The Show Must Go On (and on and on, Long Post)

Rumors of my demise, my death, my apathy have been greatly exaggerated since my last update in August 2016.  Fact is, nothing I said in August was ever superseded by later or more informative news, and so I’ve had little to say publicly about PERS (I’ve said lots on the private forum, Pers Oregon Discussion, see link on left).  Now that the political circus is back in town, the tents set up, and all the clowns are meeting with their clown faces on, we have something to discuss.

On Wednesday February 1, the 2017 Oregon Legislature convened for its long session in which thorny issues like the state budget, transportation, health, and, of course, PERS are on the agenda for their needs and for their contribution to the State’s apparent $1.8 billion budget shortfall.  This year, most of the action will take place in the Senate’s Workforce  Committee, chaired by freshman Senator Kathleen Taylor(D, Milwaukee), and vice-Chair, the estimably malign Senator Tim Knopp (R Bend), who is back for is second swing at the piñata, after contributing to the 2003 wreckage.  The Committee is also ably “assisted” by Senator Betsy Johnson (DINO, St Helens), who is not even a member of the committee.  In the opening salvo, the Committee heard a very long presentation from Steve Rodeman, Executive Director of PERS, on the financing of PERS, as well as the demography of its current membership.  At the end of his presentation, Rodeman presciently noted that “…The PERS situation is driven by math; as an agency director, there’s little margin in having an opinion about math”.  Indeed!!!

Prior to convening the Legislature, Senators Tim Knopp and Betsy Johnson convened a “Working Group on PERS”.  Ostensibly it was convened to flesh out ways in which the existing $21 billion unfunded actuarial liability (UAL) might legally be reduced.  The committee, composed of experts and interested volunteers, had two meetings - one in September and one in December.  Members of the group thought that their input would be sought when legal issues and all of the corollary issues related to reforming PERS (“race to the door”, loss of institutional memory, effects on agency recruiting, etc, as well as the actual budget impact)) would be hashed out.  In fact, nothing of the sort occurred, and after the December meeting, Tim Knopp and most of the Republican Senate caucus dropped two bills on the Legislature to be introduced at the beginning of the session.  Those bills, SB 559 and SB 560, cover a fair bit of ground and relate to some, though not all, of the ideas I discussed in my previous post in August.  Let’s go through them seriatim.

SB 559 covers the period of time used to compute the Final Average Salary (FAS) that is the benchmark for Full Formula (FF) retirement.  The bill has an emergency clause* and is set to begin on 1/1/18.   FAS is also the measure against which the Money Match (MM) retirements are compared.  This is the metric used by those hysterical newspaper headlines shrieking about those relatively few members who were able to retire at more than 100% of their final salary.  Currently, FAS is based on the highest three years of a member’s final ten years covered employment.  Usually, but not always, those are the last three years in a member’s career.  SB 559 proposes to change the time period from the  three years to the FIVE years.   It is estimated that this would reduce the UAL by about $700 million and reduce employer rates by about 65 basis points in 2017-19.  This is a tricky proposal.   Its purpose is to dilute the FAS used to calculate the benefit under Full Formula (Tiers 1 and 2, OPSRP).  Recall that the formula involves total years of service, a multiplier for each year of service (1.67% of FAS for Tier 1 and 2; 1.5% for OPSRP), and FAS.  Option 1 (the highest benefit possible without a beneficiary) is the starting point for these calculations.  Thus, a 30 year, Tier 1 member can earn 50% of FAS.  So anything that reduces the FAS will have the attendant effect of reducing the benefit since FAS is the only variable in the equation - years of service being measurable and constant for any individual and the multiplier being set in statute.  Of course, FAS is also influenced by other variables besides how many years the average is computed over.  Adding to FAS for Tier 1 and Tier 2 is accrued sick leave (for participating employers) and the value of accrued vacation time.  Another factor that can drive up FAS is the acquisition of overtime pay for those eligible.  SB 559 ONLY deals with the time period for the multiplier; SB 560 has other interrelated effects.  The bottom line is that spreading the salary over five years has a tendency to lower the FAS since the actuary uses a 3.5% salary multiplier to calculate expected salary.    An example will illustrate.   Suppose a member is earning $50,000 in calendar 2014 and can retire with 30 years at the end of 2018.  Salary in 2015 is $51,750; 2016, $53561; 2017, $55436; 2018, $57376.  Leaving aside other additions to the totals, the basic FAS under the current rules would be based on the sum of the last three years: ( $53561+$55436+$57376)/3 = $55458, with a benefit of $27729 (with rounding).  Under SB 559, note the change.  FAS = ($50,000 + $51750 + $ 53561 + $55436 + $57376)/5 = $53625/2 = $26812.   So by taking the average out over 5 years, the simple FAS is reduced by almost $2000 and the benefit reduced by nearly $1000.   Since the average state and school district employee salary is $56,028 (Rodeman’s presentation on 2/1/17), our example isn’t very far off the mark.  Assuming the salary growth assumptions are correct, this gives a pretty good idea of how much of an impact this could have on all employees retiring under FF and Formula + Annuity (although the effect would be halved for these).  I once thought the salary assumption was way off until I calculated my own average rate of salary growth.  While it didn’t increase linearly with time, the difference between my starting salary and my retirement FAS followed an average 3.5% growth trajectory per year.  However, my final three years’ salary were nearly identical, which illustrates how off this set of assumptions can be if you focus only on a specific group of years.  Many employees reach salary plateaus near the end of their careers and the growth trajectory ceases to follow the normal pattern.  I’d be surprised if the savings from this change are as much as the actuary projects.

