crazy print media that is dying rapidly.

Fool To Love You (Long Version)

Our State Treasurer, Ted Wheeler, is reported to have written a letter to the PERS Board urging them to consider lowering the assumed rate from its current 8% to something closer to 6%.  Ted also suggested that retirees share the burden of future cuts to PERS by altering the COLA provisions to apply to only a certain portion of a retiree's benefit.  No amount was given, but a guessing person might be inclined to think that Ted would be happy with something along the range of the mean PERS benefit (roughly $25,000 per year).

Between Ted Wheeler and Knute Buehler, candidate for Secretary of State, PERS members don't need any enemies in the Legislature.  One current office holder, Wheeler (what is it with guys named Ted?), and another candidate for an unrelated office want to take away benefits from existing retirees, and hammer current workers getting close to retirement.  

First, for the assumed rate change.  It is well-known that the PERS Board, along with the independent actuary working with PERS, determine the assumed rate.  The last time this issue arose was in 2011, when the PERS Board and the actuary considered changes from the current 8% to either 7.5% or 7.75%.  The actuary concluded that the long term (30 year) likelihood range of returns on investment would be between 7.75 and 8.25%.  At the time, there seemed to be no compelling reason for PERS to change its assumed rate from 8%, since the middle of the estimates included that very value.  Fast forward a bit more than a year later and public retirement systems across the country are reconsidering their assumed rate profiles and many are lowering their long-term estimates from 8% or more to the mid 7% range.  CalPERS and CalStrs - the two biggest retirement systems in the country - lowered their assumed rate to 7.75% last year, and to 7.5% this year.  There is no doubt that the 8% assumption is probably too high, and there is no doubt that the PERS Board has the authority and responsibility to change it.  Whether it deserves to be dropped all the way down to 6% is an entirely different argument.  I can find no evidence anywhere that public systems are going that low.  The lowest I've seen assumptions from systems in PERS' range is about 7% - most are higher.  A reduction to 6% would have profound effects on future retirees, current Tier 1 members, and employers.

A 200 basis point reduction in the assumed rate would mean that employers would have a substantial increase to their already high contribution rates.  This is because if PERS is assuming a lower rate on investment returns, then the money not raised by the additional 2% would have to be made up by employers.   Ted proposes that PERS could mitigate "some" of the employer increase by lengthening the period of time over which the balance due is amortized.  This would be equivalent to making a 30 year mortgage into a 40 year mortgage.  The payments are lower, but the amount of interest collected is significantly higher.  For active Tier 1 employees, a reduction in the assumed rate would have two effects:  one, it would lower the return on their Tier 1 accounts significantly and would reduce their final account balance at retirement significantly;  and two, it would increase the likelihood that they wouldn't retire under Money Match for much longer.   Remember that PERS has to pay the member the retirement benefit that is the highest of two different calculations - the Money Match calculation or the Full Formula calculation.  For members on the cusp of retirement, the impact would be more immediate.  Assuming that the rate change takes place on a normal schedule (Jan 1, 2014 effective date), any retirements taking place on or after that date would have benefits calculated on the basis of a significantly lower earnings assumption.  Last year when PERS considered lowering the rate to 7.5%, the actuaries reported that the impact would be such that a member would have to work 6 additional months to offset the benefit loss.  If that's the case with a 50 basis point reduction, then the effect of a 200 basis point reduction would extend that to 24 months of additional work just to receive the same benefit as one would receive on December 1, 2013.  For those who can't wait to retire, the immediate effect would be approximately 17% lower benefits (dependent on age of retiree and benefit option chosen).

The second proposal is a change to the COLA provision.  Ted didn't provide any detail here, but other similar proposals have been made.  Assuming that Ted's idea is about the same as the others, the effects are pretty straightforward.  It isn't clear whether Ted is proposing this for current retirees or only future retirees, but it doesn't make a lot of economic sense to propose it only for future retirees.  Legally, however, it probably does make considerable difference.  The current COLA provision was enacted in 1971.  In statute is the requirement that PERS provide a COLA based on the Portland-Salem metropolitan area inflation index.  The requirement is that retirees receive the lesser of 2% or the actual change in the cost-of-living index for the previous year.  In February of every year, the US Bureau of Labor Statistics releases the relevant figure.  If the change from the previous year is more than 2%, retirees receive a 2% cost of living adjustment on July 1 (paid August 1) of each year.  If adjustment is greater than 2%, the difference between 2% and the actual change is "banked" for years in which the cost-of-living adjustment is less than 2%.  Both the amount (2%) and the banking provision are contained in the statute.  In 2003, the legislature enacted a COLA freeze for retirees in the April 1, 2000 to April 1, 2004 retirement cohort to recover alleged over crediting of the 1999 earnings (the City of Eugene case).  The COLA freeze was challenged by Martha Sartain and OPRI, and the Oregon Supreme Court ruled in the consolidated Strunk case (including the Sartain challenge) that PERS could NOT pay a retirement benefit to which no COLA attached.  In other words, the Legislature had altered the contract between retirees and PERS.  The Supreme Court ruled this to be a breach of contract and the COLA freeze was lifted (there were other twists and turns in these cases that made the impact on retirees the same, but that isn't the point here).  So, any attempt to alter the provisions of the existing COLA for current retirees is likely to be met with a strong legal challenge again, and if history is any guide, PERS and/or the Legislature is unlikely to get away with a change that alters the existing contract.  When retirees retired, the agreement in effect at that time was that they would receive a COLA on their entire benefit annually so long as the cost of living increased in the previous year.  Both the amount of the COLA (2%), the benefit to which it applied (all of it), and the banking provision are all spelled out in the Oregon Revised Statutes and have been in effect since 1971.  

