Mamas don't let your babies grow up to be cowboys

Or Tier 1 PERS retirees either (too late, I guess). It's been pretty boring out in PERS-land lately. The only real news has come in the past week or so. PERS announced the 2006 COLA increase today (2% for everyone EXCEPT the window retirees) - so what else is new? The Supreme Court issued its way too long awaited decision in the petition for an award of attorneys' fees to the plaintiffs in the Strunk Case. The Court agreed that the plaintiffs were entitled to something, but then punted to a special master to duke it out with the plaintiffs and the defendants on how much the award should be. The Sartain (COLA freeze) piece of the Strunk case cost more than $350,000 to litigate. Wonder how much the special master will see fit to award. The legal systems continues to grind along at a snail's pace. A hearing is set for September 28th in the Arken case (Window retiree) to consider the motion of summary judgement. The Robinson case is also buzzing along at about the same speed (slowly). For those of you holding out hope for a quick resolution of any of this, I'm laying my personal odds that the current cases won't run out their legal string until about 2008, with some final resolution around 2010. More optimistic predictions focus on 2009. What's one year at this point? AFSCME is holding a Q&A session on PERS this coming Monday night (July 24th at their Portland headquarters). Call AFSCME if you're interested in attending.

Here We Go Again

A repeat title to clarify. Yesterday's post ended up as a mass of corrections and additions. My original first paragraph was the only thing that should have been published. The second paragraph is dead wrong and results from a transposition of numbers. The third paragraph tries to correct the errors of the second paragraph. It is probably easier to just repeat, in different words, the key point.

In 2005, the variable simple earned less than the regular Tier 1 or Tier 2 accounts. This is because the variable is invested in a different pool than the other accounts. The variable pool is a more aggressive mix of equities. In a good year - as last year was - the variable *usually* does better than the regular, which is why there is so much confusion. Unfortunately, while last year was a good year, it was also an unusual year. It parallels a few earlier years in the mid-1980's when the regular outperformed the variable on a pure earnings basis. PERS is not holding back any earnings from the variable. It distributes what is earned. Read PERS' financial pages carefully. You won't find a shred of evidence that the variable earned any amount other than 8.29%. But if you read the summary page, you can be misled into thinking it SHOULD have earned more. You're reading more into the page than is there. Read it carefully.

The Other Side of the Coin

Last week PERS started sending out 2005 statements to active and inactive members. Since those have gone out, I've seen a real increase in my email from Tier 1 members with variable accounts. The question is exactly the same each time. How come the regular Tier 1 earnings were 13+% (only 8% actually paid on Tier 1 Regular accounts), while the variable earnings were only 8.39%? I'm a bit perplexed why PERS has been unable to answer this question for members inquiring. The answer is simple. It is the other side of the coin of aggressive investing. The Tier 1 regular account is invested more conservatively than the Variable account, which is more aggressively managed. In really good times, the variable *should* earn more than the regular and historically this has been true. But, last year was not a "typical" year and the more conservative investment style did better than the more aggressive style. Consequently, the variable actually earned less than the regular. There isn't anything sinister happening here; PERS isn't creaming off variable earnings to stick into reserves. The variable earns what it earns and in 2005 it earned less than the regular. End of story.

Note added at 7 p.m. Not so fast is this the end of the story. Apparently the problem is a bit more complex and requires a clear statement from PERS about what is going on. According to PERS' website, the 2005 financials include the December earnings rate for the variable at 13+%. Since the December earnings are typically within a fraction of a percent of the earnings paid out after end of year accounting, it is somewhat disconcerting to see a 5% difference between the stated December penultimate earnings figure and the actual figure of 8.39%. While I'm certain there is an explanation for this huge divergence, PERS has some big explaining to do. My note above still stands - the variable earnings are supposed to be actual earnings on funds more aggressively invested than the regular Tier 1 fixed account. This year something doesn't add up. Hopefully my contacts at PERS can provide some guidance on this disparity.

Note added even later: My bad. The original statement stands. PERS shows at its variable listing that the 2005 December earnings are indeed 8.29%, not the 13+ I reported earning. I apologize for the confusion. The variable really *did* earn less in 2005 than the regular for the reasons noted above.