It’s Goodbye and So Long To You

As the winter holidays approach, my family and I wish you the best holiday season possible.  May the lengthening light of day shine bright and warmly on you.

In more practical terms, this post formally closes off any further posts to this blog, a variant of which has been online since 2001.  It also marks the official transfer of ownership of the Google newsgroup known as PERS OREGON DISCUSSION from me to a new group of owners who have promised me that it will remain up and offer the same level of courteous help that it has been known for since 2008.

While my interest in PERS probably won’t wane, my willingness to participate in further deep dives into the nuances and complexities of the system has reached its natural end.  I’m not getting any younger, I hope that I have many years of traveling and photography left in me.  Our travel plans grow more complex and lengthier each year, no small thanks to Covid.  The bottom line is that my fascination with PERS has run its course and no changes anticipated or proposed or even imagined are likely to affect me or anyone already retired.  The Legislature just keeps making the system more complex, less transparent, and figuring out what is going on, who it affects (or doesn’t) is no longer obvious. Their approach is more like a death by a thousand cuts.  None of this interests me, moves me, or motivates me any more.  I’ve served the PERS Community for 20+ years.  I have nothing more to offer.  It is time for younger people to take up the challenge.

I want to thank everyone who contributed ideas, information, problems that formed the bulk of the posts archived here.  I thank the PERS Staff who graciously and kindly answered my questions and recognized that I wasn’t a pest, but a well-educated guy with a natural math ability and a deep understanding of pensions, politics, and how to identify a problem when it arose.  Having an extensive background in software programming didn’t hurt either, especially when probing for operational definitions of legislative concepts.  I have enjoyed a good working relationship with many legislators of both parties.  But all those connections are no longer germane, as every single person I worked with over the past 20+ years has either retired, moved on to other positions, or has passed away.

So, today marks the official end of this blog.  I will keep it up so that it remains a resource for any who are interested in the issues that marked the period in PERS History between 2001-2021.  I can guarantee that history often repeats itself.  These posts may turn out to be prescient predictors of future paths of PERS peril.

Seasons greetings and a happy new year to all.  Thank you all again.  It has been a ride.

Marc R. Feldesman 

Take The Long Way Home

I wasn't expecting to post another entry to this blog, but I thought I'd reach out one different way to see what might happen. As most regular readers know, I am also the owner of the PERS Discussion Group (POD) on Google Groups. That group, through its various incarnations, has existed for 15 years providing more real time discussion of issues of interest to PERS members, PERS retirees, and PERS beneficiaries. For the same reason that I'm stopping this blog to new content, I have reached a time in my life where I am simply not willing to continue following PERS. The pandemic has totally discombobulated our lives, and I am hoping that very soon we will be able to resume our rigorous traveling schedule. That schedule does not include keeping abreast of all things PERS, or of trying to maintain a newsgroup. The blog can stand on its own as an historical record available to be researched for topics of interest to anyone so inclined. A newsgroup is an entirely different matter. It isn't that it requires a lot of work (maybe 30 minutes a week at the least), but it does require attention to the various notices and announcements that come out, occasionally checking in on the group to see if someone has misbehaved and posted some inappropriate content, and making sure that updates are done in compliance with Google's changing rules.

I have announced on POD that my time as group owner ends, by my decision, on December 31, 2021. If no one takes over leadership of the group, on January 1, 2022 the group will cease to exist. This means that more than 1300 members will be left adrift with no extant source for getting the latest information about PERS, or with any source to answer questions about changes that are either proposed or actual in the PERS system. This may not be of consequence to you personally, but believe me, there are still many changes that COULD be made to PERS that would have an adverse impact on active and inactive members, and I'm not sure that everything has been tried to go after those already retired. Many people have participated in the POD group, and there is a treasure trove of information contained in the more than 1500 different conversations there. It will take a push of a button to make all of this history go away - something I'd rather not see happen, but it is no longer my concern if it does.

Not coincidentally, one of the side projects of POD was the creation of a document library, lovingly curated by Greg Scott, which vanished about 4 years ago because Greg found other things to better occupy his time, and the resources for maintaining the library dried up. That library curated more than 3000 documents related to PERS, PERS history, Legislation, and Litigation. I have an archive of the 3100 or so documents that are available, on request, from the library. That, too, is part of POD and access will also disappear on January 1, 2022.

This is all a very roundabout way of saying that one of these days there will be an entire cohort or two that would miss the existence of these resources, and would have absolutely no idea of how and why PERS is the way it is today, and why bad things are happening to good people. This can be totally avoided, but it requires someone (or some people) to come forward to take over the day-to-day running of POD. It is best the sooner it can happen because I'm still available to help assist in the transition, make the introductions, grease the skids with people who are important contacts in various places.

Consider this truly my last post on this subject. Consider this a warning that if the group disappears, Google does not archive its contents, and all will be lost to the bit bucket in the sky. One or more volunteers can prevent this from happening. One or more volunteers can prevent a whole group of people from having to reinvent the wheel. One or more volunteers can avoid you taking the long way home. The choice is yours.

