A letter to the editor in the February 24 Oregonian, from a Portlander named Bill Chalmers, makes a point that had perplexed me when I read a February 19 story about PERS. The February 19 story, by James Mayer, said that PERS rates are going up for three reasons:
1. Investment losses for 2000, 2001, and 2002 are being spread out over time.
2. The public payroll is smaller than expected because many people retired in 2003 and some local governments have frozen wages.
3. PERS enjoyed better-than-expected stock market gains in 2003, which increased the future liabilities of PERS by increasing the benefits that it will owe its participants.
Why does this put me in mind of G. Harrold Carswell? When President Nixon nominated Judge Carswell for a seat on the Supreme Court almost 35 years ago, critics said that the judge was a mediocre candidate. Senator Roman Hruska stood up for the mediocre judge, famously saying, "Even if he is mediocre there are a lot of mediocre judges and people and lawyers. They are entitled to a little representation, aren’t they, and a little chance? We can’t have all Brandeises, Cardozos, and Frankfurters, and stuff like that there."
My friends assure me that PERS goes to a lot of trouble when it chooses outside investment managers, putting them through a rigorous selection process to get those most likely to produce superior returns. But if those managers, by producing superior returns, are simply pushing the system further into the red, then PERS shouldn’t be hiring them. (Wouldn’t it be something if PERS promised to fire any manager who achieved better than an 8% return?) If Mr. Mayer’s article is correct, then the public agencies that pay the PERS premiums should be pressing the agency to fire those money managers that outperform the averages.
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There was one former director, who announced his resignation coincidentally at the end of October 2003, that advocated splitting the PERS fund (PERF) into two separate components; one for tier-one and one for the rest. He lost that battle.
If tier-one folks can arguably demand 8 percent return, with anything less being covered by the taxpayer, then that kind of forces the trustee of the fund to seek only those investment opportunities that offer greater than an 8 percent return. Investing in a T-Bill would be a violation of their fiduciary obligation.
The quirky money match account is this legally squishy thing where the employer matches an investment account that can go up or down with the market. One point of debate, still, centers on where the employer is supposed to get the money to match the employee account. Do they cough up the money at time of an employee’s retirement or should the government actually maintain an account in their own name and invest it in tandem to the employee account?
PERS was allowed to invest in stocks, but only because it was not the government itself that was taking an interest in stock, and the government was not required to cover any losses. (Two limits based on the Oregon Constitution and both issues previously litigated to the Oregon Supreme Court.) This looks like a legal pickle to me.
The money match thing was, as some have argued, originally designed to accommodate a few people, less than ten at the time; perhaps to respect their perceived contract rights not to have their benefits reduced at the time as some sort of a remedial measure. Well, with the passage of time and a bit of magic that remedial intent of the money match vanished because it was just too good an opportunity to pass up.
If the PERF were split into two parts then we could at least apply different fiduciary rules based on the different consequences from investments. Tier-one invest in 8 percent or better and money match stuff would go into T-Bills for which the local and state government would not violate the constitutional prohibition on direct interest in private equity (but the employee is the one choosing their risk level in their own account, the one to be matched).
Poof goes the rationales for PERS bonds, premised on investments returning greater than the cost to borrow (5.5 percent), and fictionally assumed to yield at least 8 percent.
Does this make sense? My explanation, that is, not the system?
Does the decision to merge all PERS money into one common fund for investment purposes rather than splitting it have at its core an intent to make judicial resolution darn near impossible?
I don’t know enough about the details of PERS to answer your question. I’m working on learning more. From what I do understand, it seems to me that the money match program is a big part of what sank PERS, not because it’s generous (though it is), but because it isn’t pay-as-you-go, and the participant governments didn’t accrue anywhere near enough of a reserve to cover their money match obligations. What do you think?
The Money Match operates like a margin account held by a stockbroker. The stock broker typically lends their margin clients fifty percent of the purchase price of stock. Here, though, there is the added feature of a formula based minimum quite independent of the invest profits or losses.
Under either a pure pay-as-you-go plan or a pure private account plan there would never, theoretically, be any cost to the employer. The costs for the pay-as-you-go payouts come exclusively from the pay of current employee plan beneficiaries, and only out of their paychecks. If the plan, the pay-as-you-go plan, is terminated then there are no more current employees to put money into the system. The plan sponsor would then cover the cost of the terminated plan, but only as payouts became due. Until termination, the optimal balance for an actuarially sound pay-as-you-go plan is zero.
With a purely private account balance the beneficiaries can only challenge whether the trustee, or they themselves, invested prudently. The beneficiary assumes the risk of loss or gain.
I would believe that it is safe to assume that government budgets are supposed to be squared up with each budget cycle. There is no place to account for an uncertain future payment amount at some indefinite future date, to cover a money match obligation. Under this assumption the obligation would have to be funded at precisely the same time as the employees placed their bets in the stock market. Yet the Oregon Constitution prohibits the government from taking an interest in private companies on its own account, and could not make identical investments to that of the employees, zeroing out the uncertainty based on returns.
One possible way for the scheme to avoid being inherently unsound or simply unlawful is with the help of a creative actuary. If the government obtained lower returns than that which the actuary guessed that an employee’s account might get then the obvious choice, contemporaneous with the employee deposits, would be for the employer to deposit a much greater sum so that it would match the employee’s account balance at a future date.
Certainly, if the employer had to come up with big bucks up front on the advice of competent lawyers and actuaries then this would have set off alarm bells in the public. It strikes me as a case of either misfeasance of malfeasance on the part of the lawyers or actuaries or both, to offer the money match or having offered it to then hide its true cost by not funding it.
But, now that we are aware of the problem it makes no sense to continue an inherently unsound, or unlawful, Money Match option. There is room in the law to accommodate voiding a contract if it was based on a mutual mistake of fact, that is, if one can characterize an actuarial soundness determination or contemporaneous legal advice as a fact. Otherwise the employees would be insisting upon the continuation of a knowingly unlawful or unsound plan.
The PERB recently, in 2005, transferred stock market returns to employer accounts. This make no sense at all given the prohibition on the state taking an interest in private corporations. They still don’t get it.
Recently (early August forward), I have tried to get the Auditor, CFO, and Superintendent of PPS to integrate an assessment today, in the context of labor negotiations, of the potential future demands by the PERB resulting from pay decisions now. The district claims (only via the news) that PERS is separate from, and beyond the control of, the district. It is my position that the District could at least measure the potential costs that would occur in a future budget cycle, resulting from the pension system. Such a demand, if applied to the Money Match long ago, would have perhaps revealed to the public its’ flaws a long time ago.
Given the scale of the PERS costs is it too much to ask that it at least be more transparent, specifically the potential future costs that are nowhere to be found in the current budgets? Knowledge of those future costs would seem to be a required element in any contract based claim by the beneficiaries for the benefit’s of a bargain. The corollary is that government officials that knowingly hide those future costs from the public are not honoring their duty to the public. It cannot all be explained by saying that the PERB will tell us what we need to pay when they make a decision in the future.
I am still struggling with the arguments, timing, and dollars I would need to make a public records demand on the PPS for the records of the executive sessions, pertaining to labor negotiations and pensions, from August forward. It is hard to simultaneously be polite and accuse folks of misuse of their public position; but that is my charge over and over again.