Hard Bargain

As most people know, the PERS Board voted yesterday (July 29) to keep the assumed rate at 8%.  The local media seemed surprised by this decision and focused on a random comment made by one of the Board members that he didn't think the 8% was sustainable, but that he respected the wisdom and judgement of the Mercer actuaries.

Most reports didn't discuss some of the issues raised in the actuary report.  One issue is that the mean, median, and modal assumed rate across the public employee pension plans typically surveyed (about 120) sat right at 8%.  A few of the higher assumptions (8.5%) had been dropped to 8%, but over all public plans surveyed, 8% remains the prevailing assumption.  Mercer also makes its own analysis and its capital markets survey forecast that over the next 20 years, the likely rate of return using the asset mix similar to the PERS portfolio is 7.88%, while another actuarial firm, SIS, using the same data predicts returns of 8.16%.  As you can see, the central value between these two highly respected firms is about 8%.

The Board discussed other rates including 7.50% and 7.75%, but were confronted with the conundrum that by lowering the assumed rate, the employers (and hence the taxpayers) would be on the hook for even higher contributions.  The Board attempted to balance the need for long-term stability in rates against the short-term shock that lowering rates would result in.  In the end, the Board voted 4-1 to retain the 8% rate.

Many argue that the Board is foolish, is a tool of the unions, and a variety of other things.  In fact, 4 of the 5 Board members are from outside the system and work for large or small private companies with their own pension plans.  The public would have you believe that the last 5 years have been harsh and that returns are well below 8%.  This is true but misleading.  Only 2008 had the strongly negative returns of -27% that skew results significantly lower.  Leaving out 2008, PERS returns have been well above 8%, and the 7 year average return - the closest to the actuarial prediction range is 7.6%.  So, while 8% might seem high against the average, the average includes -27%, surrounded by years of 13% and 20%, and 15%.  The long-term PERS average continues to bump close to the 8% mark.  I suspect if I were on the Board, I might have pushed for an assumption of 7.75%, but that would have been reevaluated in two years anyway.  I know most people would have been unhappy with me for doing so, but I think it would have struck a fine balance between the need to have stability and the need to keep employer rates stable.

On the whole, I think the PERS Board did the only rational thing it could do given the information available.  Each PERS member owes the Board a thank you and I would encourage each of you to write to a Board member (or two or five) and thank them for their vote to retain the 8%.  It was a hard bargain and the Board made a sensible decision, deciding not to throw members to the wolves of the public and the media.

 

 

Back To Black

While I was gone the Oregon Supreme Court issued an order joining the Arken and Robinson cases for the purposes of issuing a final opinion.  While the cases are different, they cover enough similar ground that the Court apparently feels it can issue a "one size fits all" decision.  Greg Hartman doesn't know whether this is good news or bad news, but he opines that it probably means that they are closer to a final decision than he would have expected at this point.

This coming Friday, the PERS Board holds its bi-monthly meeting.  The agenda is long and there are many issues to be discussed.  For members approaching retirement in 2011 or 2012, the most significant item will be the Mercer presentation and recommendation of demographic and actuarial assumptions for the 2010 and 2011 system valuations.  For members, the critical assumption will be the assumed earnings rate going forward.  While Mercer's previous studies have shown that the current 8% is within the range of variation in their simulation studies, there is considerable pressure being brought to bear by many sources to lower the assumed rate to around 7.5%.  If this action were taken, it would take effect on January 1, 2012 and would affect future Tier 1 regular earnings (the "rate guarantee"), and, more significantly, will change the mortality factors used to calculate benefits in retirement.  The impact will be negative to members and post 1/1/2012 retirees alike.  However, the wild card in this discussion is that the assumed rate also affects the expectation of contributions from employers.  There is an inverse relationship between the assumed rate and employer contribution rate.  If PERS lowers the assumed rate by 50 basis points, employer rates would be expected to rise to offset the loss of revenue from a lower assumption.  Whether PERS will try to "decouple" the employer assumed rate and the Tier 1 assumed rate is an unknown right now.  If they don't, the employers will try to fight the reduction just as hard as the Tier 1 members.  The meeting packet is posted on the PERS website right now, but there is no hint of which way Mercer is likely to go.  They hinted at a slightly lower assumption in May, but it wasn't transparent.  This time around they will have to go out on the limb and make a recommendation.  They will be damned if they lower the rate and damned if they don't lower the rate.  Expect some lively discussion.