House of Pain

OK. I lied. THIS is my last post. Yesterday the PERS Board voted to lower the assumed interest rate from 7.2% to 6.9%. This falls between the maximum recommended by Milliman (7.0%) and their lowest bound recommendation (6.8%). This means that anyone still in Tier 1 (active or inactive) who expects to retire under Money Match will see benefits lowered from retirements during 2021 versus retirements taking place in 2022. Similarly, anyone retiring under Full Formula (from any tier) WITH A BENEFICIARY will see reductions in benefits beginning with retirements on or after January 1, 2022. We don't know how much the reductions will be. As a general guide, I've been telling people who ask that a 25 basis point reduction in the rate works out to be about a 3 month setback in benefits before crossing over into a higher benefit. The current reduction is 30 basis points, but other changes may make the setback slightly longer. We won't know anything with certainty until PERS releases the updated Actuarial Equivalency Factors sometime in late November or early December. The AEF tables combine information about mortality, assumed interest rates, inflation, salary growth, and a few other economic factors. We only know the assumed interest rate change at this point. I have no idea how the various factors come into play, because actuarial math is one of those places where I never received any formal education. I get math, but I don't have any idea how Milliman produces those tables. Now you can return to your normal channel and ignore this page in the future, unless you are researching PERS history.

Free Bird

This is my public announcement that I have posted by final content on this blog with the two entries below (Dancing in the Dark, and Another One Bites The Dust). I've been writing this blog about PERS in one form or another since 2000. It began as a short newsy email to some of my age and service peers at PSU in 2000. By 2002, it had grown larger than I had expected, had become a newsletter, and by 2005 a full-fledged blog. Over those years, my blog has touched many people - PERS members, Legislators, PERS administration, PERS employees, multiple Governors - and have helped more people than I can count make informed decisions about their retirements, or helped Legislators direct constituents to an informed source about PERS happenings. I've lost count of the number of good friends I've made because of my writing. I maintain close ties with many, years and years after this blog helped them. I treasure those friendships. Even PERS adversaries in the public and in Legislative circles have offered me a measure of respect for my attempts to report the "truth" about what was going on. 

But all things must come to an end. As the pandemic winds down (I hope), and PERS has reached a point where people's hair doesn't seem to be on fire as much as in the past, it seems logical for me to celebrate this moment, and wrap this up while there is no crisis. Crises will come and go, as we've seen over the past 25 years with PERS. But, for right now, while PERS isn't completely out of the woods and certainly not out of the headlines, things are stable. And so today, with thanks to the nearly 2.5 million visitors to this site, I announce that I am a "free bird". This site will remain active as an historical record of the past 16 years of my writing. I will still keep track of PERS in my increasingly rare "free time", but I won't be writing about it here. If you want to keep track of PERS or engage in illuminating discussions, please feel free to participate in the PERS Oregon Discussion Group (see link on left), where I still stop in now and then. 

My final wish to all who have contributed to the success of this blog is simple: "May you outlive your actuarial expectancy". 

 With all best wishes, Marc Feldesman

Dancing In The Dark

On June 4, 2021, the PERS Board will receive Milliman (the actuary) recommendations about various economic assumptions for the 2022-2023 calendar years. Among the critical recommendations will be assumptions about salary growth, inflation, and the assumed interest rate. In reading the Milliman report (details of which are found in the PERS Board packet for the 6/4/2021 meeting), they are recommending slightly lower salary growth assumptions, slightly lower inflation assumptions, and slightly more substantial reduction in the assumed rate (ceiling at 7% with a recommendation to go down as far as 6.8%). These assumptions have no bearing on members who are already retired, or who will retire no later than December 1, 2021. But for all active and inactive members not yet retired, this portends some noticeable changes that may have an effect on benefits when retirement actually occurs.

Salary growth, inflation, the assumed interest rate, and mortality factors all combine together to produce the Actuarial Equivalency Factors PERS uses to calculate benefits for Money Match retirements in Tier 1 (not many of these left, except among inactive members), and for Full Formula and Formula + Annuity retirements in certain circumstances. Let me be clear that Full Formula retirements are not directly affected by any of these changes, provided that the member retires under Option 1. For members who select a Full Formula benefit with survivor options (e.g. 2, 2A, 3, 3A and others), the Actuarial Equivalency Factors come into play because PERS must account for "joint mortality" of the member and beneficiary. Depending on the age differences between member and beneficiary, this can lead to reductions from the formula benefit by as much as 15%, unless the beneficiary is substantially younger than the member.

Final decisions on the exact economic assumptions won't take place until the PERS Board Meeting on July 24, 2021, but consider this a head's up if you are eligible for and contemplating retirement now or in the near future. This is not a trivial consideration, and I encourage people to think carefully before making a decision one way or another. If you retire earlier than you would like, you may gain a higher benefit, but may lose that advantage from loss of salary, having to deal with health insurance earlier than expected. On the other hand, waiting may net you a higher percentage of salary based on the formula, but lose the advantage because AEF changes reduce the fraction because of your beneficiary's age. There are lots of considerations. The usual calculation involves something called "break even analysis", where you cost out each of two alternative decisions and figure out how long it will take for the two decisions to converge. This is not too different from considering when to take Social Security. I took my SS at 63. I made the decision because after considering what I would get if I waited until 65 or 70 (both options for me to get full or enhanced SSB), considering the time value of money, inflation, and potential investment returns on my SS money, I figured I would not break even by waiting until I was at least 80. For me, it made sense to go early and use the money as leverage. Others may not have that option, but the analysis is the same regardless. There are a few more variables involved in the retirement decision (including SS), but if you walk through it slowly and carefully, you can usually anticipate most of the necessary inputs to make an informed decision.