The final change Ted proposed was a revisit of the tax remedy payments for out-of-state retirees.  In the 2011 Legislature, legislation was approved and signed into law that prevents PERS from paying any tax remedy payments to Tier 1 members who retire on or after January 1, 2012 (and who were eligible for such payments in the first place).  The original proposal would have removed the payments from ALL out of state retirees, regardless of when they retired.  After hearing from the Legislative Counsel and (probably) the Attorney General, the Legislature wisely decided that applying the rule retroactively to members already living out of state would be challenged legally and that there wasn't a strong case that could be made in favor of the retroactive provision.  Ted is proposing that the Legislature reconsider that proposal and apply it to all PERS retirees who no longer live in Oregon, retroactive or not.

Some PERS retirees have just finished a 12 year period of constant litigation, uncertainty, and anxiety.  Just now, as the dust has settled on the 2000 City of Eugene case, the 2003 Legislative reforms, and the 2004 PERS-City of Eugene settlement agreement, another Ted is proposing another set of changes to PERS that would trigger yet more litigation, more uncertainty, and higher anxiety yet for people who just want to live their retirement in peace.  We all lived up to our end of the bargain - we did our jobs at a high level of competence, we accepted a lower salary in exchange for a reasonably secure retirement, and we retired based on contractual promises made at the time we retired.  We've lived through the last decade always in doubt about when and what shoe would fall next.  Two of the three proposals suggested by another Ted would reinstate the uncertainty and dread that surrounds existing PERS retirees.  The third proposal would take people who are on the verge of retirement and change the rules significantly.  At what point do those of us who did our jobs and who are doing our jobs get to retire with some certainty that our benefits are really secure?  Apparently two people named Ted, both of whom got lots of love from PERS members and retirees in their election campaigns, feel that we don't deserve any peace.  That's a rotten repayment for all those votes.  

So, to both Teds I say, "I was a fool to love you", and all you've done is to increase my cynicism at the whole electoral process.  It just isn't worth squat voting these days, especially for offices in the State of Oregon.  Promises be damned; contracts be damned; statutes be damned.  

 P.S.  See what I mean by "Ted".  Ted Sickinger of the Oregonian is another of the nutso journalists that continue to write screeds against PERS members and retirees and advocates changes to benefits.  Fortunately, I have no friends named "Ted".  If I did, I'd probably want to defined them just because they were named Ted.  I don't trust people named Ted anymore.

P.P.S 8/2/12.  Indiana's PERS just dropped its assumed rate from 7.25% to 6.75%, the lowest I've seen thus far.

Traveling On

I'm always amazed at the strange twists and turns in the PERS fiesta.  The latest irony to hit the street is that the Salem Statesman-Journal's crack PERS and public employee reporter, Dennis Thompson, has been lured from his reporter's job to a job as Public Affairs spokesman for the Oregon Department of Revenue - the people who collect the income taxes, the people who will track down PERS miscreants, and the people who are all members of PERS.  While Dennis was reasonably fair and mostly accurate in his reporting on PERS, he will now find himself to be a beneficiary of PERS' supposed munificence.  I wish him well in his new job.  Instead of criticizing PERS and demanding all the information on every PERS retiree, Dennis can now join the PERS party and find out what it is like on the other side of the fence.

 

 

Lawyers, Guns and Money

For those of you who are concerned that you are just going to get an invoice from PERS, guess what:  "you are correct."  PERS does *not* intend to justify the amount invoiced this time through.  They assert that you were invoiced once in either 2006 or 2007 and you had 60 days to appeal or contest the amount.  Thus, they are not required to either document how they arrived at the amount you owe, or give you any further appeal rights.  

While all of this may be true, it seems bad policy to send an invoice with no explanation for how PERS came to the amount you owe,and claim they notified you 6 (or 5 or 7) years ago of the amount and that you have no right now to ask for an explanation or be able to challenge the amount.

