So Long, So Wrong

As this legislative session has dragged on for what feels like an eternity, we seem no closer to any answers than we had when the session started in February.  The words I’m hearing from Salem suggest that the Ds and the Rs are at an impasse over revenue measures,  with the Ds proposing a gross receipts tax that House Dems want to raise about $2.2 billion, while the Senate Dems want to raise about $800 million.  While the Ds are in general agreement over the need for the gross receipts tax, the the Ds can’t even agree amongst themselves about the amount of revenue that should be raised from this tax.  Obviously, the higher the ask, the harder it is to get agreement from any of the stakeholders.  Similarly, the PERS bills (SB 559 and SB 560) seem to be dead with the Rs pushing for them and the Ds resisting.  This gridlock would suggest that a Special Session is almost inevitable, but …… wait for it.

In the midst of this power vacuum in Salem seems to have stepped some of the unions, so I’ve been told by multiple sources.  The term “cost sharing” is being bandied as a partial panacea by various people without bothering to define what that means.  Here’s what it means.  The unions are floating a trial balloon offering to have active workers (those still working in Tier 1, Tier 2, and OPSRP) provide some of the funds to offset increasing employer costs.  Mind you, this is not to cover the UAL, but employer “normal cost”.  I’ve heard several versions, and parts of SB 560 spell out what the Rs would consider a reasonable deal - to completely capture the employee contribution currently going into the IAP and use it to offset employer costs.  That won’t fly because it probably isn’t legal, regardless of how it would be implemented.  So, in step the unions offering a compromise deal.  As the deal is presently structured, employees will have 4% (of the 6% go into the IAP); however, the remaining 2% would be redirected not to the employers (directly), but to a “risk mitigation” account, which would be reserved to keep employer “normal costs” at a relatively constant rate.  The PERS Board would control the fund and would direct resources from the fund if employer normal costs rise due to changing rate structures.  If employer rates don’t rise before an individual retires, then one presumes that the 2% captured from the employee would be returned to the employee’s IAP (plus interest, one would hope).  While nothing about this is fixed, the floating idea is that it would be phased in over several years, so employees don’t take the hit to their IAP all at once.  

I have many problems with this proposal, not least of which is that the unions (who represent employees) are behind it.  Another critical reason I’m opposed to this is because it penalizes all Tiers equally, even though the retirement benefit structure in the three tiers is different.  Everyone loses the same percentage (which seems fair on the surface), but those closer to retirement not only preserve their existing benefits, but suffer from the cut for a shorter period of time.  On the other end, those furthest away from retirement already have the worst of the three retirement plans, yet have the longest period over which to suffer the cut, but also, the longer period over which their redirected money can be captured because of rising employer costs.  Worse still, this does nothing to force the employers to come to grips with the fact that their own profligacy is a major contributor to systemic problems.  This approach provides employers with a cushion against their own fiscal mismanagement, and gives the PERS Board a new way to mitigate responsibility for the employers to pay the full cost of the system, something the employers have refused to do since 1997.  What is floating also does not address the question of the “pick up” itself (i.e. who pays the employee contribution).  Finally, this approach has another “feature” going for it.  If the unions propose it, you can bet they will not sue the Legislature if they agree to it.  For union members and all active members of PERS, this becomes a lose-lose proposition.  

I realize that everyone is in a pickle this budget year.  It is clear that the state needs more revenue, especially as long as we have the “kicker” still in place.  To get more revenue, the Ds need a couple of Rs to join in.  To “buy” those Rs, the Ds are going to have to give on something, and the Rs want PERS reform.  The union’s proposal may be the least bad of a lot of bad options, but I think that the Unions coming to the Legislature’s rescue won’t gain much respect for labor, and may antagonize members.