Just remember one crucial detail. If you decide to retire to avoid any of the future changes to the variables described above, you MUST have all your paperwork physically at PERS by no later than November 30, 2021 with a retirement date of December 1, 2021.

Another One Bites The Dust

In my previous post "Wouldn't It Be Nice", I identified a bill introduced with bipartisan support (HB 2867), which would resolve the longstanding issue of residency mistakes introduced by the way PERS defaults to determining whether a retiree is eligible for the Income Tax Remedy. The bill had, as I noted, bipartisan support, would have no direct costs to PERS or to employers. For reasons only loony legislators can possibly understand, the bill has been stalled in committee for more than a month, and at this point is unlikely to make it to the finish line. Color me perplexed.

Note added 6/4/2021. It appears that elements of the old HB 2867 have been incorporated into HB 2875. This bill addresses some of the issues raised in HB 2867 and provides a fair bit more latitude to members who are disqualified from the Tax Remedy but don't learn of it until the first check of the new year (on or immediately after 1/1/20xx). The later bill provides a 3.5 month window in which an incorrectly removed Tax Remedy can be fixed. With the appropriate documentation, a retiree may have the tax remedy restored within 2 months of notifying PERS of the error and supplying the needed documents. Unlike HB 2867, HB 2875 does NOT provide for a retroactive restoration. This bill is moving through the normal legislative process and is much more likely to pass.

Wouldn't It Be Nice

Every once in awhile, a bill that actually cures a problem with PERS comes along where everyone is a winner (The bill currently in process through the Legislature is HB 2867, which I will discuss below after some history). Sometime back in 2017, I wrote a post entitled "Tinfoil Hat", where I ruminated on something that had happened to me (and others) that made no sense, but seemed to come out of nowhere and triggered my antennae that something more sinister was afoot. The post concerned an email I got from PERS requiring me to recertify my Oregon Residency. Puzzled, I inquired of PERS and learned that the message went to more people than it should have, but that because of SB 861 way back in 2013, the Income Tax Remedy was no longer going to be paid to anyone living outside of Oregon. Since PERS has no direct way of determining residency, they used Oregon Department of Revenue tax filing information to determine residency. Each year, Oregon residents (and part-year residents) file their income taxes normally by April 15. Every year, people ask for, and routinely receive tax extensions to file their taxes later provided they pay an estimated amount by the due date. Sometime in early October, the DOR sends PERS a list of retirees filing income taxes by April 15 for the previous year. For most people, the fact of paying income taxes is prima facie evidence that you are (or were) a resident of Oregon and stands as residency certification for the next year. Until 2017, PERS didn't ask for any further recertification and it is not entirely clear why they started asking in late 2017. But, the poison pill here was that because they started asking, people were expected to recertify their residency by no later than December 15. Failure to do so meant that beginning with the check on January 1 of the next year, the Income Tax Remedy would be removed for an entire year. Two things emerged along the way that explained the problem in more gruesome detail. First, the people who were being penalized were mostly bonafide Oregon residents who (a) asked for tax extensions and (b) failed to recertify by the Dec 15 deadline. It also emerged that this was a costly penalty regardless of the reason why someone didn't recertify - illness didn't count, failure to get notification from PERS of the need to recertify, the dog ate the notice, whatever. Once the Tax Remedy was removed, the only way to rectify this was to recertify before the next Dec 15 deadline and get it restored for the following year. For many people, this amounted to an expensive and unappealable decision/mistake. Over the years, I've heard from many people caught in this trap, and from PERS about how helpless they are to remedy this because of the statutory wording.

Thanks to an eagle-eyed reader of my blog and in my newsgroup, it has come to my attention that the Legislature is considering a bill that would remedy this in a couple of ways. The bill - HB 2867 - is a bipartisan effort to redress the problem by allowing recertification of residency quarterly instead of annually (this doesn't mean that someone has to certify on a quarter-by-quarter basis). And, in cases where a bonafide resident lost the tax-remedy due to filing taxes late or other reasons, it supplies a mechanism to recover the erroneously eliminated remedy in a timely manner if the retiree can provide evidence of residency during the period where the tax remedy was discontinued. I haven't wandered deeply into the weeds of this bill yet, but two facts are important: a) the sponsors of the bill represent both parties and cover the political spectrum, which is a very good sign; and b) the bill has its first public hearing next week, which means that it hasn't already been shelved. It isn't clear whether the bill would apply to those already trapped by this administrative nightmare. It also isn't clear whether this also means that people who move out of state and who are no longer eligible for the tax remedy will lose theirs sooner than they do now. But looking at this with a slightly longer view, I suspect that Oregon will end up the net winner in this case, if my previous sentence is true, since I suspect more people move away from Oregon than move back after living out of state. Only PERS knows this information, and since there has been no detailed analysis of the fiscal impact of the bill, it is impossible to know. But, if Oregon wins, and bonafide Oregon residents who inadvertently lose the tax remedy have a standard and relatively easy way to recover, then this bill benefits everyone and I could see no reason why it wouldn't pass. That would be very nice.

