| Strunk / Eugene Frequently Asked Questions Answers |
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Q1. What does the Strunk decision mean for some PERS retirees and benefit recipients who were Tier One members?
A. Strunk restored cost-of-living adjustments (COLAs) to those retirees whose COLAs were frozen as a result of 2003 legislation. For Tier One members who retired from April 1, 2000 through March 1, 2004, the frozen cost-of-living adjustments (COLAs) will be restored as part of Strunk/Eugene implementation.
Tier One members who retired from April 1, 2004 through March 1, 2005 will receive 8 percent earnings crediting to their regular account for 2003 and 2004. Those members who retired in the first three months of 2005 received 8 percent for 2004.
Tier One members who began receiving retirement benefits after April 1, 2005 should have had 8 percent earnings for 2003, 2004, and the portion of 2005 used in their retirement calculation.
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Q2. What does the Eugene decision mean for benefit recipients?
A. Every benefit recipient who had a regular PERS account that received earnings crediting for 1999 will have that account adjusted. The Eugene case requires PERS to reallocate 1999 regular account earnings crediting at 11.33 percent (20 percent was originally credited).
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Q3. In general, how are various retirement dates and/or classes of members affected byStrunk/Eugene?
A. The combined application of the Strunk/Eugene decisions will generally affect the following Tier One groups in the manner described based on the effective retirement dates:
1. Active and inactive Tier One members who have not yet retired: the regular accounts of these members will be corrected to reflect 11.33 percent earnings crediting for 1999 instead of the 20 percent that was originally credited.
2. April 1, 2000 through March 1, 2004 retirements: these retirees have received all payable earnings for 2003 and 2004 but will have their 1999 regular account earnings corrected using 11.33 percent instead of 20 percent. Many in this group were subject to the COLA freeze that was effective July 1, 2003.
3. April 1, 2004 through December 1, 2004 retirements: these retirees need to be credited with 8 percent earnings for 2003 and a prorate of 8 percent for 2004 to the date of retirement. These retirees were not subject to the COLA freeze but will have their 1999 regular account earnings corrected using 11.33 percent instead of 20 percent.
4. January 1, 2005 through March 1, 2005 received the mid-year earnings crediting which credited 8 percent for 2004 and a prorate of 8 percent for 2005 to the retirement date. These retirees will also be credited with 8 percent earnings for 2003 but will have their 1999 regular account earnings corrected using 11.33 percent instead of 20 percent. Most of these retirees are receiving estimated payments. The lookback calculation, which has not yet been applied, will be used to determine the correct benefit.
5. April 1, 2005 and after retirements: most of these retirements were calculated reflecting the Strunk/Eugene changes so few of these retirements will require adjustment. These retirees are receiving estimated payments and their retirement benefit will now be considered final. They will receive a Notice of Entitlement as part of the Strunk/Eugene implementation.
6. Variable account participants: There is no impact on variable account earnings crediting.
7. Miscellaneous recipients: Everyone with a Tier One regular account that received a 20 percent earnings allocation for 1999 (e.g., a member who retired prior to April 1, 2000 with a partial lump sum payable in installments beyond 1999, withdrawals occurring after April 1, 2000, etc.) will have their account corrected to reflect the 11.33 percent earnings crediting.
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Q4. Are benefit recipients who had a variable account affected by Strunk and/or Eugene?
A. Variable account earnings allocations are not affected by the Eugene decision. Benefit recipients who had variable accounts in 1999 will see a smaller adjustment to their total member account or retirement benefit from the Eugene case. The affect of the 1999 earnings crediting correction will depend on the relative size of the member's respective regular and variable accounts.
The change in calculating the variable match at retirement to match variable account contributions as if they had been in the regular account (required by the Eugene case) became effective for retirements on or after July 1, 2004.
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Q5. How will the account adjustment work for retired members?
• The process for account adjustments is:
1. PERS will add up the monthly benefits paid each recipient from the recipient's payment start date to the benefit adjustment date. These are the actual payments made.
2. PERS will then recalculate the account balance for 1999 with earnings at 11.33 percent (instead of 20 percent) and compound the account balance forward to the payment start date (include 8 percent earnings for 2003, 2004, and after, if applicable).
3. Based on the adjusted account balance, PERS will calculate a revised monthly benefit at the payment start date. This is the amount the member would have been entitled to receive at retirement if the member's regular account had only been credited at 11.33 percent for 1999.
4. PERS will then calculate all revised monthly benefit amounts from the payment start date to the benefit adjustment date, including COLA increases as applicable to each monthly benefit, and sum up these revised monthly amounts.
The sum of the actual payments made will then be subtracted from the sum of the revised monthly amounts. If the result is positive, PERS owes money to the recipient.
