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What the Hall is going on? Legal issues surrounding the Hall and Parker cases against EORP and PSPRS

From this July, 13, 2015 Arizona Republic article by Craig Harris, Arizona Supreme Court picks five judges to hear pension case , we can now...

Thursday, September 22, 2016

PSPRS investment returns through July 2016 (with further evidence that PSPRS' investment strategy is failing)

The following table shows PSPRS' investment returns, gross of fees*, versus the Russell 3000 through July 2016, the first month of the current fiscal year (FY), with the FY end 2014, 2015, and 2016 returns included for comparison:

Report PSPRS PSPRS Russell 3000 Russell 3000
Date Month End Fiscal YTD Month End Fiscal YTD
6/30/2014 0.78% 13.82% 2.51% 25.22%
6/30/2015 -0.73% 4.21% -1.67% 7.29%
6/30/2016 -0.32% 1.06% 0.21% 2.14%

7/31/2016 1.62% 1.62% 3.97% 3.97%

There is usually about a two-month lag in PSPRS reporting its investment returns.

First off, we should note that PSPRS' final return for FY 2016 was 0.63%, meaning that they paid 0.43% in fees, so they did not pay more in overall investment fees than they earned, though PSPRS did pay more in fees than they earned in four of the ten asset classes .  Also, for comparison, the Arizona State Retirement System (ASRS), at a 0.50% annual return, earned even less than PSPRS in FY 2016.  However, ASRS is still handily beating PSPRS over the long run in annualized returns:

1 year  3 year 5  Year 10 Year
PSPRS 0.63% 5.71% 5.40% 4.45%
PSPRS CIP 1.79% 6.24% 5.49% 5.69%
ASRS 0.50% 7.10% 7.10% 6.00%

This again brings back to the central issue with PSPRS.  PSPRS has better comparative returns only when overall market returns are low, and as PSPRS' investment staff theorizes, when returns are negative.  As can be seen in the comparison with ASRS, this performance will not be successful in the long-term, unless PSPRS drops its expected rate of return (ERR).  PSPRS dropped their ERR 0.10% again for the current FY from 7.5% to 7.4%.  ASRS is still maintaining a 8.0% ERR.  If we look at the past three years, PSPRS earned 13.28%, 3.68%, and 0.63% over FY 2014, 2015, and 2016, respectively.  ASRS earned 18.6%, 3.2%, and 0.50% over the same there respective FY's.  That additional 5.3% earned in FY 2014 makes a big difference in the three-year annualized return, more than making up for the lower returns ASRS had in the next two FY's.

 If we look at the three, five, and ten year annualized returns, we see that PSPRS earned 51.30%, 46.55%, and 60.13% of the Russell 3000's three, five, and ten year annualized returns, respectively.  Over the same periods, ASRS earned 63.79%, 61.20%, and 81.08% of the Russell 3000's annualized returns, respectively.  Keep in mind that the ten year annualized period includes the worst of the market downturn in 2008-09, so includes both ends of the market spectrum.  ASRS clearly has a better investment policy than PSPRS.  More telling is that even PSPRS' Cancer Insurance Plan (CIP), which has a simple portfolio that invests roughly 50% in equities, 45% in bonds, and 5% in commodities, earned more than PSPRS over the same annualized periods.  PSPRS does not have to look enviously at ASRS for a sign that something is amiss with its investment strategy; they need only look within their own offices at the CIP.

At some point in time, PSPRS will have to start earning returns that more closely approach the broader market or lower its ERR.  Can someone at PSPRS please tell PSPRS Chief Investment Officer Ryan Parham that Proposition 124 passed back in the spring and COLA's are now limited to 2% or the regional consumer price index and will be included in contributions as part of the normal cost?  Mr. Parham doesn't need to lowball returns any longer and can now invest in a manner that will produce the higher returns he boasted PSPRS was capable of earning.  Is it too much to ask that PSPRS earn its ERR over the long run, especially if they actually try to do so, or are they just waiting for inflation to do the job for them?

