PERS
2002

DISABILITY RETIREMENT BENEFITS: THEY'RE PRETTY GOOD BUT THERE'S TWO CRITICAL AREAS THAT COULD BE IMPROVED.

As an overview, Oregon 's PERS, Tier 1, has been proclaimed to be the best public employee retirement benefit in the Country. The disability retirement allowance portion of it is also very good. If, from day 1 of employment, an employee is injured in performance of duty, which was not intentionally self-inflicted, and the employee is unable to perform any work for which qualified, from day 1 of employment, the employee would receive a disability retirement as if for a police or firefighter, the employee had continuously worked to the age 55. For employers other than police or firefighters, it would be as if the employee had continuously worked to age 58. ORS 238.320. In other words, it would be same service pension as if the employee had actually worked until retirement age.

If the employee is disabled as a result of an off-the-job injury, the employee has to have worked for ten years in the PERS system before qualifying for the PERS disability retirement. The only limitation to the amount of retirement is that the employee's disability retirement cannot exceed the employee's wages at the time of disability.

However, there are two limitations to the plan which have troubled a number of clients and friends who have recently had to take a disability retirement. They are limitations on earnings and medical insurance.

Limitation on earnings: After an employee has passed the earliest service retirement date (55/58), then there is no limitation on earnings. However, before that date, any income which exceeds the wages that were being earned by the employee at the time of disability, shall reduce the amount of disability retirement allowance but not to less than a minimum payment of $400.

Medical Retiree Insurance: Unless an employee belongs to one of the few employers that provide for medical retiree insurance, something that is virtually impossible to obtain through negotiations today, an employee will have to buy insurance for the employee's self and probably for the employee's family. Even doing so through the employer results in a steep reduction in the amount of disposable income for the employee. $600 to $700 a month for medical and dental full-family benefits is a normal amount that would be paid today. Needless to say, the costs of insurance will be increasing in the future at a greater rate than wages will increase. This will reduce the income that disabled employees receive.

An alternative: A program which would allow disabled employees to return to work in limited capacity for the employer, providing service to the employer, giving the employer access to the employee's knowledge acquired over the years, and providing income to the employee to supplement the disability benefits. This would take a legislative change. Up until now, employers have been reluctant to create permanent modified duty positions for a number of reasons. First, virtually no employer in this State is large enough to create these positions out of fear that too many employees would be in them, thereby reducing the number of positions available for employees who have no limitations. Until recently, there was also a concern that litigation would ensue under the ADA , that if these positions could be created for some employees, shouldn't they be available for all? In the last few years, the US Supreme Court has radically reduced the risk of ADA discrimination litigation in this area. However, the first problem still remains. Employers will state that they do not have the resources and do not wish to take the potential liability of guaranteeing every disabled employee a right to modified work, even at reduced income.

An alternative to this which could be a win/win situation is to partially fund these return-to-work programs through the disability retirement program with a match between the employer and PERS. This would reduce the PERS pay out, have a much-reduced cost to the employer, and give the employee a chance to continue to work and receive medical benefits. I know a number of employees who have had to go out on disability retirement or will be doing so in the future, who would jump at the chance for such an opportunity. Obviously, such a program would have to be carefully tailored so as to not aggravate the employee's medical conditions and to pencil out.

What exists in private disability plans? Through negotiations, most employees are also covered by a private long-term disability plan. The most common plan in this state is written by Standard Insurance. In its plan, there is a return-to-work incentive program, which is similar to the PERS plan. For the first 12 months, an employee is allowed to work, and up until the employee reaches the pre-disability earnings level, the employee is entitled to keep the income. After that, the difference will be deducted. This is identical to PERS. However, after the first 12 months, one half of the employee's work earnings will be deductible income, no matter how little or much. Perhaps a combination of these incentives, utilized on a long-term basis, could pencil out to the benefit of both the employer and PERS. This requires a legislative solution, and before the Legislature could be persuaded to enact it in these tight economic times, actuarial analyses will have to be undertaken by PERS's actuaries to project the financial impact of such a program. Employers will also have to buy into it.

