Oh, Wow It's You Again

The PERS Board held its March meeting today, both at an unusual time and definitely an unusual day of the week. Today's meeting was scheduled to finalize the 2010 earnings' crediting to all accounts. There were a number of other items of significance, which I will talk about below.

There were no surprises in the earnings creditings. Tier 1 regular accounts earned the assumed rate of 8.00%, the Benefits-In-Force Reserve was credited with 12.44%, Tier 2 accounts 12.44%, IAP accounts 12.13%. The Contigency Reserve picked up a cool $81.3 million, bringing its total to $734.4 million, while the Tier 1 Rate Guarantee Reserve took another $230.6 million, reducing its deficit to a nominal $211.1 million. All counted, the system has about $55.5 billion in assets on the books.

The lion's share of the meeting was given over to yet another Mercer example of financial modeling gone amuck. I am not going to try to summarize this presentation. It is 41 pages long and should be read by everyone who bothers to download the agenda packet from the PERS site. The basic message of the whole analysis is that employer costs will continue to rise, at least through 2013-2015 before they stabilize at somewhere near 20% of payroll, assuming all the actuarial and economic assumptions hold true. Mercer also modeled the impact of Pension Obligation Bonds on the venues that issued them. For those who issue POBs in 2002 or 2003, the longterm wisdom of that decision appears to be that they will "win" over the long haul by about 100-120 basis points. This means that they will have saved the money expected when the bonds were issued. For venues issuing POBs later, say about 2007, the news is not so good. Because of market timing, these employers are likely to see a 100-150 basis point "loss" relative to debt service costs. None of this is news, but it was nice to have it presented in pretty graphs of multicolors and in a Powerpoint presentation.

Some of the more interesting takeaway points from this analysis were: (a) it assumed that the assumed rate would remain at 8% for the forseeable future, that payroll growth would accrete at about 3.75% per year, and that the 50th percentile of earnings of the fund would be about 8.1% using the Mercer Capital Market Performance, Asset Mix, and Earnings Assumptions. This seemed to telegraph that Mercer isn't considering recommending any changes to the assumed rate, although they didn't model specifically under different assumed rates (that may come at the May meeting, when economic assumptions are considered before the 2011 valuation begins). This point was NOT mentioned at any point during the discussion of the Mercer report and I felt like it was the Elephant in the Room of the whole discussion. Everyone sees the elephant but no one wants to discuss it --- yet.

The last part of the meeting was given over to a legislative update. The good news is that of 43 bills introduced into the Legislature, NONE have been scheduled for a hearing. The bad news is that according to Capitol scuttlebutt and rumors, April 8th will be PERS day before the House Labor and Business Committee. If this is true, then we should see the agenda for this meeting by about April 4 since there is a 72 hour requirement before a bill gets a hearing. So far, PERS will get hearings on 2113 and 2114, HB 2115 is not likely to get a hearing (this is the bill to eviscerate SB 897 from the last legislature). No one knows what other bills may get heard, but again, the PERS legislative liaison heard that the bills likely to be heard are bills pertaining to the 6% pickup, the tax subsidy for out-of-staters, and the IAP return-to-work provisions. Joe O'Leary, the new PPLAD Administrator at PERS suggests that this is the calm before the storm. He expects the joint House/Senate budget to be released tomorrow and that will guide the remainder of the session (see today's Oregonian or Statesman Journal for information on the agreement between the House and Senate negotiators on the "Legislator's Budget". Do keep in mind that Dennis Richardson was one of the three members of the Committee as co-chair of the House Revenue Committee.

After the meeting, I had a chance to talk with a couple of friends, one of whom is quite concerned about the proposals the State has laid down for the negotiations with AFSCME and, presumably, SEIU. While the big details of those negotiations have already leaked out, some other details have not. If I take this source at face value - and I have no reason not to - the state's proposal is far more egregious and punitive than most people seem to be aware of. I'm merely reporting what is rumor for now. Unless I receive confirmation from someone in the know, you should also classify the following information as rumor, but be willing to try and verify.

Everyone knows that the state offered a tiny raise and then asked for concessions on health care premiums of about 15%, continuation of 8-10 furlough days, and elimination of the 6% pickup. That has widely been reported and I have no doubt on that. What hasn't been reported, according to my source, is that the state is ALSO asking employees to cover the state's increases in costs for PERS itself, roughly 4.5% of payroll. They are also asking part-timers(those between 0.5 and 0.8 FTE) to give up their partial health care subsidy (about $332 per month). For the sake of argument, I'm going to assume that my source is correct. If so, then it appears that the state is offering a 1% raise in the first year of the contract, a 2% raise in the second year of the contract, and is then taking away 6% for the "pick-up", asking employees to contribute 4.5% of the employer costs for PERS, continue to take 8-10 furlough days, and pick up about 15% of the cost of their health care. My question is this. On what basis does the 1% raise and the 2% raise get computed? This contract offer, if true, is guaranteed to drive workers out of public employ, or to drive many to food stamps. I hope to the high heavens this rumor isn't true, but I fear there may be more truth than fiction.

Also keep in mind that if the state succeeds in passing on increased employer costs of PERS to the employees, then a change in the assumed rate no longer aligns employees and employers around the 8% figure. So long as the state had to pay the cost, there was an incentive to keep the assumption as high as possible. But, if the assumption is buried by passing on increased costs to the employees, then who cares whether they lower the assumed rate. Just remember that as the "state" goes, many other employers will follow.

Believe me, I was far more disturbed by what I heard after the meeting than I was by anything I heard at the meeting. Please, somebody in authority, tell me it isn't true.