There are many people genuinely concerned about this matter.   They may have been invoiced back in the day, but many are under the impression that when the invoices were enjoined from being collected, they were effectively nullified.  Again, the policy is clear, but the implementation seems a bit heavy handed to me.  Since they have copies of the 2006 or 2007 letter, it would add little to the collection costs to include them again to remind people how they came to the amounts.  This would probably save more money in the long run than cost in the extra postage and printing.  Penny wise, pound foolish.  Also, a chance for more lawyers to get involved.  PERS cannot prove they actually sent the invoices since they weren't sent certified or registered.  People can easily claim they didn't get them.  Ugly and foolish if you ask me.  

The Age of Worry

Not a lot of PERS news to report these days.  We've been quiet here on the Fearless front.  Yours truly did get his 3 seconds of fame being quoted in the July 2012 issue of Kiplinger's Magazine on the repayment to PERS.  The article is about "recoupment" as a new worry for retirees across the country.  Somehow they found this blog, and found me.  I interviewed for about 15 minutes nearly 2 months ago and they managed to find two sentences to use in the one page report.  Fortunately, they spelled my name right and quoted me correctly.  

On the good (I guess) news front.  Anti-PERS crusaders have decided (apparently) not to take a stand at the ballot box.  As far as I can tell, there are no anti-PERS initiatives circulating for the November ballot, and it is now passed the date for new initiatives to be approved for petition circulating.  The November elections present a variety of candidates running on anti-PERS platforms, so I'm sure that next years' legislature will have a variety of anti-PERS bills.  The Salem Statesman-Journal's Dennis Thompson suggests that the two big numbers to keep in focus are the 6% "pickup" and the 8% assumed rate.  

I've been ruminating about those two numbers for quite some time and I'm afraid that I can't see how things will play out.  Stay with me for a moment and I'll clarify as we go along.  First, you need to understand that PERS gets money from three places:  employee contributions (regardless of who pays it), employer contributions, and earnings.  Currently, about 71% (or something close) of PERS' income derives from earnings on the fund.  The rest comes from contributions made by employers and by employees.  Suppose for a moment that the legislature decides to do away with the mandatory 6% employee contribution.  What that means is that no money will be contributed to the fund from employees.  That reduces the income source to two:  employer contributions and earnings.  If the fund doesn't get 6% from employees then its overall cash flow changes, and the unfunded liability rises.  We don't want that, so we might have to increase employer rates to offset the loss of funds from employees.  Now, here's where the second shoe drops.  The fund assumes an 8% return on investment annually.  This is true for employers, is true for employees (Tier 1 anyway), and for all retirees.  If PERS lowers the assumed rate to, say, 6.5% or 7%, then Tier 1 rate guarantee goes down for all future earnings, the actuarial tables are revised for future retirees to reflect lower earnings growth, and the disparity between actual earnings and needed earnings rises.  There is only one place to get that money - from employers.  So, as you can see, both the Legislature and the PERS Board have a real conundrum on their hands.  If you eliminate the employee contribution (and the employer obligation for the "pick up" where it exists), employer rates will go down, but the overall health of the fund declines as well.  Consequently, while employers might see a first pass reduction of 6% in their overall contributions,  PERS will be forced to raise the rates to offset the anticipated unfunded actuarial liability that arises from having less cash flow to the fund.  Then, if they also cut the assumed rate, employers will again be called on to contribute more.  If you're lowering the assumed rate, you're admitting that you can't grow your way out of the problem.  The solution is to get more from the employers, not less.

So, while these two issues should be of concern to everyone, the ones who will really be opposing any change in the assumed rate will be the employers.  So will Tier 1 actives and in actives, but their voices will not count as much as the employers.  As far as the 6% goes, the only way that could change is to make it owned by employees.  That means an effective 6% pay cut for all those employees working for employers providing the pickup (largely State of Oregon).  Many employers today do NOT pick up the 6%.  Way back when this was first raised, employers and the employees and their unions agreed to some compromise that has the employees picking up their 6% and the employers provided some initial boost to base salaries as a partial offset.  The State doesn't have that luxury.  So, what I expect will happen is that this issue will come up during collective bargaining and the legislature will, likely, stay away from it.  On the surface it sounds like a great way to save some money, but the money saved will end up being very expensive for employers in the long run (and in the short run).

I'm not a seer, nor a forecaster, nor even that connected, but logic dictates that the two numbers Thompson suggests are going to become most important are likely to be backed away from by the Legislature when the true nature of the problem is explained to them in financial terms.  Those dogs won't hunt.  

What this means is that we are going to have to be especially alert because when you take away obvious things, the less obvious become more attractive.  Keep your eyes peeled, and ask hard questions to candidates running for legislative office.  Try to expose their real positions and what their objectives might be.  Knowledge is power in the age of worry.

