You Win Again

After several email exchanges with the good people at PERS, I now have an answer to the question posed in my previous post "Hey, That's No Way To Say Goodbye".  Unfortunately for all the people retiring, the answer isn't the one they had hoped for, and I'm afraid that PERS is well-covered for what they do.  I won't bother with the first of the messages since it is largely unnecessary relative to the followup email.  From David Crosley, PERS' Communication Director:

"The IAP retirement application states: "IAP accounts are subject to earnings or losses. Your IAP disbursement is based on the account balance at the time PERS processes the payment, not the date you select to retire."

Tier One/Tier Two statute (Chapter 238) differs from IAP statute (Chapter 238A) regarding crediting.

For Tier One and Tier Two, Oregon Revised Statutes 238.300 states in part that interest is "credited at the time of retirement."

For the IAP, Oregon Revised Statutes 238A.350 states in part that "adjustments...shall continue until the account is distributed to the member or forfeited." "

Thus, the behavior PERS exhibits with regard to the distribution of the IAP account (however and to whom it is distributed) is entirely in conformance with the statute covering the IAP, written by the Legislature in 2003 and modified slightly in 2005.  If people are unhappy with the way PERS does things, it will require legislative action to change.  Like everything involved with the Legislature it is always wise to be careful what you wish for.  Moreover, PERS cannot be charged with failing to tell people as the application itself contains the key sentence (above) that describes exactly what happens at the time the account is distributed.

 

Hey, That's No Way to Say Goodbye

Some recent PERS retirees have discovered another potentially costly inconsistency with the way that PERS treats the IAP account.  I have numerous reports of members taking a December 1, 2011 retirement and wanting to roll their IAP into other tax-advantaged vehicles.  The problem they are encountering is that PERS has 120 days to effect the rollover, and when PERS does the rollover has a significant effect on the interest credited to the IAP at rollover.  For example, we have a member with a transferred IAP as of early January who received the November 30 earnings credit, another with a later January transfer who received the December 31 earnings credit (nearly a full 100 basis points different), while a third won't have the transfer until 2/8 and will presumably receive the estimated 1/31/12 credit.  This inconsistency is quite costly (or can be).  I suppose that the attitude is that "it all comes out in the wash", but some people would prefer you don't do their laundry<g>.

So how about it PERS.  Can't you establish a consistent administrative rule that gives retirees who roll their IAP's over and fixed interest rate that is effective the date of their retirement (assuming they make the request at retirement).  There is no reason that retirees should be subject to the whims and perfidies of how PERS operates to figure their final crediting on the IAP.

We Take Care of our Own

That used to be the motto of the group known as OPRI - the only group in Oregon dedicated exclusively to the welfare of PERS retirees.  I and many others are lifetime members of this organization.  Now about 28,000 retirees are confronting the issue of repaying benefits once thought to have been legally received, but now apparently are subject to the aggressive collection actions of PERS.  Where is OPRI?  We've heard neither hide nor hair of this organization.  The organization has been turned over to the lobbyists Mark Nelson and David Reinhardt (yes, *that* David Reinhardt) and all communications for OPRI go through the lobbyists offices.  How does a member of OPRI communicate with OPRI *without* going through the lobbyists?  We just want OPRI to take some leadership in directing PERS to offer something besides to ludicrous options they given to repay overpayments.  We don't ask for much.  We just want OPRI to get off their collective asses and actually do something.  For all we know, they may be, but communications are exactly ZERO between the organization and its members.  Jay Osborne, the new OPRI president, doesn't seem to respond to email or to outright pings on the PERS Discussion Group.

If this is the organization that I have to put my faith in to represent my interests, God help me.  I want my money back.  I've gotten nothing for my lifetime membership except an organization that doesn't respond, hides under the cover of a lobbyist, and only acts when it appears that someone on the Board's interests might be at stake.  I miss the late Russ Gregory, a Board member of OPRI who died unexpectedly last month.  Russ was always free with information and we had some idea what was going on.  Now that Russ is deceased, OPRI has gone dark.  OPRI no longer appears to care or to take care of its own.

OPRI WAKE UP AND SMELL THE COFFEE.  YOUR DAYS ARE NUMBERED UNLESS YOU COME OUT OF HIDING AND TAKE SOME AGGRESSIVE ACTION TO PREVENT THIS LATEST PERS TRAVESTY FROM COMING TO PASS.  If you need legal money, why don't you ask for it.  We are all getting tired of waiting, and angry that nothing evident is being done.  Earth to OPRI.  Where are you?

 

Things I Don't Need

This should be treated as an open letter to PERS and to OPRI:

Dear All:

I've been spending a lot of time these past few weeks thinking deeply about the upcoming attempt by PERS to collect overpayments from PERS retirees from the period between April 1, 2000 and April 1, 2004.  Since I retired during that window of time, I am one of the people who will be tagged during the collections for about $14,000 in received overpayments.  And I'm really, really, really angry about the methods that PERS has put in place to recover the money.  One way is a hoax and the other way is an income tax nightmare.