Stay For Free

There has been some discussion on the inter webs about the recently introduced SB 111 in the 2021 session of the Oregon Legislature. People have been misinterpreting this bill, who it applies to (and doesn't), and what its purpose is. I'm not going to even try to explain the bill because it doesn't need anyone's attention. The bill, introduced on behalf of PERS itself, is nothing more than a "housecleaning" bill, designed to clarify and more fully enunciate the applicability of the special circumstances passed in 2019 (SB 1049) that allows certain retirees to return to work without hourly limitations between 2020 and 2024. This bill does NOT affect anyone already retired and still working; it is effective after it passes the legislature and ONLY applies to a very tiny subset of workers who take "early retirement" (i.e. before the earliest date they can receive unreduced benefits from PERS - 58 for Tier 1, 60 for Tier 2, 65 for OPSRP, or 30+ years of service regardless of age, plus the P&F different full retirement ages.)

If you are skeptical, then I suggest you follow the various references to the statutes being amended and already in place and tied to the bill, and also to the various Oregon Administrative rules promulgated and approved in the wake of SB 1049. There is NOTHING sinister about this bill. It is primarily to make employERS aware of the circumstances under which the SB 1049 statutes apply, and why.

Confusion Wheel

There seems to be some confusion following the State Economist's report on September 23, 2020. The good news is that tax revenues for the 19-21 biennium are on target to hit needed revenue to finish out the current two year cycle. The bad news. This has led some of my correspondents to think that PERS won't be a target in the upcoming 2021 Legislative Session. While I'm not a seer, a forecaster, or witch, I think such thinking is foolish, especially when you look in the same document and see what revenue forecasts are, this far out, for 21-23. If you don't think those forecasts are worrisome, there is something seriously wrong with your thinking, or you believe in magical thinking. My advice. Look at those numbers carefully, and plan accordingly. If you think PERS isn't going to be a ripe target for the Legislature in 2021, you are fooling yourself into mass confusion. It will be, and while I am unable to speculate right now on what the targets will be, I can state with certainty that there will be PERS cuts proposed during the next full Legislative Session.

Cold Shoulder

Today, the Oregon Supreme Court issued its ruling in the James et al case, the PERS Coalition challenge to the 2019 Legislature's SB 1049 bill. This bill redirected some IAP monies into the Employee Pension Stability Account, and placed a salary cap for the purposes of FAS on post 2019 income to $195,000 per year. This ruling was one of the fastest rulings in my recall of the Oregon Supreme Court. It comes barely 6 weeks after oral arguments before the court in mid-June. The decision, written by Chief Justice Martha Walters, was en banc, suggesting there was no dissent.

The court ruled that the IAP redirection was prospective and therefore not in violation of the retrospective rules established in Moro. Moreover, they ruled that (1) the money didn't really NOT help retirees; it just applied in a different way; and (2) the fact that the employers benefit from this was essentially a consequence, not the legal intent (if you believe this, I have a 100% effective Covid-19 vaccine to distribute right now).

The court also ruled that the salary cap was not illegal and not retroactive. I must confess that in reading the court's logic and example, I found myself wrapped in pretzel logic trying to figure out exactly how the ruling didn't have adverse effects on members working past 2019. The examples all assumed that members earning less than the cap suddenly came up on the cap in the immediate post 2019 period, but the examples didn't exactly compute for me. The court argued that the blended approach, used by PERS following the Moro ruling on the COLA and, to some extent on the Tax Remedy, didn't necessarily have to apply here because, well...they said so. One of the examples they DIDN'T consider is the worker earning higher than the salary cap well BEFORE the cap went into affect. They argued that SB 1049's salary cap did not remove any benefits already accrued, but didn't make it clear how the accrued benefit is preserved in this circumstance. It may be the case that PERS has to segment the worker's career in order to implement this anyway, but the devil will be in the details. The consequence is that earnings above the salary cap after 2019 won't increase the IAP balance, and those excess earnings cannot be used to compute final retirement benefits. But it isn't entirely clear how FAS will be computed in such circumstances. I don't expect this will help keep highly compensated individuals on public payrolls.

I'm used to reading well-argued, clearly written opinions from the Oregon Supreme Court. This opinion failed that test miserably. If I have to read a sentence 5 times before I'm certain exactly what it means, it blows for me. I attribute the unclear writing to the pressure the Court must have felt about getting this ruling out there before the Legislature convenes in Special Session later this month to try to balance the budget. Once Covid struck, there was never any doubt in my mind that the court would eventually reach the conclusions they did. There is no way that I can see the current court ruling in favor of PERS members in the current climate. This does not bode well for actions that might be taken by the Legislature when it convenes in regular Session in late January or early February 2021.

The court has given PERS members and future retirees the cold shoulder this time around. I expect that measures passed by the Legislature in 2021, so long as they are facially reasonable, will probably result in PERS members and retirees being completely frozen. The days of favorable PERS member/retiree rulings are probably a distant memory.

(Note added 8/7). A number of people have asked me what the likelihood of PERS reform happening during the Special Session coming up later this month. While I concede that nothing is impossible, I regard Special Sessions as unlikely places for PERS reforms. They are too short, PERS legislation is typically too complex, and short sessions are places where simple things happen, not legislation that has many moving parts. That said, I fully expect more PERS reform to be on the 2021 Legislative Agenda. I don't have any idea what form it will take, but legislation that didn't make it out of committee during the 2017 and 2019 sessions look likely to be revisited again. Beyond that, your guess is as good as mine.