 * Returns, gross of fees, are used because PSPRS usually does not report returns, net of fees paid to outside agencies, except on the final report of the fiscal year.  Returns, gross of fees, are used in the table for consistency.  The past two years fees have reduced the final annual reported return by about a half percent.  Returns, net of fees, were 13.28% in FY 2014, 3.68% in FY 2015, and 0.63% in FY 2016.

Saturday, September 10, 2016

A 9/11 remembrance

Now that it has been 15 years since the terrorist attacks on 9/11/2001, it seems like a good time to revisit this passage from page 316 of  The 9/11 Commission Report:
The National Institute of Standards and Technology has provided a preliminary estimation that between 16,400 and 18,800 civilians were in the WTC complex as of 8:46 A.M. on September 11.  At most 2,152 individuals died at the WTC complex who were not (1) fire or police first responders, (2) security or fire safety personnel of the WTC or individual companies, (3) volunteer civilians who ran to the WTC after the planes' impact to help others, or (4) on the two planes that crashed into the Twin Towers.  Out of this total number of fatalities, we can account for the workplace location of 2,502 individuals, or 95.35 percent.  Of this number, 1,942 or 94.94 percent either worked or were supposed to attend a meeting at or above the respective impact zones of the Twin Towers; only 110, or 5.36 percent of those who died, worked below the impact zone.  While a given person's office location at the WTC does not definitively indicate where that individual died that morning or whether he or she could have evacuated, these data strongly suggest that the evacuation was a success for civilians below the impact zone. (italics mine)
Everyone can remember 9/11 as they choose.  If the funereal reading of names and ringing of bells is one's preference, that is fine.  I prefer to think of the incredible efforts of those WTC rescuers, professional and civilian alike, who accomplished a task under nearly impossible conditions on 9/11 and were able to save nearly everyone that could possibly be saved from the towers.  These rescuers were heroes not just because they died helping their fellow Americans, but because they succeeded at their mission.

Unfortunately, 9/11/2016 will likely see the spectacle of some NFL players refusing to stand during the playing of the national anthem.  This self-indulgent protest, led by a one-dimensional, injury-prone, second-string quarterback, makes the accomplishments of Jackie Robinson seem almost unbelievable.  This man, who bore so much both on and off the field while still being able to play baseball at the highest level (career slash line: .311/.409/.474), appears superhuman in comparison to the anthem sitters.  When any NFL player sits during the national anthem, it will make me appreciate the real heroism of Jackie Robinson even more.

Monday, August 29, 2016

The waiting is the hardest part for PSPRS members: The only update the the Hall case is that there is no update

I know that the number one question that everyone has (myself included) is when will the Hall v. EORP decision come out.  This is repeatedly asked in the comments and on the Facebook page.  If you are a Tier 1 member (20 years of service before January 1, 2012) or a Tier 2a member (hired before January 1, 2012 but with less than 20 years as of that date), there are major financial implications for you.  A decision favorable to the plaintiffs would mean refunds in the thousands of dollars to Tier 1 and Tier 2a PSPRS members and a 4% decrease in contribution rates going forward.  The flip side is that PSPRS will go further into deficit and affect the budgets of all public safety employers.  A decision in favor of the defendants will maintain the status quo but will also set a precedent that contribution rates are not fixed at the time of hire.  This could mean theoretically that the Arizona Legislature could constitutionally raise employee contribution rates as high as they want.  Remember that the recently enacted pension reforms require Tier 3 members (those hired July 1, 2017 or after) to split contributions 50/50 with employers, as is done in the Arizona State Retirement System.  This 50/50 split could not realistically be imposed on Tier 1 and Tier 2a/2b members as it would leave employees with little or no net pay, but it could certainly be possible for the employee contribution rate to creep up a few percentage points.  The Hall decision may affect some retirees, especially if you were an active PSPRS member after SB 1609 was enacted and did not DROP, but I would expect that this would be a very small number of individuals.  (Note: The Parker v. PSPRS case is contesting the same issue as Hall, and the decision in Hall will decide Parker as well.)