A copy of this newsletter article will be sent to the OCPA representatives with a suggestion that they consider making this a legislative priority for the future, and at least causing a study to be undertaken by PERS as to the cost of such a program. It is my suggestion that the OCPA contact the police chiefs' and sheriffs' organizations to see if they will support this program. I personally know of at least one police chief, who, if he had the resources, would be more than willing to employ this type of program for his disabled officers that are having to retire.

PERS: WHERE IS IT GOING?

As many of you have read, there was a serious movement during the special legislation session to abolish PERS all together. Another alternative was to have a third tier of PERS with fewer benefits.

The only bill that passed was one that gave the Oregon Supreme Court jurisdiction over legal challenges to new mortality tables, should they be adopted by PERS. Depending upon how those tables are adopted, i.e. retrospectively or prospectively, that could affect the retirement plans of many of you. With the assistance of OCPA and their lobbyist, Brian DeLashmutt, who did an excellent job fighting for all of us during the last legislative session, I will keep you informed of future developments in this area.

PERS INDICATES THAT IT WILL ADOPT NEW MORTALITY TABLES: LEGAL CHALLENGES TO FOLLOW

The PERS statutes contemplate that from time to time PERS will undertake actuarial analysis of its retirement system with periodic adjustments, including adjustments of mortality tables. However, PERS has not seen fit to adjust the tables for years. Now with the stock market crash and PERS rapidly becoming a hot political issue with a negative rate of return on its investment, as contrasted with its obligation of an 8% guarantee on tier one accounts, PERS is under intense pressure to make changes.

As most of you know, PERS announced that it will be adopting new mortality tables, which will be effective January 1, 2004 . Anyone who is not retired by that date will have the new tables affect all of the earnings that an employee's account has had to date. PERS attempted to make this legal by stating that any employee who retires after that date will have the higher of the two retirement amounts: that which the employee had accrued as of December 31, 2003 versus that which the employee will have accrued upon retirement with the new rates.

While my research is by no means complete, it is my tentative opinion that PERS' actions will violate federal and state rulings on the right of employees to have their existing benefits protected. PERS could change the mortality rates for earnings after the date of the PERS rule, but not for earnings before that date. Therefore, it will be my recommendation to clients that litigation should be pursued for those employees who do not have the luxury of retiring by December 31, 2003 .

OCPA has joined the PERS Coalition and urged all of its members to contribute to litigation that the PERS Coalition will be filing. While my retainer does not cover litigation over retirement benefits, when Measure 8 passed (the 6% pick up) the firm I was in handled that litigation as part of our services to all of our clients. It is my intent to handle this upcoming litigation in the same manner. However, whether you wish to make a contribution to the PERS Coalition is your decision.

The change in the mortality tables technically does not affect those employees who retire using the formula method (for law enforcement 2% times final average salary times years of service), but as soon as one of the options is exercised for survivorship, then the mortality tables come into play. For those utilizing the money match method for retirement, the mortality tables come into play. Only for those employees who pull all of their retirement contributions out of PERS will the mortality table not come into play. This is a rarely utilized option, and that is not recommended for tier one employees.

LEGISLATIVE THREATS TO END THE PERS SYSTEM WILL FAIL

The Republican scheme in this special session to terminate PERS effective immediately and turn it into a defined contribution retirement plan for all time worked after the date of termination of the system will violate the court decision in the OSPOA case and previous Oregon Supreme Court decisions. Should the legislature pass such a statute and Governor (broken promise) Kitzhaber sign such legislation, I will immediately commence litigation over the legislative action.

Client inquiries about these issues are welcome.

PERS DISABILITY RETIREMENT: AN UPDATE

In a prior newsletter I discussed the pluses and minuses of PERS disability retirement benefits. In addition, I have had research done by the lawyers I utilize for analyzing retirement benefits on the taxability of PERS' disability benefits. I have also corresponded with PERS on this matter.

While PERS gives a disclaimer that it does not give tax advice, both PERS and the attorneys I utilize agree that a duty related disability retirement benefit utilizing the formula (see above) is not taxable. However, if instead of utilizing the formula, a disabled retired employee were to use the money match option, then probably the difference between the money match and the formula disability retirement would be taxable. In addition, when an employee turns the normal retirement age, PERS puts the employee into its normal retirement system and then the retirement benefits are taxable.