All Said and Done

The chatterati have been babbling on about Mitch McConnell's remark last month concerning letting states declare bankruptcy. Let's put this horse down right now. Federal law does not permit states to declare bankruptcy, and it would involve an amendment to the Federal Bankruptcy Code to even permit this to happen. Researchers would be advised to look to the state of Arkansas from 1933 for an example of how this might play out for states that were permitted to do so. It isn't pretty. States can be insolvent, but they can't go bankrupt. In the former case, they are declaring an inability to pay their current bills, but it doesn't involve an unelected Federal Judge from elsewhere to prescribe solutions for creditors. Puerto Rico in 2014 provides an instructive example there.

There is always Municipal Bankruptcy. Well, yes if it is permitted by State law. Oregon doesn't permit municipal bankruptcy without amending the Oregon Constitution. And if that happens, one can look to Orange County, CA for an example of how that worked out.

In short, the odds of Oregon (1) declaring bankruptcy or (2) Oregon allowing municipal bankruptcy are virtually nil.

Thus, this is a solution that isn't on the table now or anytime in the near or distant future. With this said, I still expect some legislators, likely from the same party as Mitch McConnell, to try to force PERS retirees to accept some cuts to their current benefits. Whether the current Supreme Court would permit this remains an open question. The Moro ruling (2015) seems to preclude this possibility, but circumstances change, and the current situation is unprecedented in my lifetime. People who ask me to forecast the future are grasping at straws. My magic 8 ball says, "ask another time with more information".

Shake, Rattle, and Roll

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

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

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

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

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

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

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

PAY ATTENTION

I am deviating from my normal pattern of using song titles as titles for my blog posts. There is an important item I want to bring people's attention to, especially if you are planning to retire after December 1, but could retire ON December 1..

The bottom line is this is that the Actuarial Equivalency Factors that PERS uses are adopted in the same year that PERS adopts the Assumed Interest Rate for the next even numbered year and the following year. In July, the PERS Board approved maintaining the assumed interest rate of 7.2%. At the time, it was expected that the Actuarial Equivalency Factors (AEF) would also remain unchanged. As it turns out, the Milliman Experience Study, which involves examining elements of mortality among recent PERS retirees of all classes, as well as national mortality rates among similar classes of people, showed increases in longevity that MAY result in some small adjustments to the Actuarial Equivalency Factors, which are used to compute benefits for anyone retiring under Money Match, or any other method involving a beneficiary (Full Formula, for example).

So, this means that the Action Item on the PERS Board Agenda for its December 6 meeting includes "Approve Actuarial Equivalency Factors". It is likely, though not certain, that the AEFs approved on 12/6 will be slightly different from the current AEFs even though the Assumed Interest Rate has not changed. The problem is that December 6 is past the last day for someone eligible to retire on December 1 to make that decision. Worse, PERS does NOT have the new AEFs yet from the actuary, so they do not know by how much the setback might be. PERS Phone Support has been suggesting 3 months as a "worst case", but they don't actually know that.

I have actually spent a fair bit of time on the phone today to a Senior PERS Manager who has assured me that if they get the AEFs on Monday (something apparently likely), they will get something on their website on Monday alerting people to this.

My advice at this point is to get your retirement papers in order if you were planning to retire in the early part of 2020. The additional work probably won't benefit you in terms of your computed benefit (it might be lower), and then make your decision after Monday's (hopefully) post from PERS. If nothing is forthcoming, and you don't want to take any risk, then you need to get your papers in by Friday November 29 Wednesday November 27 for a December 1, 2019 retirement.

This is NOT a stealth change as some have suggested, but results from a variety of factors including the altered timing of the Experience Study, the Economic Assumptions, and the PERS Board altered meeting schedule. It might also be a result of the changing leadership at PERS. In addition, both PERS Staff and Milliman have had to deal with a Secretary of State-ordered audit of PERS during 2018, which subsequently required both staff and Milliman to respond to pieces of the audit during 2019. Keep in mind that PERS has never before been subjected to an audit, and there was little experience anywhere on how to deal with one.

I have implored PERS to be forthcoming with this as soon as possible. Unfortunately, telling somebody that "something might happen" isn't sufficient. They need to be clear about what that "something" is. Without the new AEFs, there is nothing to say.

One final note, this isn't limited to Tier 1 retirees. This affects all retirees who retire with a benefit having a beneficiary. Tier 1 members are also affected with or without a beneficiary if they retire under Money Match.

Trampled Underfoot

It has been a long time between postings. Since the Legislature passed SB 1049 concerning diversion of part of the IAP contribution, salary cap, and a few other elements pertinent to the existing PERS members' accounts, things have been pretty quiet.

Predictably, the PERS Coalition filed suit within the 60-day window prescribed by the Legislature, contesting both the IAP diversion and the salary cap. Just as predictably, the State and the affected employers filed their responses. The plaintiffs (PERS Coalition) asked the Supreme Court to appoint a Special Master to compile the legal arguments, case law, and specific injuries so the Supreme Court would have a factual basis and a legal basis on which to draw their opinion. This was done in the Strunk case as well as in the Moro case. Unsurprisingly, the defendants (the State and other employers) objected to the appointment of a Special Master, by stipulating to the "facts" of the case and arguing that a narrow set of legal issues are at stake and that there is no need for a Special Master to sort the issues out. (This is unsurprising since the Respondents made nearly the identical arguments in Strunk and Moro, and the Court rejected their arguments both times). The Petitioners objected to the Defendants' argument and, as of today, things stand unresolved with the Supreme Court. It is unlikely that this will be untangled before Thanksgiving, making the likelihood of a formal Supreme Court resolution before the start of the 2021 Legislative Session.