I wish I had some insight into when the decision was coming.  If anyone, other than the four judges and the one Arizona Supreme Court justice who heard the case in February 2016, knows when or what the decision will be, I don't know who that would be.  My understanding of the process is that once the decision is finalized and ready to be made public a 24-hour notice is given to the parties to the case.  That is it.  I do not know if there will be also be a 24-hour advance press release or any other public announcement, though such a big decision will be headline news the day of the decision.

For some perspective, we can look at the timeline of the Fields case.  The Arizona Supreme Court heard arguments in Fields on June 4, 2013 and didn't announce a decision until February 20, 2014, which is over 8 months. The arguments before the panel in Hall were on February 18, 2016, a little over 6 months ago, so if they take as long as in Fields, we could be waiting until October 2016 for a decision. Furthermore, Hall is dealing with the issue of increased contribution rates (the COLA issue in the Hall case is now moot with the passage of Proposition 124 in May 2016), an issue that is not as clearly protected by the Arizona Constitution, so if they take longer than in Fields and announce a decision sometime in 2017, I would not be surprised, especially in light of the aforementioned consequences to all parties.

I have added a link to the Arizona Supreme Court in the sidebar.  If you go to active civil cases, you will see Hall v. EORP at the very top of the list.  It shows the last update to the case was in April 2016 with nothing else since that date.  I have heard that PSPRS is preparing for a plaintiff victory, though I do not know if this is just wise preparation or if they have some other insight into what will happen.  Ideally, a plaintiff victory will come soon enough before the end of 2016 that refunds would come in the 2016 calendar year.  I say "ideally" because my guess would be that the large refunds of excess contributions will likely be subject to  an IRS withholding rate of 25%.  (I do not know how the state of Arizona will treat the refund; hopefully more leniently since it was the state's doing in the first place.)  These refunded contributions are wages and subject to state and federal income tax, and the lump sum nature of the payment is similar to a bonus.  A payment in 2016 will allow members to get back any overpayment in taxes, if they have a lower taxable rate than 25%, early in 2017 via their 2016 tax refund.  A payment in early 2017 would mean members would not see a refund of any tax overpayment until a year later after they file their 2017 taxes.  It is way too early to speculate about the refund, but I would guess that it would come back through the employer if the PSPRS member is still employed by a public safety agency.  Also, the refund could also be broken up into smaller chunks or paid out over two or more years to lower the immediate tax burden.  Once again, we are probably getting a little ahead of ourselves here.

A decision could come tomorrow or six months from now.  I wish I had more information, but we will all just have to wait.

Thursday, August 25, 2016

PSPRS investment returns through June 2016, or how PSPRS made more for Wall Street than it did for PSPRS members and Arizona taxpayers

The following table shows PSPRS' investment returns, gross of fees, versus the Russell 3000 through June 2016, the final month of the current fiscal year (FY), with the FY end 2014 and 2015 returns included for comparison:

Report PSPRS PSPRS Russell 3000 Russell 3000
Date Month End Fiscal YTD Month End Fiscal YTD
6/30/2014 0.78% 13.82% 2.51% 25.22%
6/30/2015 -0.73% 4.21% -1.67% 7.29%

7/31/2015 0.13% 0.13% 1.67% 1.67%
8/30/2015 -1.43% -1.31% -6.04% -4.47%
9/30/2015 -1.02% -2.31% -2.91% -7.25%
10/31/2015* 1.95% -0.36% 7.33% 0.08%
11/30/2015 0.37% 0.09% 0.55% 0.63%
12/31/2015 -0.95% -0.86% -2.05% -1.43%
1/31/2016 -1.41% -2.26% -5.42% -7.00%
2/29/2016* -0.35% -2.61% -0.52% -7.52%
3/31/2016 3.45% 0.84% 7.04% -0.48%
4/30/2016 0.64% 1.49% 0.62% 0.14%
5/31/2016 -0.11% 1.39% 1.79% 1.93%
6/30/2016 -0.32% 1.06% 0.21% 2.14%

PSPRS did not provide monthly investment returns for October 2015 or February 2016, and returns for those months are estimates based on the prior and following months' returns. There is usually about a two-month lag in PSPRS reporting its investment returns.