It is easy for me to criticize all efforts at PERS reform; none of them affect me.  But I try to look at this in a more long term perspective.  Does this proposal do anything to address the long-term problem with PERS?  Nope.  The UAL will still be there no matter what happens.  Does the proposal offer generational equity?  Nope.  Those with the best benefit structure pay relatively little compared with those who are just starting their careers or are in the first decade of their careers.  Will this help attract the best possible workforce?  Nope.  Every time you take something away from people just coming into the system, it makes it harder to recruit and retain talented and enthusiastic workers.  Finally, we have no clue how much this will actually save, and whether it would be enough to stave off further raids on active worker pension promises in the future.  It seems to me that the primary purpose of this proposal is to insulate employers from the inevitable lowering of the actuarially assumed interest rate by the PERS Board effective January 1, 2018, which will have the effect of raising the employer’s normal cost for the employee’s retirement.  So, in the end, active members will get the shaft from two ends - reducing the amount of money going into their IAP, plus lowering the payout structure for annuitized benefits at retirement.  And, we still don’t know how this affects or doesn’t affect the “pick up” itself.  Logic dictates that it shouldn’t affect the “pick up”, but nothing logical has emerged during this session yet.

As this saga continues well into the beginning of summer, it is beginning to look like a case of “so long, so wrong”.  

Waiting in the Weeds

While last week’s post was a bit dour, this week’s is less so.  Tuesday’s revenue forecast contained mostly good news, but not quite in the way I expected it.  Because of my own confusion about how the revenue forecast(s) [note the plural] work, I underestimated the power of forecasting to turn two different forecasts into winners for everyone.  The forecast for the 2017-19 budget is up by about $200 million over the previous forecast, dropping the shortfall from the last guesstimate of $1.6 billion, to $1.4 billion.  At the same time, the forecast for the 2015-17 biennium ending balance is up by $400 million, which will trigger the “kicker” if the forecast turns to reality when the final budgets are closed out by late August.  If the revenue drops significantly below the $400 million threshold, then the “kicker” won’t be triggered and the excess can be rolled up into the 2017-19 budget to offset the shortfall even further.  In addition, corporate tax revenues for 2015-17 are up, which means the possibility that the corporate “kicker” can be rolled into K-12 budgets on top of any other revenue they might get.

All this combined reduces the pressure on the Legislature to come up with big revenue enhancements, but the Rs in the Legislature have announced that the budget is good enough for them that NO revenue enhancements are needed, since the shortfall can be covered by program cuts.  For PERS members, this means more wheel-spinning.  The Rs are the ones pushing for PERS reform; the Ds are pushing for revenue enhancement, particularly the corporate income tax.  These two forces stand in direct opposition to one another; there is no way the Ds will agree to PERS cuts, or many other cuts, without the Rs agreeing to corporate tax reform.  So, while more draconian PERS cuts *might* be off the table, PERS cuts, in general, remain so long as there is a possibility that the Rs might agree to some revenue increasing measures.

Expect this saga to drag on for awhile, and lead to, possibly, a stalemate that results in the need for a special session after the revenue situation for 2015-17 is sorted out in the latter half of August.  This only pushes the problem for PERS members further into the future, staying the date of execution until later.  There may be some movement before sine die in late June or early July, but I’m growing discouraged that anything will be settled by then.

I wish I could offer something more informative, but, like you, I’m still waiting in the weeds.

