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PERS reform - 2013 Legislative proposals

2013 Legislature's Senate Bill 754

OSBA and a group of coalition partners introduced Senate Bill 754 in the 2013 Legislative Session to reduce the overall cost of the Public Employees Retirement System (PERS) and providing a stable and adequate retirement benefit for public employees. It is anticipated that if SB 754 were enacted, the savings provided could be in excess of $1.75 billion for the system in 2013-15.

SB 754 contains five major proposals:

  • Limiting the cost of living adjustment (COLA) for PERS retirees;
  • Limiting what can be defined as “salary” for the purposes of calculating a retirement benefit;
  • Eliminating the Oregon tax benefit for out-of-state retirees;
  • Transferring the member “Six Percent Contribution” back into the pension system; and
  • Lowering the assumed earnings rate for “Money Match” retirees.

In addition to these reform measures, SB 754 requires the PERS Board to recalculate the rates for employers as soon as the bill becomes law. The bill also has a provision that allows for direct appeal to the Oregon Supreme Court if the measure is challenged as being unconstitutional.

Read Attorney William Gary's analysis (3.2mb This file is in Adobe Acrobat PDF format.) of the concepts proposed in SB 754.

Read the Milliman actuarial analysis (435k This file is in Adobe Acrobat PDF format.) of SB 754.

Limiting the cost of living adjustment (COLA) for PERS retirees

Under current law:

  • A PERS retiree receives a COLA on his/her PERS benefit that is equal to the Consumer Price Index (CPI) capped at two percent.
  • This COLA occurs occurs regardless of the amount of the benefit a retiree receives.
  • Example: Mike Bellotti, the former University of Oregon football coach, who receives a monthly benefit from PERS of over $42,000, receives a COLA (up to $10,080 increase), as does a retiree who may only receive $1,000 per month (up to $480 increase).

Under SB 754

  • A PERS retiree receives a COLA on his/her PERS benefit that is equal to the Consumer Price Index (CPI) capped at two percent.
  • A PERS retiree receives a COLA only on the first $24,000 of annual benefit.
  • Example:  An employee who receives $1,000 per month would still receive up to a two percent COLA ($480).  Mike Bellotti, the former University of Oregon football coach, who receives a monthly benefit from PERS of over $42,000 would receive the same COLA amount as the employee receiving $1,000 per month ($480 instead of $10,080).

Why was $24,000 chosen as the “magic number”?

According to PERS, that is the average benefit paid on an annual basis to PERS retirees; limiting the COLA to the first $24,000 in benefits paid can reduce the system-wide PERS rate by approximately 4.4 percent of payroll and save over $800 million in the 2013-15 biennium.

Limiting what can be defined as “salary” for the purposes of calculating a retirement benefit

If a PERS retiree is going to retire under the “Full Formula” calculation, PERS uses a formula to calculate the pension benefit a retiree will receive.

  • One of the components of that formula calculation is the “final average salary” an individual received while working as a PERS-covered employee.
  • Tier 1 and Tier 2 members are currently allowed to factor lump sum vacation pay and unused sick leave into their “final average salary” when calculating their benefit. SB 754 eliminates these lump sum payments from the calculation.
  • This has the effect of driving their “final average salary” higher and providing a higher retirement benefit.
  • PERS has calculated that limiting the definition of “final average salary” may save the system $129 million in 2013-15.

Eliminating the Oregon tax benefit for out-of-state retirees

This provision would eliminate a supplemental tax remedy benefit for PERS retirees who do not pay state income taxes in Oregon. The remedy was created by the legislature many years ago to give PERS retirees a benefit equal to the Oregon tax liability they face on their Oregon income tax for their PERS pension income. This benefit is paid to both Oregon residents (who pay the tax), and to out-of-state retirees (who do not pay the tax). PERS estimates this concept could save more than $55 million system-wide.

Transferring the member “Six Percent Contribution” back into the pension system

The fourth concept is to re-direct the member’s six percent contribution back into the PERS pension system for Tier 1 and Tier 2 members.

Where is the contribution now?

  • One of the PERS reforms enacted in 2003 was to move the member’s contribution out of the pension system and place it into an Individual Account Program (IAP), to be set up like an individual 401k plan.
  • The contribution went into a member’s account and earned whatever the pension fund earned and be credited to the member’s IAP account.
  • Moving the member’s contribution into the IAP had an immediate impact on the cost of the system and virtually eliminated the “Money Match” method of calculating the retirement benefit for a retiree.
  • It also had the effect of not placing funds directly into the system to fund the system

What happens under SB 754?

  • These funds would go back into the system, thus requiring the member to have some “buy-in” into the pension system.
  • This provision only re-directs the member’s future six percent contribution. It does not direct any of the member’s IAP balance into the system.
  • PERS has estimated that this would create system-wide savings of approximately $570 million.

Lowering the assumed earnings rate for “Money Match” retirees

Currently, for Tier 1 and Tier 2 members, PERS does two calculations to determine a member’s retirement benefit.

  • The first method of calculating the benefit is the “Full Formula Benefit,” where PERS uses a formula to create the benefit.
  • The other is known as “Money Match.”
    • Under “Money Match,” PERS takes a member’s pension account balance and doubles that amount, which creates a “Money Match” fund.
    • PERS then annuitizes that amount at eight percent and calculates a benefit based on that annuity and how long the member and his/her beneficiary, if he/she designates one, will live.
  • The retiree receives whichever benefit is higher.

Under SB 754:

  • If an individual were to take his/her private funds and seek to purchase an annuity to fund his/her retirement, he/she would face current annuity rates of three percent or less.
  • SB 754 seeks to allow “Money Match” retirees to use four percent as the annuity rate on their pensions benefit.
  • PERS estimates that action would save $221 million system-wide in 2013-15.

 

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