PSPRS has reverted back to form for the FY end, ending with a final FY return, gross of fees, of 1.06% versus 2.14% for the Russell 3000.  The last post about PSPRS returns covered the returns through April 2016, and at that time, PSPRS was actually showing a higher return than the Russell 3000.  PSPRS did not have a July 2016 Board of Trustees meeting, so the May and June 2016 returns were included in the August 2016 meeting materials.  Since April PSPRS has lost about a third of a percent while the Russell 3000 gained two percent.

PSPRS earned 49.53% of the Russell 3000 in FY 2016.  For FY 2014 and FY 2014, PSPRS earned 54.80% and 57.75% of the Russell 3000, respectively.  For the three and five year periods, PSPRS earned 55.97% and 50.86% of the Russell 3000, respectively.  PSPRS has shown a pattern of earning just 50-60% of the Russell 3000 since PSPRS implemented its "nationally recognized" investment strategy, though it looks like PSPRS is working its way toward only a 50-55% range.  With a 7.40% expected rate of return (ERR), the Russell 3000 would have to average between 13.50% and 15% annual returns in order for PSPRS to earn that 7.40% ERR.

If we look at individual asset classes, only the private equity class earned at or above the ERR with FY 2016 earnings of 12.41%.  The next highest earner was private credit at 4.23%.  Of the ten major categories, seven had positive returns while three had negative returns.  Seven of the ten categories did not achieve their target benchmarks.  PSPRS missed the fund target benchmark of 1.98% by 0.92%.  What I found most interesting was the real estate category.  At the end of April, it had a healthy FY year-to-date return of 7.95%, but it ended the FY with a return of only 1.69%.  Real estate lost 1.87% in May and a whopping 4.00% in June.  Much of PSPRS returns for FY 2016 were driven by just two categories, private equity and real estate--two asset classes that are difficult to value since they are not easily liquidated.  It leaves us wondering how real estate dropped so much over such a short time.  Barring a major economic crisis that would affect all asset classes, we would expect real estate to be very stable and not subject to such monthly volatility.

The cherry on top of all this is that these FY 2016 returns are gross of fees.  PSPRS usually pays about a half-percent in aggregate investment fees, which means that, net of fees, PSPRS will have earned more for its investment "advisors" than it did for PSPRS members and Arizona taxpayers.  A lesson from Randolph and Mortimer Duke might be in order here for PSPRS' investment staff.  In anticipation of the excuses that will soon be coming for PSPRS Board of Trustees Chairman Brian Tobin, Administrator Jared Smout, and Chief Investment Officer Ryan Parham about why PSPRS had such bad returns, the next post will go little more into PSPRS' returns.

 * Returns, gross of fees, are used because PSPRS usually does not report returns, net of fees paid to outside agencies, except on the final report of the fiscal year.  Returns, gross of fees, are used in the table for consistency.  The past two years fees have reduced the final annual reported return by about a half percent.  Returns, net of fees, were 13.28% and 3.68% for fiscal years 2014 and 2015, respectively.

Monday, August 15, 2016

PSPRS service purchase calculations and how they can cost you a bundle if you're not careful

PSPRS has posted the new service purchase estimator that will be used until the start of next fiscal year.  You will need Microsoft Excel to open it on your own computer.  I would encourage anyone who can buy service time to play around with the calculator just to see the dollar amounts required to buy their service time, now or in the future when it becomes much more expensive.

The calculator has some nice features.  It allows you to break down fractional time into a yearly total, so if you have, for instance, four years, nine months, and 28 days, it will convert that into 4.827 years for you.  I have not looked at my DD-214 in years, but if I remember correctly, it breaks down military service into years, months, and days, which now can be easily converted for your calculation.