Looking At The World From The Bottom Of A Well

Only in Oregon can we have a state agency(PERS) that has made no provisions for public employees to accelerate their payments to satisfy an obligation created by the PERS Board in 2000.

Back in 2006-2008, PERS finally began to compute what certain retirees owed as a result of the "mistake" made by the 2000 PERS Board to credit regular account balances at 20% instead of 11.33%.  After countless court battles PERS prepares to finally collect all the money owed (about $185 million) by this group of retirees.  Part of the money was recovered in 2006-2007-2008 via adjusting benefits (down) going forward to prevent individuals from receiving more than they were eligible to receive.  However, between April 2000 and April 2005, retirees received larger benefits and PERS intended to collect that money via a method known as "actuarial reduction".  This method took the amount overpaid, divided it by the remaining life expectancy of the retiree and the monthly benefit was reduced by this amount.  In a perfect world, retirees would have paid their obligation completely by the time they reached their anticipated life expectancy.  However, PERS, in its infinite wisdom (stupidity?), decided that the payment would never cease until the retiree and his/her beneficiary ceased to exist.  This would allow longer lived retirees to subsidize shorter-lived retirees, who would not "pay up" under this scheme.  Actuarial reduction was a very unpopular method with retirees who didn't feel they should be obligated to pay more than they owed.   Judge Henry Kantor stopped PERS from collecting from any retirees after June 2007, until higher courts could rule whether PERS had any legal right to collect at all.  So, some unknown number of individuals were trapped in "actuarial reduction" before Kantor's injunction, while others did not have to pay until starting sometime this year, when the Oregon Supreme Court entered a judgement permitting PERS to resume collections.  So,….

PERS heard the complaints of the retirees trapped by actuarial reduction, they heard from OPRI, they heard from the PERS Coalition, and they heard from ME.  People weren't going to go for the "actuarial reduction" because it was inherently unfair.  PERS came up with a more reasonable method which allows affected retirees to repay their "overpayments" over a period of up to 10 years.  This means that virtually all retirees will be paying between 2% and 5% of their gross benefit, pre-tax, until they are paid up, and then ….THE PAYMENT STOPS, ends, terminates.  We all agreed this was a fairer plan.  Moreover, unlike the actuarial reduction, PERS gets its money sooner, retirees have a chance to live part of their retirement without having a recurrent stream of money taken from their benefits.  Perfect…ALMOST.

You would think that the geniuses at PERS would want to allow EVERYONE who owes money resulting from the 1999 over credit to participate in a plan that give PERS its money back SOONER.  BUT NOOOOOO.  Those poor souls on the "actuarial reduction" plan are terminally locked into a plan that PERS itself admits is unfair.

As Ricky Riccardo would say:  "splain this to me".  PERS has computers - a really spiffy system as I understand - installed recently.  They just asked the legislative E-Board for about $3 million for staffing authority to collect this $164 million.  And yet they can't 1) permit "actuarial recovery" persons to shift to the new payment plan and pay their debt off SOONER; 2) tell "actuarial recovery" people how much they owe now, today, this minute, and 3) let "actuarial recovery" people just pay off their remaining balance today, this minute because of 2).

It makes a person wonder whether the people who bid and installed the PERS computer system took their guidance from the Portland Water Bureau or the Oregon DMV.  We (members) spent zillions on PERS' computer system and yet we have all these unfortunate retirees stuck at the bottom of a hole, unable to pay PERS off early by any means.  Talk about looking at the world from the bottom of a well.  All I know is that I regard this as a stupid policy, with no rational explanation, that deprives PERS of essential income earlier, and leaves affected retirees in the unenviable position of paying a bill that never comes to an end.  Just remember, the 1999 over credit was a decision made by the PERS Board, not by the members.  Computers are supposed to make life easier.  PERS has managed to spend a fortune on a bargain basement system that cannot be adjusted to changing circumstances, and are too dumb to realize that they have managed to stab themselves at the same time they've stabbed some retirees.  Nice work PERS (not)!

Ain't That a Kick in the Head

The PERS Recovery effort has gotten under way, although no formal, official collection letters have gone out yet.  PERS is still waiting for a decision on their budget request to the Legislative Emergency Board.  