Way Down In The Hole

PERS members are coming down to the Wire (bad pun for some) to make final retirement decisions.  Nothing of substance has moved in Joint Ways and Means, but broad hints have been dropped about what might await those members near and far from retirement.  The two main areas are for members to pay more for their retirement benefits (redirecting the 6%) and getting less for their money (spreading out the FAS calculation over 5 years instead of 3, disallowing sick leave accrued after 1/1/18, using a first-in-first out method for charging sick leave after 1/1/18).  Not much chatter about all the other “features” of SB 559 and 560 (the $100,000 FAS cap seems to ebb and flow, but its implementation seems problematic, and it doesn’t really save as much money as people thought it might because of its delayed implementation to preserve accrued benefits).  It also seems fairly likely, at this point in time, that June 1 is still a safe date to retire and avoid any possible impact from the legislative changes.  Of course, if none of the changes take effect until January 1, 2018, one could wait to retire as late as the last working of November for a December 1 retirement.  The calculus of choosing that date over June 1 or possibly July 1 is complicated however.  If you are still working for a PERS employer, waiting until a Dec 1, 2017 may make sense because you will continue to get your full salary until November 30, you’ll be 5 or 6 months older in the actuarial tables (this isn’t as significant for younger workers as it is for older workers), and your IAP balance will continue to grow by 6% of your gross salary each additional month you work.  If you are inactive, the calculus is different, especially for Tier 1 members.  While your Tier 1 account balance continues to grow by 7.5% annually (0.625% monthly), and your actuarial factors will be somewhat larger on December 1 as opposed to June 1 or July 1, the former date deprives you of a 2% COLA on your initial benefit that you would get if you retired on either of the latter dates.  In addition, retiring June 1 or July 1 (as well as May 1 or April 1) makes you eligible for the July 1, 2017 2% (assuming you have been inactive since BEFORE October 1, 2013), you also will get 0.14% deposited in your COLA bank to be used in the future if the COLA is less than 2% (remember that the maximum COLA is 2%; it is not a guaranteed rate).  So, when you combine these details for an inactive member, adding in the angst and worry over what the Legislature might still do, you are probably at a near wash between the earlier two dates and the later date.  You have to run your own numbers to see how this works for you (this is why financial calculators and spreadsheets were invented).  [edit 5/12:  I’ve heard an unconfirmed rumor that the PERS bills in Joint Ways and Means are DOA because the Gov doesn’t want litigation uncertainty hanging over budgets for the next two years.  I suspect this is a bit of hyperbole; the real reason may be something more pedestrian like the the two parties can’t come to any agreement over Revenue measures, so PERS cuts are off the table.  What this means is that IF this is a proper rumor with some substantiation [something I’ve not been able to confirm so far], a Special Session is likely to be called once the final revenue information is available in the latter part of summer, long after the Legislature adjourns.  I continue to try to verify the legitimacy of the rumor with multiple sources.]

Next Tuesday, May 16, 2017, at 8:30 a.m., the State Economist will release the final revenue forecast that the Legislature will base its 2017-19 budget allocations on.  This event signals the final push to wrap up budgets, bills that affect the budget, and to enter the glide path towards a desired June 23, 2017 adjournment of the Legislature.  The revenue forecast holds out the prospect of good news, very good news, or good news so good that it turns into bad news.  Everyone knows the economy is up, which thus perplexes people trying to figure out how the state’s revenue is inadequate for the budget needs of agencies in a growing economy.  At last news, the potential budget shortfall ranges between $1.6 and $1.8 billion, depending on who you ask, and what day of the week it is.  The source of the shortfall is unrelated to the economy.  It is result of Legislative stupidity back in 2013 (the COLA legislation that was overturned by the Supreme Court) when the Legislature allocated about ten times more money from the longterm COLA savings, than the short-term savings justified ($60 million in savings vs $885 million allocated).  The court decision didn’t come until late in the 2015-17 Legislature, so the impact of the Court’s ruling was delayed until the 2017-19 session and PERS employer rates rose significantly (because, of course, the employers spent their allocations like drunken sailors on shore leave) for the 2017-19 biennium.  This adds about $400 million or more to the shortfall.  The second factor has to do with the way Medicaid reimbursements changed under the ACA and were reduced under the early days of the current administration.  This is probably about $650 million of the shortfall.  The remainder of the shortfall is largely attributable to inflation that has occurred since the last biennium (about 3.5%) just to maintain current service levels (which should happen minimally in a growing economy).  This accounts for about $500 million or so.  So that explains most of the projected shortfall.  So, in an economy near full employment, with wages and salaries up slightly and tax revenues increasing, what could possibly go wrong?