So, there is lots of black clouds still looming over the PERS horizon.  One of those clouds will either be lifted on Friday (no change in the assumed rate), or the deluge will begin (it gets lowered).  The other cloud awaits us at the Oregon Supreme Court, where a decision in the Arken and Robinson cases will probably come before summer's end.

Miles To Go

On Thursday, the Oregon Legislature bid sine die and all went home for the remainder of the year.  PERS members and retirees escaped from any significant harm, although HB 2546B did finally pass and so our fellow members who retire on or after January 1, 2012 and who live out of Oregon and who accumulated PERS credit for work performed before October 1, 1991 will see that the income tax subsidy they were entitled to disappear.  The Legislature wisely avoided the potential legal pitfalls associated with trying to take this subsidy away from those members already retired.  In all, this was the sum and substance of the Legislative "tinkering" with PERS for this session.  Beware, however, that a lot of people are still unhappy with the Legislature and, more especially, with Public Employee Unions.  Now that we have annual sessions of the Legislature, it is possible that more harmful bills will be researched and proposed during the shorter Legislative session beginning next February.

Now that the Legislature has been removed from the current equation, the next hill to climb is with the PERS Board.  On July 28, 2011, the Board will consider whether to change the assumed earnings rate from its current 8% to a lower amount.  The most likely lower amount will be either 7.5% or 7.75%, although neither is a certainty.  Mercer, the actuarial firm in charge of PERS' mortality tables, has to decide whether to formally recommend lowering the rate.  To do so has profound consequences for all active and inactive members as well as employers.  While all earnings under the 8% rate are protected, a lowering of the rate for future earnings would mean two things for members.  First, all subsequent earnings will be reported at the lower guaranteed rate.  In the short run, this has little immediate effect on members; in the longer term it does.  Because the mortality tables are built from a set of assumptions, chief among them is the assumed rate of return on investments, lowering the assumed rate will mean that the actuarial tables will change and the benefits paid out will be lower because the expectation is for lower earnings.  On the employer side, interest rate assumptions are inversely related to employer contribution rates.  If PERS lowers the assumed rate of return, the employers will be expected to contribute more to insure that the "true-up" when a person retires is as small as possible.  With all the various "accomodations" employers have been given to pay for their increasing rates, the short-term effect on the employers would be to raise their contribution rate.  In this particular instance, employer and employee interests are aligned, at least for the first few years.  I'm sure that the PERS Board will find some way to lessen the burden on the employers, but all this means is that the "unfunded" portion of the PERS fund will grow.  So, if you are interested in commenting on this possible change, having input on not changing the rates, you would be extremely wise to plan on attending the PERS Board Meeting on July 28, 2011 at the PERS HQ in Tigard.

Finally, as the icing on the cake, the benefit payments that retirees receive on the first of every month got a bit FUBARed on Friday July 1, 2011.  As reported on the PERS Web Site, there was some sort of coding error that resulted in one of several possible things happening with the July 1 check.  First, as many of us discovered, the check got deposited in our savings account rather than our checking account.  This is a known problem at OnPoint, Advantis, and several other credit unions here and elsewhere, including out of state banks.  The second thing is that some deposits were simply rejected because there was no savings account to put the deposit in.  The people in this situation are the worst off because of the holiday weekend.  It will be mid-week next week before all this can be straightened out.  Finally, some of you may have noticed your check went to the same old place.  You were lucky.   If you have any issue with this, you are asked to call PERS on Tuesday morning July 5 so they can help get this sorted out for you.  PERS assures us that this programming issue will be resolved before we receive our August 1, 2011 checks.

I hope you all are planning to be involved in safe activities over this long weekend.  Don't get too much sun, drink plenty of fluids, practice safe fireworks, do not drink and boat or drive.  In other words, behave normally.  If you are crossworder, practice safe lex.  Above all, be thankful we live here and not in some of the other less friendly places on the planet.