In the meantime, the little, niggling things I mentioned in my last post are starting to clarify, and the little people are finding that PERS has a variety of groups that are suddenly discovering that they owe PERS money even though they either retired before the 1999 earnings crediting, or after the so-called adjustment.  In other words, there are far more people affected by the recovery than just the so-called "window retirees".  We've encountered people from the Police and Fire group who retired after the recrediting action, but who purchased Police and Fire units while the 20% crediting was still in force.  Those units were not adjusted at the same time that the Tier 1 regular account recrediting took place, and thus were surprised to receive a collection letter.  There are approximately 1300 retirees affected by this untimely notice.  People who took the partial lump sum (retired prior to 2004) in the late 1990s and decided to have PERS distribute it in some (up to 5) annual payments.  The money remaining in PERS after electing the partial lump sum was also credited for 1999 earnings at 20% and so many of those people found themselves receiving an ugly surprise letter from PERS last month.  The original default repayment amount started out at 2% and was, unthinkingly and uncritically, selected by PERS staff without any analysis of the actual impact on the timing of repayments.  While most people would retire their obligation in under 10 years, a significant number wouldn't.  Some extreme outliers wouldn't be recovered in under 40 years.  Thus, PERS has had to revisit the minimum payment and revise it to between 2% and 5%. The people most likely to be affected by the higher percentages, some as high as 10%, are people who took partial lump sums.

We've also heard from people who asserted that they had no obligation to PERS yet they received letters.  The largest percentage of instances were people who retired in May, June, and July 2005, supposedly after all the account adjustments were made and before they could possibly have received a single overpaid monthly benefit.  PERS initially denied that there were any confirmed errors, but I now know of at least three cases in which PERS has acknowledged erroneously sending the letter.   I'm pretty confident that there will be more.  I have heard from no one who did not receive a letter who believed he/she should have.  At this point it is probably safe to assume that if you haven't received a letter, you probably won't receive a letter.  However, some of the cases are so complicated and involve so many issues that there may be a few stray letters yet to come along.

The most common question I'm getting is:  "when will we actually see the invoice and have to start repaying?"  The answer depends on whether the Legislative E-Board approves PERS' request for additional spending authority.  If they get the approval, I would expect invoices to start going out in August and probably take about a year to complete.  I have no idea how PERS will stage the invoicing, although if I were doing it, I would go after all the low-hanging fruit first (i.e. retirees receiving a monthly benefit).  These make up about 75% of the total, so the low-hanging fruit also yields the greatest return for the least expense.  There will probably be a much more protracted effort to contact all the people in the other categories, especially if PERS does not have an ongoing relationship with them.   If PERS does not get the additional budget, the process will take much longer.  I have a hard time imagining that PERS won't get the money since the benefit to cost ratio is so extremely high.  

Meanwhile, the silly season is in full tilt, the structure of next year's Legislature is in doubt until November, and early returns suggest that a few well-known players want to revisit PERS yet again in February.  The cockier Legislators, or legislative wannabes seem to think there is still legal low-hanging fruit to be harvested from PERS, but I'm doubtful that the bigger pieces will withstand legal review.  Nevertheless, we've been kicked in the head so many times in the past decade, that I'm not willing to let up on my scrutiny of the big (or small) picture.  A new Attorney General might let up a bit on the privacy matters, but that may be a small victory if we attain it.  The price of a PERS retirement now seems to be eternal vigilance, something none of us anticipated when we retired. 

 

Swallowed Up

Little niggling things continue to concern me about the latest campaign PERS has organized to collect from "window retirees" for the overpayments we were paid.  Part of my concern was raised in yesterday's post, and will be elaborated on in today's post.  However, another issue has bubbled to the surface as well.  I've been hearing from more and more PERS retirees from  2004, 2005, and 2006 (outside of the "window") who also received the pre-collection letter.  Since these members did not, to the best of my knowledge, receive any documented "overpayments" (their accounts were completely debited for the entire over crediting from 1999 after the settlement agreement was executed in January 2004).  Thus, they received no overpayments, yet are receiving a letter charging them with receiving overpayments.  One went so far as to call PERS and received the unwelcome news that there is a group of about 2000 post-window retirees whose accounts are being reviewed for possible overpayments.  It is hard to figure out how these retirees could have been overpaid, and the idea that PERS is using the cover of the Strunk/Eugene remediation to go after possible mistakes long after the statute of limitations has expired is more than a trifle worrisome.

Now, back to the 2%-5% issue.  While I now know the reason why PERS had to revise the minimum payment, I still cannot understand two things about it:  1) why wasn't this obvious to PERS when they first proposed the 2% default payback; and 2) how they are going to determine who is going to have to pay more than the 2% minimum.   If PERS stuck to the 2% repayment plan, some individuals would be in payback status for as long as 40 years; most are not anywhere near that long.  About 80% of "window retirees" receiving a monthly full benefit (i.e. did not take any lump sum) will be able to repay their entire obligation in 10 years or less.  PERS has decided, unilaterally I might note, that the collection process should not run for longer than that.  About 18% of regular monthly recipients would require longer than 10 years to repay their debt and these are the people PERS will tag with higher monthly reductions (up to 5%).  For the rest of the people - about 2% of regular monthly benefit recipients, and a large proportion of people who took a single lump sum payout - the reduction required to liquidate their "overpayment" in 10 years or less will be substantially higher than 2%, possibly as high as 10%.  PERS will be in contact with this group of individuals to arrange for some additional payment commitments to ensure repayment is complete in 10 years.