SB 560 is much deeper, more harmful, and worth more detail.  The essence of SB 560 is to redirect employee contributions (the 6% paid currently into the IAP) into a another fund (a second IAP-like fund?) dedicated to the pension costs for the employee (the FF, MM, or F+A) beginning January 1, 2018.  It also forbids employers from paying the “pick up” on or after 1/1/18.  The second piece of SB 560 is to place a cap on salary used to compute FAS at $100,000 beginning 1/1/2018 (see SB 559 also on how this impacts).  This bill also has an emergency clause* that takes effect upon passage.  Both bills are referred directly to the Oregon Supreme Court for adjudication.  

On the face of SB 560, the redirect appears to be “wage theft”, clearly illegal.  On closer inspection, however, the structure of the second “individual” account is such that it still belongs to the employee. If the employee ceases service for a PERS-covered employer before reaching retirement age, the member can go inactive until retirement age and the second “individual” account (the redirected 6% plus earnings and/or losses) will be used to offset the pension costs (i.e. FF or F+A, or conceivably MM in the case of Tier 1 or Tier 2).  The current IAP will be frozen as of 12/31/17 and will only accrue earnings from here on out.  If a member chooses to withdraw completely from the PERS system before retiring, they would be entitled to the balance in their Tier 1 or Tier 2 account, the IAP, and the second individual account.  No employer contribution is made in this case.   In the case of OPSRP members, there is no “member account” in the same sense of there being a Tier 1 or Tier 2 account.  The OPSRP member would have two individual accounts - the IAP (which is supplemental to the pension), and the post 1/1/18 individual account that would be applied toward the cost of the pension portion of the Defined Benefit of OPSRP (a formula-based pension).

The wild card in this portion of SB 560 is the prohibition, beginning 1/1/18, of employers “picking up” the member contribution.  While this certainly could be a negotiating tactic, the “pick-up” itself is a subject of collective bargaining and cannot simply be turned off by legislative fiat.  I presume that the intent of the bill, although this is nowhere clearly stated, is that this becomes the mandatory condition as collective bargaining contracts expire after 1/1/18.  Regardless of its interpretation, the only way this ends up saving employers any money is if all the money contributed is diverted to offset pension costs in the future, and that the employers do not incur offsetting expenses in exchange for having to discontinue the pickup.  To be completely revenue neutral to the member, the 6% member contribution currently paid for by employers would have to be added to the base salary of the member and then deducted, pre-tax, from the employee’s check.  That would be the only way this would not be “wage theft” as far as I can tell.  Of course, my legal opinion is worth what you pay for it - bupkis, nada, nothing - as I am not a lawyer.

The $100,000 cap on FAS beginning on 1/1/18 will end up saving money only for those employees who are slightly over the $100,000 FAS near retirement.  Those who are significantly over the $100,000 FAS after 1/1/18 still have either the 3 highest or 5 highest (see SB 559) years to use in computing their FAS.  The bill only says that the FAS will be limited to $100,000 for years beginning on or after 1/1/18, so members in the higher salary brackets will simply end up using other years for their FAS calculations.  Once out beyond 5 years or so from 1/1/2018, this bill will start to have a serious impact.  It will have an immediate impact on recruiting high-salaried professional into management positions, into Professorial and Administrative ranks in Higher Education, and in recruiting for positions at OHSU’s Medical School and Dental School.  Worse still, however, is that $100,000 is an unrealistically low threshold with neither an inflation adjustment, nor a recognition that the current average salary in the PERS system is approximately $56,000 per year.  Since the actuary uses a 3.5% per year salary multiplier, it would take the average member who receives no other adjustment other than the multiplier per year, less than 18 years for the average salary to be over $100,000.  This comports with Steve Rodeman’s testimony on 2/6/16 to the Senate Workforce Committee that a potential “unintended consequence” of this legislation, for example, would be to push the average salary over $100,000 in 20-25 years.  

Needless to say, both of these bills contain plenty to piss active members off.  Public testimony opens on these bills on February 13, 2017, and I expect there to be considerable argument both for and against them. I urge readers who can attend to do so.  Testimony on real impacts of these bills would also help. [Added 2/7].

One other feature of these pieces of legislation.  While both refer any legal challenges directly to the Oregon Supreme Court, which makes the resolution doable in about two years rather than four, both bills prohibit the Supreme Court from awarding legal fees to the winner.  This is a direct fiscal challenge to the PERS Coalition and any individuals seeking to challenge separately.  In the past, attorney fees have been awarded to the winners (i.e. PERS Coalition through Bennett, Hartman, Morris and Kaplan LLC).  This served to offset legal expenses of the PERS Coalition acting on behalf of all of its participant members.  Under these new wrinkles in the bill’s initial language, win or lose, the expenses will be borne by each party to the case, with no chance of recovering them in the event of a win.  This is both diabolical, and probably (at least in my opinion) illegal.

As more information about these and other proposals emerge, I will update this post, or post a new one.

 

*Emergency Clause does not affect the implementation date of either bill.  That is firmly established at 1/1/2018.  However, by making the bill effective on passage, the legal process or sorting out whether the bill(s) violate contracts, the Oregon Constitution, or the US Constitution, as well as collective bargaining agreements (???), can start immediately after the bill is effective, not on its implementation date.