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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 29, 2016

If you're an employer, how do you stop PSPRS from destroying your budget?

In the coming years, we can probably expect to see more and more pieces like this one by Prescott Mayor Harry Oberg, Yes, the State's PSPRS debt can be solved, which appeared in Prescott's The Daily Courier on July 28, 2016.  I find Mayor Oberg's editorial quite interesting, not because of what it actually says, but what can be read between the lines.

If we look at his proposals for eliminating PSPRS' debt, they are all, to varying degrees, non-starters with most falling into the "rich relative(s)" solution that can only work as long as there is actually some entity available that can play that role.  The City of Detroit was only "saved" because contributions obtained from charitable foundations, the Detroit Institute of Arts (a city-owned museum with an art collection valued in the billions), and Michigan's taxpayers were used for to pay for the $800 million "Grand Bargain" that helped limit cuts to pensions and city services.  As far as I know, we have only Arizona taxpayers on which to rely for contributions.

Mayor Oberg offers five suggestions to generally eliminate PSPRS' debt and Prescott's more specifically:

1. "Pool the assets and debt of all Tier 3 PSPRS employees."  As it stands now, only assets are pooled for investment reasons, while every employer has its PSPRS liabilities calculated individually.  This proposal sounds good, but it is a horrible idea.  As with any financial proposal, we should remember basic economics and look at potential unintended consequences.  This proposal will incentivize irresponsible behavior by employers and public safety employees, yet spread the cost to all employers and taxpayers, regardless of how judiciously they manage themselves.  Shouldn't we first ask why there already exists such a disparity in contribution rates between various state employers?  The answer is obviously that some employers and public safety employees have been irresponsible with their finances over the years, despite the fact that they could see their PSPRS liabilities inexorably growing.  Why would expect better behavior if we hide individual irresponsibility in one large debt pool?  Most likely, this will incentivize bad behavior by even those who are inclined to act responsibly.

2. "Add one cent to the state sales tax for a specified period of years until the state PSPRS debt is 80% funded."  Do we need to say any more than we already said about the first proposal?  Mayor Oberg wants to punish everyone in the state for the excesses of individual employers and their public safety employees.  This would include taxpayers who pay for private fire protection or donate to and work at volunteer fire departments.  This seems unlikely to be approved by Arizona voters, and it is especially hypocritical for someone opposed to any increase in Prescott's local sales tax for the same purpose to propose a similar measure for the entire state.

3. "Create a revolving fund similar to the state’s Water Infrastructure Finance Authority of Arizona (WIFA) to allow immediate payment of debt and establish a repayment bond at 2-3 percent." I am perplexed at this fascination politicians have with pension bonds, as if they were some form of free lunch.  Pension bonds are one of the worst things a government can do and act only to postone a permanent solution to pension underfunding.  They remove the immediacy of the pension problem, which also removes the impetus towards the necessary financial discipline that had been missing in the first place.  Pension problems will continue and underfunding will not decrease, and governments end up with the same pension liabilities and pension bond debt.

4. "Obtain state legislative authority to increase the city property tax (with a cap) to a level which will sustain police and fire operations and pay."  Of all Mayor Oberg's suggestions, this is the only one I can see as feasible since both costs and revenue will stay local.  However, money is fungible, and the mayor and council will still be in charge of the budget.  How do they assure taxpayers that they are actually paying down Prescott's PSPRS liability, rather than using the increased tax revenue for other things?  Taxpayers in Prescott already rejected a sales tax increase for this very same purpose, so why would they trust the mayor and council any more with enhanced property tax revenue?

5. "Specifically for Prescott, consider providing pension funding for all the families of the deceased Granite Mountain Hot Shots (GMHS) covered under PSPRS."  I am not completely sure how much Mayor Oberg wants from the state.  He mentions a $5 million payment already paid by the state to cover the pension obligations of the six full-time Prescott firefighters that were part of the GMHS.  I believe he is saying that he wants more to cover those six firefighters' pensions.  I believe he is also implying that the state should also help with the pension obligations of the three seasonal GMHS firefighters who were retroactively awarded PSPRS pensions by the Prescott PSPRS fire board.  He bases these claims on the fact that the GMHS were ordered onto state trust land by the state forestry division.  I do not know the details of the agreements between the City of Prescott and the state forestry division when it came to fighting wildfires, but I would assume that if there was any potential that the state was legally liable for any of the pension obligations, Prescott would already be pursuing this in the courts.  Mayor Oberg is free to make any claim he wants based on compassion, but the choice to staff a hot shot team with all the attendant financial risks for such a small city was Prescott's, not the state of Arizona's.  And while I am not making any statement about the morality of retroactively awarding PSPRS pensions to the seasonal employees of the GMHS, this entirely local decision was made knowing that it had huge financial consequences for the City of Prescott.  Fortunately, there were other programs that helped the families, but Prescott should not expect the state to bear the costs of its decisions.

All these proposals, except possibly for one, are not realistic.  None of them solve the underlying problem for Prescott or any of the other 256 public safety employers.  Mayor Oberg hints at it, but he never comes out and says what that underlying problem is: pension costs fall fully on local entities, though the local entities do not control the pension benefits.  Would Mayor Oberg accept it if Prescott city workers negotiated their wages, health insurance premiums, or vacation accruals with the state legislature?  I would think not.  Yet this is exactly what happens with public safety pension benefits.  The state legislature, which has nothing to lose, negotiates pension benefits with state public safety unions, which have everything to gain, while the local entities have to pay for whatever they agree to.

This most recent pension reform was a perfect example.  The League of Arizona Cities and Towns offered a "yardstick" for pension reform, but as far as I know they played no part after that, despite the fact that they had the most at stake.  Fortunately for the League, the state public safety unions were too busy protecting the benefits of senior members and betraying the next generation of public safety personnel to realize that they set the PSPRS defined benefit pension on the path to extinction, so local entities will make out in the long run.  However, this does not mean that that the legislature and the state public safety unions will not continue to play the same game they have always played.

I hope Mayor Oberg and other local elected officials realize that any enhancement to pensions become permanent via the Arizona Constitution's Article 29, unless changed via a vote of the state electorate (ala Proposition 124 in May 2016).  I suspect that the process of reintroducing harmful policies and unsustainable benefits is already in the works.  If Mayor Oberg wants to do something to help his city, he and other local elected officials should reassert their authority over their own budgets and get more proactively involved in the crafting of state pension statutes.  This strategy will be more ethical, more successful, and certainly more dignified, than begging the state for money.

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.