One question does not yet have a clear and unambiguous answer.  I serve as a perfect example of the problem.  My "overpayment" is in the mid 5 figure range.  If I take 2% of my current benefit and divide it into the amount I owe, it will take approximately 10 years and 4 months to repay the debt.  However, that calculation does not take into account cost-of-living increases I will receive along the way that will leverage up my benefit and my repayment amount (it is always set to be 2% of whatever my gross benefit happens to be at the time).  So, if I figure on getting a 2% COLA annually until my debt is repaid, it will be less than 9 years of actual repayment.  So, my question of PERS is this:  how is it determined whether an individual will need to pay the minimum 2% or something greater?  If the amount owed is divided by 2% of the current base benefit, I fall into the "more than 2%" category; however, if the amount owed is divided by 2% of the average expected benefit over the next ten years, I fall into a completely different category.  PERS would be wise to answer this question because I know an awful lot of people who will be swallowed up by this piece of arithmetic sleight of hand.  

Again, I remind all that WE DID NOT CAUSE THIS ERROR TO BE MADE.  Therefore, PERS' obligation is to be reasonable and not arbitrary.  The process started out to be quite reasonable and most people I've communicated with thought it was fair and equitable.  If now, every time we turn around, PERS starts changing the rules and making exceptions to the simple approach initially proposed, there are going to be a lot of people very angry, and a more vocal and intimidating group will start showing up at Board meetings to express their displeasure.

 

Nasty Letter

Most of the "window retirees" probably have received the initial letter from PERS concerning the beginning of the "payback" of the 1999 over credit of interest to Tier 1 regular accounts.  While this should not be news to most "window retirees", I'm sure that a large percentage of the 29,000 recipients were probably shocked to learn that they still owed PERS money, and that PERS was going to start collecting it sometime over the next year.  The letter was relatively simple to understand, although a fair number of people I know who have already repaid their "overpayment" back to PERS received the letter.  This will, no doubt, trigger some anxious and anguished phone calls to the PERS Customer Service group.  This group already has the reputation of being not very helpful, and occasionally downright obstreperous.  This will mean more work for the second level support people.

In January and March of 2012, the PERS Board meetings revealed the method that PERS was going to use to collect the overpayments.  Out is the actuarial recovery method (ARM) that some people were trapped in before Judge Kantor ruled in June 2007 that PERS could NOT collect overpayments.  Since the case was appealed, PERS simply stopped billing those not yet repaying, but left the payments in tact for those already in repayment status.  Based on discussions and conversations with PERS staff, OPRI, the PERS Coalition, and many others, PERS decided (wisely) to discontinue the ARM for new payees, and instead come up with a mechanism that is both fair and enables retirees to repay only what they owe - no more, no less.  This mechanism set 2% of the gross benefit as the default amount to repay.  Thus, a member receiving $1000 per month (before taxes), would see $20 per month deducted from the gross benefit and assigned to the repayment.  Under typical circumstances, window retirees would see their benefit reduced for about 6.5 years, after which the benefit would become the current gross benefit without the reduction for the Strunk/City of Eugene repayment.  Alternatively, members could write a check for a lump sum to repay in a single payment.  Members who wanted to accelerate their repayment could choose any amount in excess of 2% and repay sooner.

This method is both fair and reasonable, so what is nasty about it?  There is nothing nasty about what is described above.  It is exactly what the Board authorized at its March 2012 meeting.  To many people, the letter yesterday contained a very rude, very unexpected, and, if true, very nasty surprise.  The 2% minimum payment seems to have evolved into a less specific "2% to 5%" minimum payment.  In other words, we no longer know for certain that the default minimum will be 2% of gross monthly benefit.  Now, the minimum could be as much as 5% of gross monthly benefit, making what was a very reasonable minimum now become a much harsher minimum.  Who will be stuck with the larger payments?  Dunno.  There was a buried hint in the letter yesterday.  There was a reference to a 10 year period.  What has possibly occurred is that PERS' actuaries ran analyses using the actual cohort of eligible retirees and found that under a 2% minimum, some people might be paying for a really long time, possibly 10 - 20 years.  At this point, I'm just guessing because PERS hasn't gotten back to me to answer my question about the unexpected change.

In the meantime, even though PERS has discouraged phone calls about the repayment plan, I think that if you are concerned enough about this, you ought to email PERS and ask for an explanation.  This is a badly FUBARED public relations nightmare, not to mention an unexpected fiscal surprise for a group of people just coming to grips with the 2% reduction in benefits.  To confront a possible 5% reduction may be the tipping point for many retirees.  PERS ought to stick to their word.  The agreement they reached with the stakeholders was for a 2%, with the OPTION for individuals to increase the size of their repayment if they desired.  With this move, PERS has taken away another degree of freedom.  Just remember:  the overpayment was PERS' fault, not ours.  Anything that penalizes retirees is going to make a lot of people angrier than they already are.