There is also a calculator for those who may be interested in purchasing service time via payroll deduction.  Once you calculate the total service purchase cost, you can enter that total into another calculator that will give you a biweekly payment amount.  This biweekly amount can be paid for and length of time up to 15 years for a total of up to 390 payroll deductions.  The payroll deduction also gives you a breakdown of how much you will pay in principal, interest, and in total.

The one feature I do not like about the calculator is how they fix dates for the purchase of time on either the current date or July 1, 2017.  I believe the current date calculation uses the 7.4% expected rate of return that will be used until the start of next fiscal year, while the July 1, 2017 calculation uses the 10-year Treasury Bill rate plus 2% that will be the permanent variable rate starting next fiscal year.  It would have been preferable if members could enter in their own proposed service purchase date.  This is especially true for anyone who is very close to 20 years of service.  This is because the actuarial formula "punishes" you for buying time that push you up to a milestone like 20 or 25 years of service.  This is why most of us already have been told that we should only buy time very early in our careers or after we have hit a milestone like 20 or 25 years of service.  This is pretty verify with the calculator by comparing the cost of buying one year of service at 19 years of service and at 20 years of service.  (Note: I used my date of birth and an average high salary of $75,000 for all the calculations.  Your numbers will vary based on your own data.)  Today at 19 years of service, a single year will cost $51,576 versus only $21,705 at 20 years, or nearly $30,000 more.  Today at 24 years of service, one year would cost $48,835 versus $27,130 at 25 years of service.  However, the strange thing about the 24/25 yer calculation is that you can buy 0.99 of a year and still get the lower calculation ($21,488) even though you are just short of reaching 25 years.  This does not apply to the 19/20 year calculation where buying 0.99 of a year at 19 years of service will still cost you $51,060.

All this is important for those close to 20 years of service because it makes sense to buy as small amount of time that gets you to 20 years of service.  If you have 19 years of service today, you will still want to buy your service time at the higher discount rate (7.4%) before July 1, 2017 because it will make it cheaper.  However, like on the Price is Right, you will want to purchase it as close to July 1, 2017 as possible without going past that date because then you will be pay less under the aforementioned 19/20 years of service issue.  As an example, say today (August 15) is your 19th year of service, which means you have 10 months, 15 days left in the fiscal year, or 0.874 of a year.  If you were to by that time today, it would cost you $45,062 for the 0.874 year which would get you to 20 years of service.  The other 0.126 of a year would then only cost you $2,735 since you were already vested at 20 years of service.  This would cost you a total of $47,797 for the full year you purchased today.

Now what if you wait until June 1, 2017, one month from the deadline.  You would then be buying only 0.83 of a year to get you to 20 years of  service at the cost of $4,290.  The remaining 0.917 of a year would only cost you $19,903 because you would already have 20 years of service.  The total cost of the one year service purchase on June 1, 2017 would now only be $24,193, a savings of $23,604.  This is a particular example for those really close to 20 years of service, but I suspect the problem will likely affect a quite a few PSPRS members.  Another problem I foresee is with those who may be close to 25 years of service.

As we previously discussed, the actuarial calculations are different for those with the 24/25 years of service issue.  A person in this situation will want to make TWO service purchases before the July 1, 2017 deadline.  As another example, say you have 23 years of service as of today, and you have five years of service time you want to purchase.  What should you do?  You should NOT buy the full five years in one chunk, which would cost you $151,930. (This is again using the same high average salary and birthdate as before.)  You would be better off going to your local PSPRS office and buying 23 months and 15 days worth of time (1.958 of a year) for $42,497, waiting 15 days, then buying the other 3.042 years for $82,531.  This would cost you $125,028 and save you almost $26,902 over buying the whole five years at one time.  Unlike the previous 19/20 years of service example, there appears to be no advantage to waiting closer to the deadline in this situation.  I calculate that waiting would actually cost about $3,000 more to do the two purchases nine months later than today.