Also, if an employee ends up with non-duty disability retirement, that income is taxable. Why? Because that's the way the IRS regulations are written.

THE CIRCUIT COURT PERS RULINGS

I initially reported on Judge Lipscomb's rulings in the PERS litigation in the 5 th Edition of the 2001 Newsletter. At that time Judge Lipscomb had ruled on the summary judgment motions of the parties to lawsuits initially filed by employers and then by employee groups, i.e. The PERS Coalition, attacking various aspects of PERS' decisions. The case has now gone to trial and Judge Lipscomb issued his final rulings earlier this month.

This case is quite complicated. The initial summary judgment decision is 26 pages and the final order in the case is another 26 pages. These cases deal with the interplay of PERS statutes. I do agree with Judge Lipscomb's comments that the overall statutory scheme is somewhat cumbersome because of all the amendments that have been made to it over the years. However, I disagree with every significant ruling that Judge Lipscomb has made in favor of the employers. Those rulings are as follows:

  1. In 1999 PERS allocated far too much money to employees' retirement accounts when the PERS Board should have been funding the reserve account. Judge Lipscomb faulted PERS for not putting additional funding into that account in prior years, but indicated that any attack on PERS' failure to do so would be untimely.
  2. Primarily as a result of the 1999 allocation, the PERS increased bills to employers sent out in the year 2000 were too high.
  3. PERS used an improper method of calculating the employers' contributions for employees who retired on the “money match” system.
  4. PERS should have been using updated actuarial tables over the years and its decision to adopt new tables as of the end of 2003 was described as too little and too late. Judge Lipscomb ordered the immediate use of new mortality tables.
  5. Judge Lipscomb did not give specific orders as how PERS was to recalculate employer bills or recoup income that has been allocated to employees' accounts. He remanded the case back to PERS for decision-making in conformity with his rulings. However, that will not occur for a number of years.
  6. Judge Lipscomb commented that retirees left public employment in reliance upon promise of a set income. Therefore, he opined without authority, that whatever PERS does cannot affect the accounts of employees who have already retired, even though there is a statute, which allows for re-coupment of overpayments. He ignored the issue of what happens to those employees who have kept working based on the promises of retirement benefits at a certain level and did not switch jobs in reliance on those promises. Of course, what about those former employees who left years ago and were making their financial plans based upon their PERS projected benefits? (Yours truly.)
  7. As previously reported, the Court did rule that PERS's giving employers retroactive credit for a year of matching employees' earnings in the variable account was improper as those earnings should have been allocated only to employees. However, given the Court's ruling on the failure of PERS fully fund the reserve account, any reallocation of this will not go to employees' benefit.

The State is going to appeal these rulings. A final decision is probably still years away.

The options for all of my clients are as follows:

  1. Do nothing; there are plenty of oars in the water right now.
  2. Support the PERS Coalition. It will be happy to accept your money.
  3. Authorize me to file an Amicus brief in appellate courts in support of the actions that PERS has taken over the years.

It is my recommendation that those clients who wish to do so, authorize me to file an Amicus or Friend of the Court brief on their behalf in the Appellate Courts, arguing that PERS has acted properly. As I indicated in my last Newsletter when reporting on the Special Session's threats to amend PERS' statutes, and the PERS Board adoption of new mortality tables, this litigation has previously been handled without charge. In fact, because of the number of clients, no client was charged for hours spent of the OSPOA case years ago involving the 6% pick up.

Today things are considerably different. The OSPOA case was fairly simple and easy to litigate. The issues in these consolidated lawsuits over the PERS system are extremely complicated. A competent appellate brief cannot be written without reviewing the trial record including a huge transcript and mounds of exhibits. It would require a significant amount of work.

My retainer does not cover this type of litigation. Therefore, I propose that I will keep separate billing of my hours spent on this case and will allocate that time to client retainers on pro-rata basis. For instance, if only two clients authorized an Amicus brief in their name, and one of them had a 190 members and the other had 10 members, 95% of my time would be allocated to the large client and 5% would be allocated to the small client. This might or might not cause an increase in my retainer to an individual client when those retainers expire. The other alternative to this is additional hourly billings and that does not seem to be as beneficial as the method that I am proposing.