Time for PERS to feel some of that wrath.

Do You Think I Really Care?

PERS is notorious for making some totally mystifying decisions.  The latest mystery is why PERS is NOT going to give those retirees already in payback mode, the option of switching to the newer system adopted for later retirees.  Back in 2006, PERS made its original (bad) decision to permit retirees two options for paying back monies owed due to overpayments between 2000 and 2006 from 1999 earnings crediting.  PERS gave retirees the option of either an Actuarial Recovery Method (ARM) or repaying the entire balance in a lump sum.  The ARM took the member's balance due, computed his/her actuarial life expectancy and divided the balance by the number of months the retiree was still expected to live.  This became the ARM amount.  The catch with this method is that there never was a mechanism in place to stop the payments after a member had fully repaid his/her debt.  Thus, the mechanism was designed so that longer-lived retirees (and their beneficiaries) would subsidize the accounts of shorter-lived retirees.  This proved to be immensely unpopular, although the repayment amounts were typically so small that retirees didn't ever bother to complain too much about it.

Once the Supreme Court ruled that PERS could begin collections again, OPRI, the PERS Coalition, I, and many others began to petition PERS to come up with a more reasonable method that would insure that retirees paid no more than they owed.  This led to a higher repayment amount, but over a shorter time period and with the certainty that members would pay what they owed and no more.   I expected, perhaps naively, that PERS would offer the same deal to retirees already under a payment plan using the ARM.  To my surprise, and many retiree's chagrin, PERS does not currently plan to make the new payment plan available to any member already under the ARM.  This is both unfair and also contrary to PERS' objective of recovering the money faster.  It is unfair because it saddles retirees under the ARM with the continuing burden of repayments for an indefinite period of time.  They risk paying significantly more than others, although at a much reduced monthly amount.  I fail to see how this is an equitable treatment of people who, for no other reason than pure bad luck, had the misfortune of being billed before Judge Kantor issued his original restraining order.

PERS' rationale is that they didn't plan for the "extra" work required to (a) turn off the ARM and calculate a retiree's current balance, and (b) turn on the new method that takes a minimum of 2% per month.  I have no idea how many people are affected by this, but I don't imagine it is very many compared to the number of people who will be placed under the current repayment system.  There are 28,000 members affected by the new repayment system.  It is estimated that there were approximately 35,000 "window retirees".  So, assuming all of the ARM'd retirees are still living, or have living beneficiaries, we are looking at no more than 7000 people.  PERS has a brand new computer system and it is hard to imagine (at least for me), that programming their database is that difficult.  Presumably, it is a variant of Oracle or mySQL or something common like that.  A good programmer armed with the structure of PERS' database ought to be able to cobble up the code to make the necessary adjustments in an afternoon and test it out fairly thoroughly the next day.  Even if PERS does the calculations with a spreadsheet, we are not looking at THAT many calculations.

I basically don't buy PERS' current excuse for not offering the new system to members repaying under the ARM.  PERS has asked the legislature for 3 limited duration positions to handle the initial calculations for the affected 28,000 members.  I wonder how much PERS will save by not doing this compared to the cost of defending themselves in litigation complaining about the inequitable treatment of retirees in the same class.  Somehow, I think this falls into the category of "penny wise, pound foolish."

Right Down The Line

There are lots of questions about how PERS will implement the recovery of monies owed by "window retirees".  PERS has tried to answer these as best they can in their FAQ posted at the PERS website.  One recurrent theme in the discussions surrounding the repayment is the fact that members want flexibility to repay PERS at higher than the minimum 2% of gross benefit that PERS came up with.  But, in wanting flexibility, window retirees seem to want to have it both ways - flexibility to increase the amount of the payment in good times, and the flexibility to reduce the payment back to the minimum in harder times.  While I know that PERS will consider these arrangements on an individual basis, I think it prudent for those affected by the repayment to consider agreeing on an amount - 2% up to 10% of gross benefit - as permitted by ORS 238.715, and sticking to the payment amount they decide on.  It is not PERS' obligation to permit "window retirees" to constantly change their payment over the life of the debt.  PERS has enough trouble now keeping records straight; it hardly behooves them to introduce a fail-safe mechanism doomed to failure from the outset.  My advice would be to pick an amount, any amount, and stick with it until the debt is fully repaid.  If 2% doesn't pay back fast enough, increase the percent, but don't expect to fall back on the minimum if life deals you a bad hand.  Once you agree to an amount, stick with it unless you want to write a check and pay the balance off at some future date.  Don't put PERS in the position of having to decide whether you are destitute because you made a poor decision at the beginning.