Between the time of filing of the James et al case (the captioning for the SB 1049 litigation), the PERS Board finalized its decision on the 2020-21 assumed interest rate, leaving it at the current 7.2% rate that was set to expire on 12/31/19. They also confirmed that the Actuarial Equivalency Factors would remain unchanged for 2020-21. This means that both active and inactive members need not stampede to the door to exit before the end of 2019 to retain the current AEF and assumed interest rate. For actives, however, the effects of SB 1049 take effect on 1/1/2020 although there is still some confusion (mine mostly) on when the IAP diversion officially begins.

Not much else to report at this time. Once the Supreme Court oral arguments begin, or the Special Master begins taking testimony or both, I'll report back on what I expect based on what I read.

One caution. I will be traveling extensively from mid-January to the end of April. I will have wi-fi and email access until mid-March and then will be largely off-the-grid until late April. I expect that much of the litigation argument will take place during my traveling. I will be in the US for a good part of January - March, so if arguments occur then, I should be able to access them in near real time. But beginning in mid-March, I will have no access to any modern conveniences, especially wifi, so anything that occurs during that month of quiet for me will have to wait until my return.

Wishing all of you a happy holiday season and the blessings of good health.

It Doesn't Have To Be This Way

Short post to clarify something.  In the past several days I’ve gotten emails from a couple of readers who have had reason to contact PERS’ Customer Support line.  In two instances, callers have received misinformation concerning the assumed rate to take effect January 1, 2020.  On July 26, the PERS Board approved keeping the assumed rate at 7.2%, unchanged from the rate adopted in July of 2017 for the 2018-19 calendar years.  The Board considered a range of possible assumed rates before deciding in a close vote (3-2) to retain the rate already in effect.  

The misinformation was that the rate wasn’t finalized (which is actually true), and that the rate could still change down to 6.8% (the number actually given by one or both CS agents).  Callers wrote to me asking how this could possibly be true when the Board’s vote was supposed to be final.  The answer to that question is:  the rate IS 7.2% and will NOT CHANGE in January 2020.  

The confusion, I think, stems from the true part of the statement and the added requirement imposed by SB 1049 passed by the Legislature in May 2019.  SB 1049 requires that the PERS Board and Staff report to the Interim Joint Ways and Means Committee on actuarial changes (or not), their impacts on employer rates, and on the UAL.  The rate is not considered final until Interim Ways and Means approves the Board’s decision *and* the formal rule change is filed with the Secretary of State’s Office with the required 30 day comment period.  At that point, and only at that point, does the rate become final.

So, while it is true that the Legislature could force the Board to revisit the assumed rate decision, that is so unlikely in this case as to be considered impossible.  Why?  Because SB 1049 was written with the savings based on the assumed rate remaining at 7.2%.  Thus, it is virtually impossible to believe that the Legislature would undermine itself when the Board has done precisely what the Legislature assumed in the writing and passage of SB 1049.

But, there is a bigger problem that this exposes.  How to counteract the misinformation that is communicated by PERS frontline staff, which leads to chaos, despair and utter confusion?  While many PERS frontline staff are extremely helpful and well-intentioned, they don’t always have the answers to questions posed by callers or emailers.  Somehow PERS has to get a better handle on the training of these people, especially in the aftermath of complex Legislative changes.  Instead of being so “helpful”, sometimes it would just be better to say “I don’t know” and offer to either transfer the caller or the problem to someone in a better position to know.  While it took me less than an hour to get this particular matter straightened out and with an assurance that the correct answer would be communicated to all Frontline staff, I think PERS needs to be more proactive in its training of Frontline staff so these wrong answers don’t arise in the first place.  People on the cusp of retiring following a policy change do not need the added anguish that an incorrect answer provides.

Kevin Olinek, if you are reading this, please consider this a strong suggestion that you need to impose a better training regimen on the front-facing staff in your organization.

Tricksters, Hucksters, and Scamps (Warning: this is long)

[Note:  this is a work in progress.  Expect some changes over the next day or two, mostly in clarifying language and as I discover more things along the way.  Legislative language is torturous to read and decipher.]

As the 2019 Oregon Legislature nears the final month of its session, the biennial hair-on-fire “PERS is going to bankrupt Oregon” faeries are out in full force.  The latest attempt to rein in PERS costs has cleared the first committee hurdle.  SB 1049 was voted out of Committee and sent on to the Joint Ways and Means Committee for consideration.  So, what have our hucksters, tricksters, and scamps cooked up for the Oregon Supreme Court to review this time?  Why it is an absolute cornucopia of “fixes” that will, in all probability, spend the next two years being picked apart by the Oregon Supreme Court.  (Some of it is so impenetrable that even I don’t have the patience to try to decipher it).

SB 1049 contains a whole passel of changes.  It directs proceeds of Sports Betting in the Oregon Lottery to be directed to PERS.  Frankly, who cares?  This isn’t a huge amount of money, and it is entirely discretionary spending on the part of Oregon citizens; therefore, if you don’t want your Lottery money going to PERS, stop betting on sports.