During the recovery period that Judge Kantor stopped back in 2008, PERS offered affected retirees two ways -- and only two ways -- to repay money that was given to them THROUGH NO FAULT OF THE RETIREE.  PERS failed to warn any member considering retirement from April 2000 to mid-2003 that there was ANY possibility or likelihood that their benefit might be subject to change because of a (then) little-known and not-very-well publicized case involving the City of Eugene and other employers versus the PERS Board over the earnings crediting for 1999.  PERS provided estimates and benefits that noted NOTHING about this case, and counselors did nothing to warn retirees that benefits might have to be reduced because the 1999 earnings had been challenged and were not yet final.  So, many members retired in complete and total ignorance of this case, and were stunned in 2003 when the Legislature, following Judge Lipscomb's ruling, codified the earnings as 11.33% instead of 20% and provided mechanisms for collecting the amounts overpaid.

PERS, deciding to be generous, came up with a "friendly" (to whom?) way to repay the benefits.  They created the utter hoax called "actuarial recovery".  In this method, retiree overpayments would be divided by the number of months remaining in their actuarial life, and benefits would be reduced by that amount.  Seems simple, fair, and appealing.  They weren't planning to charge interest - kinda hard to do when the mistake is their fault, not ours anyway - and so this looked like one of the most friendly, least punitive ways to repay the amount owed.  UNFORTUNATELY, this description leaves out one of the unsavory aspects of the method that turns this seemingly user-friendly approach into a financial windfall for PERS.  The catch in all of this is that the payments continue for as long as the retiree and a beneficiary (if there is one) live, not when the bill is fully paid.  Thus, anyone who beats the actuarial odds will be paying considerably more than what he/she owes and PERS gets to keep and invest this bonanza along with all the other funds.  PERS' rationale for this is that not everyone would live as long as their actuarial life expectancy and so the ongoing reductions in benefits are needed to subsidize the benefits not repaid from those who die early.

The alternative to this unappealing choice is to repay PERS in a lump sum, which guarantees that you won't pay a nickel more than what you owe, although there are some tax implications that would require a CPA to untangle for you.

And, when you receive the final invoice, you'll have a grand total of 60 days to decide which poison you want to take.

I am deeply offended that PERS thinks I'm that stupid that I don't see the hidden costs of the actuarial recovery method.  It doesn't charge interest, but it charges payments for money you don't owe if you live long enough.  How is that different from charging interest?  Why can't PERS shut off the payments when the balance is paid in full?  Believe me, as a computer programmer, I know that it isn't difficult to do programmatically unless PERS' computer system is written in Sanskrit or Hebrew.  This is a trivial programming task.  What about the losses from people who die young?  Well, there is a simple answer to that question.  What about all the earnings from the people who decide to pay in a lump sum?  All of that money will be turned in within 60 days of billing and PERS has the rest of our actuarial life to invest that money and more than cover the losses from people who don't make it to fully repay their debt.

Furthermore, why aren't there more repayment options? The actuarial reduction method is a punishment to people who simply lack the funds to pay in a lump sum.   They are subjected to a lifetime reduction in benefits solely because they cannot pay all at once.  For the poorer of our brethren, there is NO choice on how they repay PERS.  This is akin to loan sharking because, as usual, the poor will get stuck paying more and for longer than the more affluent who can afford to pay the lump sum and be done.  Talk about economic discrimination.

PERS has methods on the books now to allow individuals to accelerate their repayments but only for the length of time it takes to repay the bill.  For example, ORS 238.715 offers the possibility that PERS can reduce member benefits by as much as 10% per month to repay a debt.  At this rate, most people would have repaid their debt in 3 or 4 years, rather than 20 or 30.  I suspect some people would take this option if it were available.

What about a 5 year payment plan where individuals who can't afford the lump sum could repay the benefit in 5 equal installments over 5 years (or 60 equal installments over 5 years).

There are many options that would lighten the burden on the less affluent, or encourage some of us to consider a shorter time payment plan than the lump sum.  In any of these cases, PERS would get its money back sooner, be able to invest it in securities that would more than indemnify against any losses due to early death and failure to complete repayment.

The bottom line is that PERS must consider some alternative repayment methods to the ones it offered the first group.  It is clear that if PERS continues to collect payments in perpetuity, it must be in violation of the Fair Credit Standards and Practices in a way that would make a loan shark blush, not to mention invite scrutiny from the same agency.

This whole issue needs careful input from legal advisors and those who are not thinking of taking the easy way out.  It would be nice if OPRI would get off its hind end and take an active role in pursuing alternatives to the ones available now.  When the first round of repayments began, OPRI was nowhere to be found except through the actions of the PERS Coalition in the courtroom trying to prevent repayment at all.  That's all noble and good, but now it is crunch time and most of us will be facing the invoice in a few months.  At this point, we need some legal hardball.  What I don't need is someone telling me how generous PERS has been.  That's bullshit and we all know it.