As we can see it would be very helpful if PSPRS members could enter the future purchase date.  Of course the further away you are from 20 or 25 years of service, the less helpful this would be since the variables in the calculation, such as your high average salary or the 10-year Treasury Bill rate, are less predictable the farther you are from retirement.  PSPRS members with longer retirement horizons may want to check the payroll deduction option, especially if they have only a small amount of time they want to buy.  For example, a member with five years of service and a high salary average of $50,000 could purchase one year today for $10,540.  Over 60 months, he would pay about $191 every two weeks and spend about $905 in total interest.  Buying more time becomes prohibitively expensive, likely eating up the member's full paycheck, and extending payments out longer increases the interest expense.  Also, it would probably be better to wait and see what inflation is like in the future because, if you are like me and believe it will be higher in the future, it may be cheaper to buy service time in the future as the variable discount rate approaches, equals, or even surpasses PSPRS' expected rate of return.

There may be some difficult decisions to be made if you are planning on purchasing service time, whether via payroll deduction or in a lump sum.  I hope that there will be assistance available to members who will be making important decisions that will cost them thousands of dollars.  Also, assurances need to be received that all requests for service purchases made before July 1, 2017 are honored and calculated correctly.  Members also should not be hit with anymore "surprises" about newly-enforced clauses or last-minute legislative changes.  PSPRS members, past, present, and future, have already been serially shafted by various entities, most egregiously by those whose sole purpose was to protect their benefits at the state level.  Why PSPRS members must have their service purchases discounted at a lower rate than PSPRS discounts its own liabilities is a question that the incurious state public safety unions are unwilling to ask of an indifferent PSPRS administration.  Hopefully, the unions locals, who actually care about public safety workers, will at least be provided the necessary tools to take care of their own members.

Tuesday, July 19, 2016

They'll fail but you'll pay: The financial injustice in PSPRS' new service purchase policy

I would like to share the following email about service purchases that I received several weeks ago, just in case any active PSPRS members did not receive it.  It is reproduced verbatim, except for contact information for the author:

Dear Brothers and Sisters:
Brothers and Sisters, many of you have discovered that the PSPRS has raised its service purchase rates.  We have fielded many of your phone calls and we have responded by communicating these issues directly with PSPRS staff and we requested that they re visit this issue.  The good news is that they have agreed.  Brian Moore from Local 493 put together a great article clarifying what PSPRS has agreed to do.  Thank you Brian for providing this information.  

By Brian Moore, Vice-President Local 493 Healthcare and Member Benefits Elected Member, City of Phoenix PSPRS Fire Pension Board

Last year and without notice, PSPRS changed the manner in which it calculated the cost for service purchases of Rural Metro and out of state service time. A number of Arizona Fire Fighters had planned to make service purchases last year and were shocked to find that the change made by PSPRS resulted in a cost increase of 60% or more depending on the member’s years of service, salary and age. Also affected were many Arizona police officers working. Many of these experienced officers came to Arizona after being recruited by cities and towns during the police officer shortage that existed statewide in the late 90’s and early 2000’s when the economy was booming. All of those affected had been planning to make purchases when they had close to 20 years of service and were rightfully upset when the change was made without any advanced notification.

A little history is necessary to understand the problem that developed. To entice out of state police officers to relocate to Arizona, PSPRS statutes were amended to allow police officers and firefighters to “buy” unlimited amounts of previously served time in other states. In the mid 2000’s, PSPRS statutes were amended again to allow purchase of Rural Metro service credit for those who later began working for a fire district or municipal department that was covered under PSPRS. Purchases of up to a maximum of 4 years of military service had always been allowed as had unlimited years of prior service that was credited in the Arizona State Retirement System (ASRS) and the Corrections Officer Retirement Program (CORP).

The infamous Senate Bill1609 passed in 2011 change a number of provisions of service purchases. It changed the requirements to 10 years of membership in PSPRS before any purchases could be made and limited out of state and Rural Metro service purchases to 5 years max no matter how many prior years one might have. The law changed again in 2012 to allow out of state and Rural Metro purchases after 5 years of PSPRS membership but Military service purchase still required 10 years of service. Laws pertaining to purchasing prior service in any of the Arizona plans- ASRS, COPERS, CORP or City of Tucson Retirement plan remained unchanged.