If the result is negative, the recipient owes money to PERS. If the recipient owes PERS, he/she can repay the overpayment in a lump sum or via an actuarial reduction to the revised monthly benefit. If the recipient chooses to pay the entire amount owed in a lump-sum payment, the recipient's monthly payments will be the revised monthly benefit as of the benefit adjustment date. Alternatively, the recipient can choose to repay the overpayment via an actuarial reduction to the revised monthly benefit based on the length of time the benefit is expected to be paid. No interest or fees will be charged to the member under either repayment process.
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Q6. How can I determine how the recalculation will affect me?
A. The complexity of the retirement calculation and the limitations of the agency's existing information technology systems mean that the process to determine the impact on each individual member will take time. Many factors will affect the result of this recalculation (e.g., participation in the variable, effective retirement date, benefit option selected) so no general adjustment factor can reliably be applied across all accounts.
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Q7. What is the “direct recovery” method?
A. This term describes a method that will recover overpaid amounts caused by the 1999 earnings crediting from persons that received the amounts as opposed to recovering those funds from reserves or charging them to administrative expenses. The Board directed PERS staff to pursue this method given the Board's legal, fiscal, and fiduciary obligations.
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Q8. As an affected retiree, can I repay the overpaid amount in a lump sum and will that lessen the monthly reduction to my benefit?
A. Yes, PERS will provide the option to repay the overpaid amount in a lump sum. If the recipient chooses this option, the monthly benefit payment will still be revised to reflect the reallocated 1999 earnings.
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Q9. Can an affected benefit recipient receiving a monthly benefit repay the overpaid amount in some manner other than a lump sum or actuarial reduction (e.g., equal payments over five years)?
A. For individual members who are receiving monthly benefits, PERS will only offer the lump sum or actuarial reduction method repayment plans.
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Q10. Will the actuarial reduction end when the member has fully repaid the overpayment from the 1999 earnings allocation (calculated as of the benefit adjustment date)?
A. The actuarial reduction will continue as long as the affected member's benefit payment stream continues.
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Q11. Will the actuarial reduction end with the death of the recipient, or will the collections continue to affect the beneficiary over their lifetime?
A. The actuarial reduction method will calculate the recovery over the expected duration of the benefit payment stream, including the life expectancy of a beneficiary if a survivor option was selected at retirement, and apply the reduction for the duration of that benefit payment stream.
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Q12. Can I change my benefit option election originally made at retirement because the amount of my benefit is changing?
A. The statute that allows a member to convert to an optional form of benefit payment (ORS 238.305) specifically limits that election to within 60 days after the member receives their first benefit payment. No statute provides the Board with the specific authority to waive or extend that election period. Since the statute provides for a specific period and no authority is granted to alter that period, the PERS Board does not have the authority to allow members to change their election beyond the 60-day period.
If an affected retired member is receiving estimated benefit payments the member has not received his/her “first benefit payment” until PERS generates a Notice of Entitlement and converts the retired member from an estimated to a final payment amount. In those circumstances, those retired members will have an opportunity to change their benefit option election if they so choose.
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Q13. Can an affected retiree purchase service credit in light of the adjusted accounts, benefits, and possible retirement method changes?
A. No. For eligible members, these purchases must be made around the time the member retires (generally within 90 days of the member's effective retirement date). These time frames are specified in statute and the PERS Board does not have the authority to waive or extend them. Therefore, members cannot be allowed to reconsider their purchase transactions that were or could have been made beyond the statutorily specified timeframes.
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Q14. Which life expectancy factors will be used to determine the amount of my monthly repayment - the blended life expectancies from the last Milliman study or a new experience study done by Mercer?
A. For the Strunk/Eugene revised benefit calculations, PERS will use the life expectancy factors in effect at the time of the original retirement calculation. For calculating the actuarial reduction to recover overpayments, the current life expectancy will be used to determine the factors that will be used, which will further moderate the effect of the actuarial reduction on the revised monthly benefit by spreading the repayment over a longer time period.
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Q15. Will the actuarial "factors" be derived from occupational groups, gender groups, or simply from the blend of these as is currently used for actuarial equivalency factors?
A. The factors will be derived from the blended tables that are currently used for actuarial equivalency factors.
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Q16. Why not charge off the overpayments made to retirees to administrative expenses or reserves?
A. Charging the overpayments and overcrediting to administrative expenses raises legal and fiscal questions and shifts the burden entirely to current Tier One/Tier Two members and employers. It is also not justifiable from a fiduciary standpoint because the direct recovery method equitably aligns the burden of recovery with the benefit received.
Charging the overpayments and overcrediting to reserves raises similar legal, fiscal, and fiduciary concerns. This approach would also create a benefit/burden mismatch between former and current members and employers.
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Q17. What are the financial impacts of the Strunk/Eugene decisions to PERS' unfunded actuarial liability?
A. The PERS actuary estimates that the Strunk decision (requiring annual crediting to Tier One member regular accounts at the assumed earnings rate – currently 8 percent – and voiding the “COLA freeze”) added approximately $2.1 billion in unfunded actuarial liability as of December 31, 2003 (the date of the most recent system valuation).