Easy Money

In a surprise development last Friday, PERS officials received the latest "purchasing power" study from Mercer actuaries.  It shows that with the rise in gas prices over the past few months that the purchasing power of retirees from 2000 on have lost more ground than their counterparts who retired in earlier years.  With COLA increases so limited despite increases in the actual cost of living, PERS announced that it would be suspending efforts to collect from "window retirees" for at least a year, and would petition the state E-Board to declare all PERS recipients eligible for a one time $50 ad hoc benefit increase.  When asked about this, PERS officials stated "…we know the last decade has been brutal on the retirees from the same period.  The combination of uncertainty about the outcome of litigation, the short period when retirees had their COLA frozen, and the repayment of all the litigation costs, we felt that those retirees who had actually managed to survive the decade should be rewarded for their persistence in the face of nearly insurmountable challenges."  Dennis Richardson (R-Gold Hill), a member of the state's e-board, announced that he thought this was a great way to preserve morale amongst PERS retirees, and he thanked all of them for their perseverance in helping to get this decade behind us.  He agreed that the $50 benefit increase was a small price to keep retirees spending their hard-earned dollars to fund the Oregon economy.  OPRI and the PERS Coalition were, for once, speechless.

Splitting The Atom

Now that the PERS Board has decided on the method for implementing the collection of the 1999 overcredit, there are a number of important details that remain to be decided.  Moreover, there exists considerable confusion among those "window retirees" for whom the collection is only a dim memory.  The purpose of this post is to summarize what is known, so far, about the collection effort, what remains to be answered, and to clarify a common misperception about the 2003 effort to freeze the COLA for Tier 1 members charged with an over credit.

There are four groups of people to be subjected to collection efforts.  The first group is the 20,000 or so retirees who were notified in 2006 of their adjusted benefits and were sent an invoice for overpayments, but whose invoices were suspended by Judge Kantor in his initial ruling on the Robinson case.  The second group consists of window retirees who took either a single or double lump sum, who've been invoiced, but collections were also suspended.  Third, are members of the two previous categories who have been invoiced and who started paying via actuarial recovery beginning in about 2006 or early 2007.  Finally, there are beneficiaries and alternate payees who are receiving benefits after the death of a PERS member, or a divorce from a PERS member who have not been invoiced or collected.

The most complicated group will be those retirees who collected their PERS benefit as a double lump sum settlement and have no ongoing business relationship with PERS.  In order to collect what is owed, PERS first has to locate these individuals.  If they remain in Oregon, the Oregon Department of Revenue will locate them.  If they are outside of Oregon, the Revenue Department does not have reach; consequently, PERS will have to contract with collection agencies who will use skip tracers to find these retirees.  (Heck, if they wanted to pay me, I could probably locate about ⅔ of them with a simple web search).  If found, and if these retirees work with PERS, PERS will allow these members to set up a payment plan to recover the lump sum that will span approximately 6 years.  This is a far better deal than before.

For any window retiree, beneficiary, or alternate payee in a current business relationship with PERS - i.e. receiving any sort of monthly benefit - a current address already exists, and PERS has an easy way to notify affected retirees.  The default repayment option is a base 2% reduction in benefits (from the gross benefit) for however long it takes to repay the amount invoiced.  In most cases, overpayments will be recovered in approximately 6.5 years, at which time the reduction will stop and members will have repaid all owed benefits.

Members have the option of repaying the benefit as a lump sum, or they have the option of accelerating the repayment by selecting a repayment amount greater than 2% of the gross benefit.

More details will be forthcoming next week as PERS prepares a "Frequently Asked Questions" document for posting on their website.

One question that has appeared with some frequency in my own mailbox has been the question of whether PERS will "finally" apply the "lost" COLAs for the years 2003, 2004, 2005 and possibly 2006.  The answer to this question is an unequivocal NO.  Regardless of what you think PERS has or hasn't done, PERS has already applied the necessary COLA payments to the revised benefit you're receiving now.  When PERS recalculated your benefit to comply with the court-ordered, legislatively approved and mandated 11.33% for the benefit year 1999, it went back and recalculated the benefit it actually owed you when you retired.  The original benefit was computed with a 20% credit for 1999.  The new benefit was computed with the "correct" credit of 11.33%.  Once they computed the correct benefit, they then applied subsequent COLA for 2003, 2004, 2005, and, if relevant, 2006.  The effect of this was to raise the corrected base benefit to nearly the level (or surpass it) that the un-COLAd benefit was at the time of the adjustment.  Thus, according to PERS, the courts, and the Legislature, there is no additional COLA to which members are entitled.  You may not agree with this, but this is exactly what happened.

I will update information as it becomes available.  Suffice it to say that the re-invoicing will take place sometime beginning this summer, and repayments will follow 30 days after you are re-invoiced and choose or default to the method of payback.  The initial billings are planned so that they coincide with the new 2% COLA for July, payable on August 1.  It will barely hurt.