The second piece is to extend the amortization (payback) schedule of the UAL to 22 years, from 20 years, for the Tier 1 and Tier 2 UAL.  The OPSRP UAL would remain at 16 years.  This one befuddles me.  I doubt it is illegal, since GAAP guidelines permit lengths as long as 40 years.  Oregon’s current schedule is comparatively short.  Nevertheless, the longer you amortize debt in an uncertain world, the higher the likelihood that your debt will grow rather than shrink.  Unlike a fixed-rate mortgage, the UAL is amortized based on assumptions about earnings rate, which change regularly every two years.  Currently, the rate is 7.2%, and that is surely to fall to below 7% beginning on January 1, 2020* (but see below).  Unfortunately, when the assumed rate falls, the UAL rises because more money is expected to be covered by employer contributions than by earnings.  Thus, once the new rate is determined on July 28, 2019, the actuary will revise the existing UAL to the new (2 year) rate assumption.  The general direction of assumed rates across the country is down.  Every time the assumed rate goes down, the UAL rises.  A booming economy may help; a recession would be catastrophic.  Despite all the hoopla about the booming stock market, 2018 was really kind of dreadful.  The PERS fund missed its 7.2% by 5.8 points, which is why the UAL increased from $22 billion to $27 billion.  If you don’t hit your target, the UAL increases.  Moreover, the assumed rate is perverse.  People think that lowering the assumed rate would cure all problems, but the employers don’t want that to happen; neither do members.  The PERS fund is currently funded by Earnings + Contributions.  A PERS benefit is constructed from Earnings + Contributions.  All things being equal, if earnings are assumed to be lower, then contributions (from the employer) have to increase to make up the difference.  Getting the assumed rate correct for the economy is a goal, but an imperfect one.  The rate has to be decided in advance; rarely do actuaries, market analysts, investment advisers get it exactly right.  A too low rate provides more room to be wrong in a positive direction; a too high rate provides more room to be very wrong in a negative direction.  In this context, extending the amortization period of a variable rate UAL simply broadens the horizon over which to be wrong.  The principal reason the UAL is so high is that since 1997, employers have used every dodge, every ruse, every possible accounting trick to keep their contribution rates artificially low.  If you pay too little for too long, you end up being underwater, which is where the employers are today, in a situation that is mostly of their own making.  So why would you want to extend the time over which they can pay too little for a debt that has been accumulating for more than 20 years.  The bill says that the amortization rate will be only for 22 years one time, after which it returns to 20 years.  Yep, and Bill’s your uncle.  Having said that the idea is stupid, I guarantee it isn’t illegal, so the court won’t touch it, and the unions probably won’t litigate.  It falls into the “I bet this is a FAIL” category.

The third piece is the first to directly affect active workers.  In 2003, the Legislature ended Tier 2 (Tier 1 ended in 1995), and froze the principal balances but continued to let them grow by the assumed rate (Tier 1) and by market rates (Tier 2).  For employees starting on or after 8/29/2003, the legislature created something called OPSRP (which, for simplicity here is going to be called Tier 3).  For Tier 1, Tier 2, and Tier 3, the legislature directed the formation of something called the Individual Account Program (IAP for short) into which the employee contribution (the 6%, regardless of who actually paid it) would go.  This money was allowed to earn market rates, but ownership of the account was treated like a 401K.  Because of an inability to think outside of the box, the morons of 2003 didn’t really consider the implications of removing a 6% member contribution into a privately owned, but PERS managed, account.  As of end 2018, individual IAP accounts hold almost $9 BILLION, not a penny of which contributes to the overall balance of the PERS Fund, which is currently running an approximately $25-$27 Billion Unfunded Actuarial Liability (UAL).  So the geniuses of 2003 effectively punched a $9 billion hole in the PERS fund in their effort to stanch the growth of Tier 1 and Tier 2 account balances.  The action accomplished one of their intended goals.  By 2008, Money Match no longer was the dominant method of retirement for active members; for those inactive members, it changed nothing since no new money was going into their accounts anyway.   By today, so few active members retire under Money Match that it is virtually inconsequential in the overall scheme of things.  However, there are still many inactive Tier 1 and Tier 2 members whose accounts have continued to grow and for which Money Match is the obvious and only likely method of retirement (more of this below).  So, recognizing that the 6% member contribution isn’t helping the fund at all, members have been accused of “having no skin in the game” (which beggars belief since the members didn’t want this in the first place back in 2003).  Now, SB 1049 proposes a sort of “give at the office” scenario in which 2.5% of the 6% Tier 1 and Tier 2 member contribution is DIVERTED into an Employee Pension Stability Fund (i.e. other than to the IAP).  This isn’t a voluntary contribution and its objective is to create a pseudo-employee account that grows in the same way that the IAP does, except that the member doesn’t really get a dime of the money at retirement as he or she did before.  The money is in the employee’s name, but counts as part of the overall PERS Fund.  (The fact that it is in the employee’s name is probably because the Legislature didn’t want to get slapped with a “wage theft” claim in the Oregon Supreme Court).  The intent of this money is to contribute to the member’s likely Full Formula benefit at retirement.  It is often believed that the member account balance is irrelevant to a Full Formula benefit.  This is only partly true.  If you add together the member’s regular account balance plus the EPSF balance, the Full Formula benefit is funded from these balances plus a contribution from the employer.  To the extent that a worker continues for, say, another 10-12 years before retiring, the Employee Pension Stability Fund can knock a big chunk off the employer obligation for the Full Formula Pension.  For Tier 3, which has a lower benefit structure, the Legislature only wants a tithe of 0.75% of the 6% member contribution.  Again, the idea is to reduce the employer’s obligation to fund the Full Formula benefit.   (Whether an involuntary redirection of money you can no longer lay your hands on constitutes “wage theft” or an involuntary “salary reduction” will ultimately rest with the unions and the courts).