The PERS actuary estimates that pursuant to the Eugene case, approximately $1.6 billion in unfunded actuarial liability reductions will occur as of December 31, 2003 (the date of the most recent system valuation) by recovering reallocated 1999 earnings from the following members:
- Active Tier One: $500 million
- Inactive Tier One: $300 million
- Retired Tier One: $800 million
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Q18. Will interest be paid if PERS owes me money based on voiding the COLA freeze?
A. No. PERS cannot pay interest on obligations unless specifically allowed by statute (see ORS 238.470 ) and no existing statute permits interest to be paid on these amounts.
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Q19. Will PERS help individual members with possible tax issues associated with the overpayment and potential tax consequences and penalties associated with repayments?
A. Although the agency is not qualified to give individual tax advice, we can provide some general information about how the benefit payments have been and will be reported to the state and federal government for taxation purposes. Under Revenue Ruling 2002-84, the effect of actuarially reducing future benefits is that PERS will report what the agency actually pays the recipient under this method, not what the recipient would have received absent the adjustment. Similarly, for payments received prior to the adjustment, those are the amounts that the recipient actually received and should conform to the amounts reported as taxable. For actuarially reduced benefit payments after the adjustment date, therefore, PERS will report the taxable portion of the benefit the recipient actually receives so there should be no offset or deduction from what the recipient would have otherwise received but for the benefit adjustment and overpayment recovery.
If the recipient instead repaid PERS in a lump sum, PERS would report the recipient's future revised benefit amounts, again resulting in no special tracking or reporting requirements. Whether the recipient would receive a deduction or credit towards their current year tax return for the amount of the lump sum repayment depends on the recipient's individual tax situation and the amount of the repayment. Concerns that enter into consideration include whether the recipient itemizes their deductions; whether the repayment can be classified as a casualty loss under Internal Revenue Code §165(a) and §67(b) (generally, a miscellaneous deduction of losses under $3,000 subject to the two percent floor); or if the repayment qualifies for an immediate deduction or credit (generally, repayment of over $3,000). IRS Publication 525, Taxable and Nontaxable Income, page 31, explains how the deduction or credit works when the repayment amount is greater than $3,000.
All these variables demonstrate how the tax implications of this transaction depend not only on the repayment option the recipient selects but also on their individual tax situation. For answers to those questions and to develop a specialized tax strategy, recipients need to consult their tax professional.
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Q20. What does the term “window retiree” mean?
A. “Window retirees” are Tier One members who retired from April 1, 2000 through March 1, 2004. Some of those retirees had their cost-of-living adjustments (COLAs) frozen as a result of 2003 legislation. The Strunk decision restored those COLAs, which will occur as part of the Strunk/Eugene implementation.
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Q21. Will PERS wait until the White case is resolved before adjusting Tier One regular accounts for the 1999 overcrediting? (The White case challenges elements of the Settlement Agreement entered into by the PERS Board and the original plaintiffs in the Eugene case).
A. No. The 2003 PERS Reform legislation and the Oregon Supreme Court decisions in the Strunk and Eugene cases have defined the parameters within which PERS can implement the Eugene Settlement Agreement. By its terms, PERS is now required to implement the rest of its obligations under that agreement and administer the law as it stands today, including implementation of the Strunk ruling.
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Q22. If I retired under the Full Formula method, will the Strunk/Eugene adjustments affect my retirement benefits?
A. The Full Formula monthly benefit amount is based on three factors:
- Final average salary,
- Years of creditable service, and a
- Statutory factor (1.67% for general service members and 2% for police and fire members).
As with all monthly retirement benefits, the benefit is funded first by converting the member’s account balance into an annuity, and then adding to that annuity a pension from employer contributions that raises the total benefit to the amount determined by the Full Formula calculation.
This combined annuity and pension is initially calculated on a Refund Annuity basis. Members who elect to receive their Full Formula benefit on a refund annuity basis may receive an additional benefit at death if the total of their annuity payments have not equaled the their total account balance. Members who received their Full Formula benefit on a refund basis will not see any change to their monthly benefit based on Strunk/Eugene.
However, many members elect to receive their Full Formula benefit on a lifetime basis (no refund) which produces the highest monthly benefit (Option 1). This option is higher than the refund annuity as the value of the member’s annuity increases because there is no potential refund upon death. Other members choose Option 2 (100% survivor payment) or Option 3 (50% survivor payment). These options are calculated as the actuarial equivalent of Option 1.
All member annuity calculations are based on the member’s account balance. So, even if a member retired under Full Formula, any change in the member’s account caused by the Strunk/Eugene adjustment will change his/her benefit payment amount if the member converted from a Refund Annuity benefit to any other optional form of benefit payment.
Click here for samples of calculations for some typical PERS retirees.
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