Then in April of 2015 and because of another obscure change in state law, PSPRS began using a much lower discount rate to determine the cost of Rural Metro and out of state service credit. No other service purchases were affected. The discount rate is the rate used by pension plans to discount the cost of future liability for these service purchases to present value and takes into account the short-term risk of not meeting the assumed rate of return. The main reason for the cost increase was because the new discount rate was around 4% instead of the previous discount rate which was equal to the assumed earnings rate of the PSPRS fund which was 7.5%.

Because the change was without notice and created a significant hardship to many folks who had been playing by the rules, Local 493 leadership, PFFA representatives and the police unions went to PSPRS and the legislature to get the discount rate changed back to what it was prior to April 2015. These efforts led to House Bill 2019 that was passed by the legislature and signed by Governor Ducey in April of this year. The law takes effect on or about August 6th since the effective date is 90 days after the legislature adjourns. Some of the main provisions of HB 2019 are as follows:

The discount rate will change to equal the assumed rate of return set by the PSPRS Board of Trustees for the fund which will be 7.4% on July 1st of this year. This TEMPORARY discount rate change will LOWER the cost of service credit purchase substantially. 
This special purchase provision is TEMPORARY and will be in effect until July 1st, 2017 at which time the discount rate WILL CHANGE and become an amount equal to the yield of a 10 Year Treasury Bill plus 2% (meaning the discount rate would be about 4% right now) and thus purchases WILL COST SUBSTANTIALLY MORE after that time.
Military service will be able to be purchased after 5 years of membership in PSPRS instead of 10 years. (New provision)
Payment plans will be available using “after tax dollars”. This is a new provision. Service purchases can still be made by transferring 401(a) and 457 assets but those must be used for lump sum purchases.
After July 1st, 2017, ALL TYPES of service purchases will be calculated using the lower 10 Year T Bill plus 2% discount rate. This will dramatically INCREASE the cost for military, ASRS, COPERS, Red Shirt time, Rural Metro, out of state time etc. You might want to consider making any service purchases prior to 7/1/17 or at least look at the cost differences- even if you do not have 20 years of service. (New provision)
Remember that in order to purchase prior military, Rural Metro or out of state service, you must have 5 years of membership or service credit in PSPRS. Other service purchases/transfers do not require a 5 year wait.

PSPRS representatives have told me that they will not be updating the service purchase website and online service purchase calculator or even providing specific details until the effective date of the law which is on or around August 6th. In the meantime, you can check what the higher cost is now and then around August 6th when the updated calculator is posted, recalculate your cost to see the difference. The web address for PSPRS is www.psprs.com . Click on the “Public Safety” link at the top of the page and this will take you to the Public Safety page.

This is my personal summary of the legislation and only intended as a general overview. This summary is based upon conversations with the PSPRS lobbyist and PSPRS Service Purchase staff. Please refer to PSPRS and HB2019 for specific details and information. PSPRS will be providing more information in the near future. I know this is pretty lengthy (omitted) if you have any questions or require any additional information.
We hope this information will be helpful to you. Stay safe out there, one and all.

Bryan Jeffries
Professional Fire Fighters of Arizona
The gist of this is that any active PSPRS member who wants to purchase service time will need to do it before July 1, 2017 or he or she will have to pay significantly more.  How much higher? I went here to see the cost difference between the old and new rates.  I calculated a service purchase estimate for myself of three years at 20 years of service (with an average high three-year salary of $75,000) under the old higher discount rate and the new lower discount rate and found a difference of about $28,500 in cost--$65,161 versus $84,475.  This amounts to a 29.6% increase in the cost of the service purchase for me.  The estimate will vary depending each member's own date of birth, service time, and average salary.