There is a “safety valve” in two forms.  If you want to fully fund your IAP, you have the option to contribute your own after tax dollars to the IAP to make up for the diversion.  The second form is that should the fund reach a 90% funding level, PERS would stop diverting the money (until, of course, the fund dives below 90%).  Basically, the diversion is a correction for the monumentally stupid IAP plan created by some of the same people who are still today bemoaning the sorry state of PERS by failing to admit their own complicity in the problem.

The fourth piece of SB 1049 probably affects a relatively small number of individuals in the larger scheme, but will make recruiting even harder at places where high salaries are required to recruit and retain high priced talent.  The Legislation calls for a cap of $195,000 on salary earned on or after 1/1/2020 to be included in FAS calculations.  This one continues to bewilder me for a variety of reasons.  First, it is not problematic for anyone well-below the threshold of $195,000 (subject to adjustment by the same factor used in calculations of the retiree annual COLA).  For people already over the threshold, it really isn’t a problem that I can see for retirements occurring before 2023.  Currently FAS is calculated by taking your highest 36 month salary total and dividing by 3 to come up with FAS.  Included in the salary computation is half the value of accumulated sick leave (if the employer participates), the 6% member contribution (diverted or not), and the value of unused vacation time (Tier 1 and Tier 2 only).  Since your highest 36 months is likely to come in the last 10 years, you have a long look back window over which to draw 36 months, which could EXCLUDE** the period after the salary cap goes into effect.  So, for members nearing retirement, the practical effects of this are small.  Longer term, the picture isn’t quite as rosy.  Complicating this is the fact that Tier 2 has a limit at the IRS threshold (currently $280,000) as does Tier 3 (OPSRP).   Tier 1 has no such limit, as the limit wasn’t in existence at the time Tier 1 was created.   So, this new rule caps the amount of salary that can be credited for FAS purposes after 1/1/2020, but doesn’t affect uncapped salaries prior.  (**Do not interpret this to mean that THIS will be the way it is implemented.  As I note below, the devil lies in the details or the weeds.  Converting statutory language into software is a daunting task when language is ambiguous).

As they always say about legislation, the devil is in the implementation details.  Questions:  Does the PERS cap (not the IRS cap) prevent employees from contributing past $195,000 of earned salary?  Does the employer have to continue contributing once the member has passed $195,000?  What happens with any contributions between the PERS cap and the IRS cap for Tier 2 and OPSRP?  To put these questions a different way, at what point does the cap come into play - at the time the salary is earned, or at the time of retirement?  This distinction is critically important for those small number of members who are already earning over the PERS cap before this change is implemented.  It becomes a secondary problem for Tier 2 and 3 members earning over the PERS cap but still under their IRS caps that already exist on their plans.  (I have no explanation for why the Legislature decided to set the cap at $195,000.  I suppose they did this to make their numbers come out right).

I suspect that the court will have a problem with the salary cap for still-working Tier 1 members.  It doesn’t apply to the inactive Tier 1s.  The court may be also troubled by the existence of two caps for Tier 2 and Tier 3, and how they will interact.

Collectively, these changes will reduce employer contribution rates by about 5.43%, pretty much the amount that they would go up in 2021, other things being equal.  

There is an additional clinker buried deeply in the bowels of SB 1049.  The PERS Board will, if SB 1049 passes, be required to report to the Legislature 30 days before they make any changes to the assumed interest rate (and, by inference, the employer contribution rate, the actuarial equivalency factors).  Since the assumed interest rate is always adjusted (for the upcoming calendar year) in the summer of an odd-numbered year, this will compel PERS to make decisions about this slightly earlier than usual, and will now subject the decision to political pressures heretofore not required of an independent Board.  The reason for this is painfully obvious.  Go back to my third paragraph.  Raising the assumed rate means lower employer contributions; lowering the assumed rate means HIGHER employer contributions.  The stakeholders always had the opportunity to provide input to the process of rate setting, but the Legislature stayed out of the fray.  Now, the Legislature will get a voice, and can potentially use its political will to force the PERS Board to make decisions that are not in the Fund’s best interests, thereby exacerbating the problem that SB 1049 attempts to fix.

This is just a first pass through the bigger pieces of SB 1049.  The bill has other elements that I haven’t had a chance to study as well.  I will follow this post with another if SB 1049 gets any further in the Legislative process.  

UPDATE:  Not more than 15 minutes after I posted this, the Oregon Senate suspended the rules and voted out this bill in a 16-12 vote.  Three D’s voted against the bill.  The bill now moves on to the House where it is likely to have few hurdles to clear.  I’m happy to report that my Senator, Rob Wagner was one of the No votes.  Thanks Rob.