With this Newsletter, I am enclosing an extra page with a signature block for each client through its President to check indicating whether or not the Association wishes to participate in this case by way of an Amicus brief to be filed on its behalf. If you have questions about this, do not hesitate to contact me. I will be happy to respond to more inquiries about the lawsuit.

The number one question I am getting from employees who were close to retirement is: what should I do? The answer is doing whatever you planned to do. PERS will not act in accord with Judge Lipscomb orders, which would cause a reduction of every one of our retirement accounts, until the litigation in this case is over. That will take a number of years. It is my somewhat optimistic prediction that the rulings made by Judge Lipscomb will not he upheld on appeal. If I had to pick one issue in which PERS arguments were weakest, it was why it did not utilize updated actuarial tables as the statutes clearly contemplated. However, since my theory is that those tables can only be used prospectively, arguably it would be too speculative to recalculate the differences in retirements that a timely adoption of new tables would have produced.

PERS, PERS AND PERS

In case you've missed it in the newspapers, the outgoing and incoming Governors are pushing the parties to the PERS litigation, which has been in front of Judge Lipscomb, to try to settle the matter. I am not confident that any settlement will be for the benefit of employees, but I am fairly confident that any “settlement” will probably produce more litigation. Given that fact, I have made the personal decision to start drawing my retirement account from the State. I had not wished to do so because of the guaranteed rate of return, but my distrust in what may occur as a result of that case, outweighs other factors.

It is my very murky crystal ball projection that intense pressure will be brought to bear on the parties to the lawsuit to settle the case. That settlement will not be to your benefit. It is my recommendation that any employee that is eligible to retire, retire a.s.a.p. Waiting until the end of next year to retire at the end of next year just before the proposed OAR revamping mortality tables goes into effect may be dangerous if the deal results in an immediate adoption of a new mortality table. However, every person must make their retirement decision based on their individual circumstances.


PERS - 2001

MARION COUNTY CIRCUIT COURT JUDGE MAKES THREE IMPORTANT RULINGS ON PERS LITIGATION:

  1. The PERS handling of the variable annuity program as it related to the money match option was to the detriment of employers.
  2. PERS did not allocate enough income to the contingency reserve account and are now charging employers too much as a result of that failure.
  3. PERS’s allowing employers retroactive credit for money in the money match account diverted money which should be for the sole benefit of employees to the employer.

These lawsuits came out of litigation where both employers and employees sued PERS.

In a complicated analysis of PERS’ statutes, which have been amended over the years, Judge Lipscomb found that under the variable account statutes, employers should not have to “match” the higher variable returns (or get the benefit of “matching” lower returns). The employer should only have to contribute the same amount no matter whether the employee is in the fixed or variable account. The effect of this ruling is to reduce the value of variable accounts and will allow PERS to reduce the recently increased employer contributions. One ugly question concerns what happens to those employees who already retired based on the current method of calculations? Probably nothing, but that is by no means certain. In addition, the Court found that PERS had not set aside enough money from its earnings in a reserve fund to be utilized when the guaranteed rate of 8% was not earned. Both of these rulings can affect earnings credited to employees account.

On the other hand, employees had brought a lawsuit alleging that when PERS gave the employer retroactive credit for one year of investments in the variable fund, that PERS had taken earnings that were solely to be used to pay benefits to employees and used them to pay benefits for employers.

Judge Lipscomb then ordered the case set for trial to examine damages for employees and what remedy he was going to enter for employers.

Editorial Comment: This case will be going through the Courts for years to come. A trial as to damages and remedies will be extremely complicated and may take more than a year to complete. The litigation will be three to four years on appeal.

Those with the greatest risk are employees who have money in variable accounts in that there may be a ruling that employers need not match the employees’ contribution. Also, earnings may be reduced in order to better fund the contingency reserve.

Of more interest will be what remedy will be given to employees for the fact that their money was unlawfully diverted to employers. In theory, the dollar value of that money should be refunded to the account of all employees in PERS, whether they are in fixed or in variable accounts. However, that money may end up in the contingency reserve.

One thing can be sure. The answers to these lawsuits are three to four years away.