Several points need to be made here.  The first is that we can once again see the utter cluelessness and naivete of the Professional Fire Fighters of Arizona (PFFA) and the other state public safety unions.  The PFFA's appeasement of the Arizona Legislature over the last year or so apparently has no limits.  The oddly triumphal tone of PFFA President Bryan Jeffries' message shows this.  He considers this a victory?  A year-long reprieve?  The hundreds of thousands of dollars this will cost public safety members over the years seems not to register any alarm or outrage with him or any of the other state union leaders.  I guess Mr. Jeffries and the other leaders were too busy giving away member benefits through the front door to notice the stuff being taken out the back door.

This brings us to my next point.  If we go to the PFFA's "Leadership" page, we see listed a Director of Legislative Affairs, a Political Director, a Director of Government Affairs, and two Staff Representatives.  I assume the law enforcement unions have similar men and women on their staffs.  These individuals, whose job it is to stay abreast of changes that affect PSPRS members, could not head off this change to the service purchase policy?  The only purpose of the PFFA and other state public safety unions is to lobby the Arizona Legislature and protect member benefits at the state level, and yet they allow this to happen?  What about all the political capital they should have gotten by working with State Senator Debbie Lesko and others in the Arizona Legislature during their sellout of future PSPRS members?  Once again, I guess the Legislature figured if the state public safety unions were so willing to sell out their own members, why not help themselves to a few more member benefits as well.

This brings us to the transparency-challenged leaders of PSPRS.  While I never expect much from the PSPRS administration, they can always surprise us with their arrogance.  Mr. Moore writes that PSPRS ". . . will not be updating the service purchase website and online service purchase calculator or even providing specific details until the effective date of the law which is on or around August 6th."  Well, that's a very service-focused attitude by the PSPRS administration.  They will tell us about the thousands of dollars in cost increases to PSPRS members when they are good and ready!

While it is easy to focus on the ineptitude and indifference of the state public safety unions and PSPRS administration, we should not miss the most important point that needs to be made here.  Mr. Moore wrote:
The discount rate is the rate used by pension plans to discount the cost of future liability for these service purchases to present value and takes into account the short-term risk of not meeting the assumed rate of return. The main reason for the cost increase was because the new discount rate was around 4% instead of the previous discount rate which was equal to the assumed earnings rate of the PSPRS fund which was 7.5%.
I have placed in italics the critical part of this passage.  So PSPRS will extract from the member a higher service purchase payment due to "the short-term risk of not meeting the assumed rate of return." This implies that a member is doing something similar to buying an individual annuity, rather than contributing to the combined investments managed by PSPRS, which has no short-term horizon.  Furthermore, a PSPRS member who buys service time is likely to have an investment period of 20 years or more for the purchase price he pays.  Does PSPRS consider 20, 25, 30 years short-term?  Why does a member buying service time at 45, 50, or 55 years old with a life expectancy of 75 years or older have to bear the cost of short-term failures to meet the assumed rate of return (ARR)?

If PSPRS cannot earn its ARR over a 20-year or longer period, the failing is on PSPRS, not the individual members buying service time.  It is called an "assumed" rate of return for a reason.  It takes into consideration the long-term ups and downs of the markets to get an annualized rate that should hit that expected rate.  The justification for using this lower discount rate for service purchases makes no sense.  It is merely a form of extortion that will discourage members from buying service time at all.  PSPRS members do not control how much PSPRS earns over the long or short term ,the Board of Trustees and the PSPRS staff do.

By expecting PSPRS members to use a lower discount rate for service purchases, PSPRS is being indicted as either incompetent, deceptive, or some combination of both.  PSPRS assures us they can earn 7.5% (or 7.4% now) with their "nationally recognized" investment strategy, so forcing PSPRS members to pay more by using a lower discount rates indicates a high expectation of low earnings by PSPRS.  The PSPRS administration must feel no confidence in their own abilities or else they just don't care since I have not seen them come to their own defense and point out the unfairness of this new service purchase policy to PSPRS members.  In the end, I do not understand why, if the Governor and the Arizona Legislature have so little faith in the ability of the current PSPRS administration and Board of Trustees to earn the ARR, they don't get rid of them and bring in some people who can.