What, indeed, could go wrong with a growing economy?  Well, for those with short memories, or those who haven’t lived here all that long, a Legislature long ago (1981) passed a monumentally stupid budgeting law.  It is enshrined in the Oregon Constitution as the “kicker” (as in “kick back”).  At a time when property taxes were rising rapidly, Oregon decided it wanted to head off a property tax measure (like Prop 13 in California, passed in 1979-80).  So they created this rule that says, in effect, if the revenue at the end of a biennium exceeds the State Economist’s most recent revenue forecast by more than 2% (e.g. 2.0001%) the ENTIRE surplus revenue is refunded to the taxpayers after the books are closed on the previous biennium (ours will end June 30, 2017).  How this refund occurs has varied over the years, but for at least the past 16 years or so, it has been treated as a tax credit for the following year’s taxes and is based on some fixed percentage of taxes paid in the previous tax year (I would get a huge kicker, but I don’t want it).  So, how does this affect PERS and all the other things mentioned above.  The 2% threshold for 2015-2017 is $336 million.  At the end of the first quarter (Jan-March), the excess in collected revenue over forecast was $206 million.  That leaves, April, May, and June to fill out the remainder of the biennium, and there is an extremely high likelihood that the May forecast (next Tuesday remember) will be forecasting final 2015-17 revenue surplus (and therefore the starting budget for 2017-19) at greater than $336 million.  Of course, the final number won’t be known until all the books are closed on 2015-17 after June 30, 2017 (usually it is late August before all the final accounting and auditing is finished and the budget can be officially closed; this is also the time when the Treasury decides whether the conditions for the “kicker” have been met).  So, if the revenue forecast comes in at $330 million above predictions, the Legislature gets to budget the extra $330 million, which will reduce the amount of shortfall that has to be backfilled, and agencies, and possibly near-term PERS retirees-to-be can breathe a slight sigh of relief because the PERS legislation will be closed out by the time the Legislature adjourns between June 23 and the mandatory July 8, 2017.  But, suppose the revenue forecast comes in at, say, $450 million above final projections.  That ought to be great news but, unfortunately, that’s where the “kicker” comes into play, and the ENTIRE $450 million would have to be refunded (“kicked back”) to income tax payers when they file their 2017 taxes in 2018.  That would mean that the growth of revenue would NOT be available to Legislators to appropriate towards the existing shortfalls.  That could produce an even bigger budget hole, and possibly lead to budget standoffs between the parties who want revenue reform and transportation improvement (the Ds) and the parties that want PERS reform and transportation improvement.  Everything hinges on what kind of deal the parties can make over the contested ground (Ds - revision of corporate taxes; Rs PERS reform).  With less money available, the stress will be greater, and this leads to the possible scenario where neither party wants to budge, and the parties agree to a compromise, temporary budget to start the new biennium, but come back either in a Special Session in the Fall after the final revenue figures are in, or they wait until the even-year session to settle budget details.  Regardless of how they do it, if this happens, it extends the period of uncertainty for PERS members on the cusp of retirement, and with it the anxiety that drives PERS members insane during a legislative year like this.

And, if this isn’t enough to drive people even deeper down in the hole, there is the fact that the PERS Board (very independent of the Legislature) is currently conducting its biennial review of the economic assumptions that underpin the formal system valuation that will occur next year.  This process (required in statute) means that the assumed rate gets revisited, mortality rates get revisited, and after the PERS Board hears from the actuaries and other experts, it will decide to lower the system assumed rate, update mortality tables, and both of those figure into the Actuarial Equivalency Factors (AEF) that convert account balances into streams of payments for retirees and beneficiaries.  The experts have already weighed in on the assumed rate (with forecasts ranging from the high 5% range to slightly below the current 7.5% rate), while the IRS is in the process of updating its recommended mortality tables that are partly incorporated into PERS’ final mortality figures and AEF.  If you look at all the expert opinions, you have to be willing to consider that PERS could drop its assumed rate to 7%, and extend out mortality tables beyond what might have been done in the past.  The bottom line is that if you are Money Match retiree, or a Full Formula retiree with a beneficiary, your monthly benefit will be lower beginning January 1, 2018 even if the Legislature does nothing.  (Do note, that this only applies to people who retire on or after 1/1/18; nothing changes if you are retired before then).

So, there you have the most current update of what is going on now.  There are an incredible number of variables in play, and no clear schedule (except PERS’ own timetable) for when major decisions will be made.  If you thought “you wanted it darker” was dark, now you are way down in a hole, where only math, personal considerations, and external life events can possibly help you with your decision.  Your only question happens to be the title of another song “should I stay or should I go?”.