In part 1 of this 3-part series we reviewed the current Oregon Public Service Employees Retirement Plan (OPSRP) and the significant events leading up to the plan that became effective for employees hired after August 28, 2003. Now in part 2, we’ll examine what’s being proposed in the 2013 legislative session that sets the July 2013-June 2015 state budget and the potential effects of these proposals on employee retirement benefits.
There are currently two reform bill proposals submitted to legislation for consideration.
The first is SB8221, proposed by Senator Richard Devlin, Co-Chair of the Ways and Means committee. Second, a proposal first introduced by Governor John Kitzhaber and later codified and expanded on in SB7542, sponsored by the Oregon School Board Association. Both proposals contain provisions to cap or lower the annual cost-of-living adjustment (COLA) and eliminate state tax remedy for out-of-state retirees.
SB754 proposes a biennium savings of approximately $810 million by capping COLA at 1% for retirees whose benefits exceed $24,000 per year. SB822 proposes a cap on COLA but only for higher-pension retirees. Both bills estimate biennial savings of $55 million due to the elimination of tax benefit for out-of-state residents.
In addition to the above proposed reform SB822 proposes to “smooth” the budget effects of the unfunded liability on state agencies by a partial deferral of employer rate increases that essentially pushes out or defers some of the deficit to later budget cycles. Total biennial savings of proposed SB822 is $805 million in 2013-2015 and $455 million on-going. The savings results in a reduction to the current unfunded liability of over $14 billion by $2.5 billion.
SB754 proposes additional changes that result in an ongoing savings of about $1.2 billion biennial beginning July 2013 and ongoing and a reduced unfunded liability of approximately $5.3 billion. These changes include: (1) prohibiting the “spiking” of final average salary used in the full-formula calculation (2) reducing the interest rate used in money match annuity calculations that apply to Tier’s 1 and 2 and (3) redirecting Tier 1 and 2 employee contributions from employee accounts into the general pension fund.
Spiking is a common practice by some public employers whereby the annual salary is inflated by insurance premiums, for example, in the three years leading up to retirement. This inflated salary is used in the full-formula calculation to determine the defined benefit portion of the employee’s retirement leading to inflated benefits.
Reducing the assumed interest rate to a “risk-free” rate of return used in money match calculations has the effects of lowering the money match benefit due an employee. Under money match the defined benefit is calculated by taking the balance in the member’s regular account, doubling it, and then calculating an annuity based on life expectancy and an assumed rate of return over the period of life expectancy. If the assumed rate of return is reduced from 8% to 4% less money is available to spread over the expected life resulting in a lower monthly benefit for Tier 1 and 2 employees choosing the money match method.
Lastly, redirecting Tier 1 and 2 required contributions from employee accounts into the general fund reduces the unfunded liability while these employees continue to work. This change results only in a small reduction to benefits for Tier 1 and 2 employees retiring within a few years since the Individual Accounts Program didn’t come into existence until 2003. Since Tier 1 and 2 benefits are more generous than benefits offered under OPSRP this change would also help resolve some of the inequities in the system by lowering the burden passed on to future generations.
The changes made to the Oregon Public Employee Retirement System over the last 10 years have poised the system for the future but Tier 1 and 2 benefits continue to present issues that will likely haunt legislators, citizens and taxpayers for generations to come.
See next week’s blog for part 3 of this series for a look into a PERS past filled with hardship, new beginnings, record inflation and controversy.
Gretchen Stangier, a Certified Financial Planner (CFP®), has been providing financial planning and advisory services to PERS members for over 15 years. If you are a PERS member and need help understanding how these changes may affect you, call us at 1-877-257-0057 to schedule an appointment.