Money Changes Everything

At the end of last year (2011), the Oregon Supreme Court ruled in its Robinson v PERS opinion that PERS could collect the overpayments that have been outstanding since as early as 2006 when the Strunk/City of Eugene remediation plan was implemented.  To refresh memories, the overpayments were the result of PERS calculating benefits for people who retired between April 2000 and April 2004 on the basis of the challenged 20% earnings crediting for 1999.  When the 2003 Legislature and the PERS/City of Eugene settlement agreement were finalized, the earnings order was vacated and replaced by one crediting only 11.33% for 1999. The overpayments resulted because PERS used the account balances that included the 20% crediting and then subsequently recalculated benefits using 11.33%.  Thus, from the time an individual retired in the specific window mentioned above to the time the benefits were corrected beginning in 2006, individuals were receiving more than they were legally entitled to receive.  (I'm stating facts here, not my individual opinion about the propriety or ethics of collecting on the overpayments).  For almost 20,000 individuals, they were overpaid anywhere from a high three figure amount to some healthy five figures.  PERS began collecting from some members before Judge Kantor ruled that PERS couldn't collect the money and so they are not affected by what PERS does now.

The most common question I receive is "how is PERS planning to collect the money".  Again, a brief history lesson.  When PERS decided to begin collecting the overpayments, it gave retirees two options to pay.  The first option was to repay the money in a lump sum and be done with it.  The second option was to take the balance due, compute the individual's life expectancy, and reduce the benefit an amount deemed to recover the overpayment by the time the retiree reached his or her actuarial life expectancy.  Because PERS intended to charge no interest on the repayments (it wasn't the individuals' fault that they occurred), the plan was to keep on collecting until the individual and his/her beneficiary died.  Of course, for individuals with long life expectancies, they would be paying significantly more than individuals whose life could be foreshortened by illness, or unexpected events.

It is unlikely that PERS will change the methods by which individuals can repay the benefit overpayment, but the time elapsed since the original collection invoice and now has been significant and many of us have had plenty of time to think about this and to come up with important questions about the process that have not been satisfactorily answered.   Yesterday, I sent a list of four questions to PERS.  Predictibly PERS was not ready to answer these questions, but they remain important and will demand answers before PERS starts collecting from anyone else.  For the benefit of all, I post my questions here.  I don't pretend that these are the only questions, but they are ones that have occurred to me and to others as the day of reckoning draws nearer.  People are not going to have a long period to decide what mechanism to choose, and the answers to these questions may go a long way toward helping people make the correct decision.  Of course, these presume that individuals actually have a choice.  For many people, paying in a lump sum simply isn't an option.

My questions are predicated on a simple fact.  The money owed is money we've already received and have already paid federal and, in most cases, state income taxes.  We are going to be required to repay the gross amount, not the after-tax amount.

Herewith are my questions, with an additional one not posed in my email.

1.  Under the actuarial repayment method (ARM), is the payment computed only once and then remains fixed for the duration?  In other words, are there circumstances under which the ARM payment changes (e.g. after a COLA or a pop-up following the death or divorce of a beneficiary)?

2.  Is the ARM payment taken pre-tax (as it should be), or is it taken post-tax, which means it will be taxed twice.

3.  Under a lump sum repayment, will the 1099R for the tax year in which the payment is made (presumably 2012), reflect the amount in box 10, 11, 12, 13, 14, where such non-taxable credits are typically reported?

4.  If the 1099R does not show the amount of the lump sum payment as an income offset for 2012, then will the invoice we receive be detailed enough that the amount of overpayments will be listed by calendar year of overpayment?  This level of detail would be critical should those of us who have sizable overpayments to make decide to file a "right of claim" (section 1341, IRS Code) on the amount as either an itemized deduction or a tax credit (lump sum greater than $3000) against our 2012 Federal and State income tax returns?  This should be mandatory of PERS.  The IRS isn't likely to take kindly to the typically uninformative bills and statements that we've gotten from PERS up to this point.  It is imperative to have complete documentation of what and why we are repaying so that we can take this to the lawyer or accountant of our choosing and file whatever papers we need with the IRS to facilitate a credit for the amount of taxes we've paid on money we're no longer entitled to.  No one is asking PERS for tax advice and no one is asking PERS to do anything extraordinary.

5.  Would it be permissible to pay the lump sum by taking money from an existing tax-advantaged account - IRA, 401K, 403B, 457, SEP - and negotiating a trustee to trustee transfer, thereby not triggering a taxable event?  In this circumstance I don't believe that there is a "right of claim" to be exercised and this might be the easiest method of all for many.

This is not an ordinary event in one's tax life.  Most people don't have to repay amounts that have already been taxed.  PERS should bend over backwards to provide ordinary, but complete, documentation of the when, how, why, and how much so that individuals can avoid the whammy of repaying a pre-tax amount with post-tax dollars.