Featured Post

Après Hall, the déluge: What comes next for PSPRS members

Now that we have a day for the Hall v. EORP decision to sink in, let's look at some of the issues:   Where's your money? : How an...

Tuesday, January 31, 2017

Hall of mirrors: What issues are holding up the final resolution of the Hall case?

We are a month into 2017, and PSPRS members know only a little more about the final resolution of Hall v. EORP than they did in November.  The latest information from PSPRS came in PSPRS' Second Quarter Newsletter.  Here is what it said:
The timetable for a conclusion to the Hall lawsuit – and the related Parker lawsuit impacting PSPRS – is still difficult to estimate.
As advised in mid-December, EORP, the Hall lawsuit defendant, filed a motion to reconsider with the Arizona Supreme Court that will likely extend the timeframe for the implementation of any remedies ordered by the courts.
The motion seeks additional explanation to the court’s conclusion that the 2011 contribution rate changes violated the state constitution but does not amount to an “appeal” of the court’s actual decision. The Hall opinion released by the court in November relied on case law but resisted an analysis based on the state constitution’s contract clause, which is what EORP and the state requested in their motions.
Assuming there are no changes to the court’s conclusion, the Hall litigants still have to return to the trial court to decide how to provide the refund of excess contributions to affected EORP members hired prior to July 2011. The outcome of the lawsuit will also have to be reconciled with Parker v. PSPRS, which presumably would result in excess contribution refunds being made available to impacted public safety employees. There is also the possibility that a court could apply a different remedy to the Parker lawsuit than the contribution refund ordered in the Hall lawsuit by the state supreme court.
PSPRS will continue to provide Hall and Parker lawsuit updates as information becomes available.
This has some good information, particularly the last sentence of the third paragraph, though I would say that, if anything, the contract clause strengthens the case law under Yeazell, which held that the pension plan existing when an employee commenced employment was a binding contract that could not be changed unilaterally by the employer (or in this case the Arizona Legislature), unless the change favored the employee.  However, the a possible rationale behind the motion to reconsider becomes apparent when we read what Bryan Jeffries, president of the Professional Fire Fighters of Arizona (PFFA) wrote in November 2016 soon after the Hall was decided:
The pension reform approved in Proposition 124 in May includes changes directed at new hires, which are not affected by this decision in Hall v. EORP, since they don’t have a vested interest before employment begins.  There is also a change to the COLA for current and future retirees: COLA will be based on the consumer price index for Phoenix, capped at 2 percent, and pre-funded.  This provision is not directly affected by the Hall ruling because the Court in Hall based its decision on the pension clause.  As you know, Prop 124 specifically excepted the pension clause for purposes of enacting the one-time statutory changes to PSPRS with respect to current and future retirees (attached).  Therefore, there is no direct application of Hall to Prop 124.  However, Prop 124 could still be subject to a challenge under the contracts clauses and a plaintiff could rely on Hall to argue that actuarial soundness does not justify the breach of contractual rights.  It is difficult, if not impossible, to know how a court would decide a contracts clause case and whether the facts surrounding the enactment of Prop 124 are distinguishable enough from the facts in Hall that we could still make a financial soundness argument.
I put in boldface a possible explanation as to why EORP and the State may be asking for an analysis based on the contract clause.  They may be trying to head off any challenges to Proposition 124 based on the contract clause, a legal concept also included in the US Constitution, by getting a clear decision in advance of any challenge to the PBI/COLA changes implemented by Proposition 124.  Depending on how the court rules, this could discourage or encourage lawsuits to nullify Proposition 124.

The Arizona Supreme Court website shows that the plaintiffs (Hall) have until February 3, 2017 to file a "Response to the Motion for Reconsideration."  This is where it gets interesting for all of us who are waiting to find out when refunds will be issued to those who are owed back permanent benefit increases (PBI's) or refunds of excess contributions.  In a Hall update on December 13, 2016, PSPRS wrote this:
The Supreme Court will issue its mandate within 15 days after the final disposition of any motions for reconsideration. The issuance of the mandate will terminate the appeal process, and return jurisdiction to the Superior Court of Arizona, which only then can address the unresolved issues. These unresolved issues involve determining a method for restoration of excess contributions and unpaid PBI, allocation and amount of fees, and the question of prejudgment interest.
This leaves a lot of mystery as to what happens next.  It says the "Court will issue a mandate 15 days after the final disposition of any motions for reconsideration," but what constitutes the "final disposition?"  I do not take this to mean that on February 18, 2017 the Court will issue a mandate.  I take it to mean that a mandate will be issued after they complete the entire process of "reconsideration," which means they could spend some time deliberating over a completely new constitutional facet of the case.  Who knows how long this could take.  I am not an attorney and do not know what is usual practice in a case like this.  They could simply refuse the contract clause analysis and issue a mandate within a few days, or they could take months on the contract clause analysis.  I don't know.

While the motion for reconsideration remains up in the air, it appears that there is little that PSPRS can do to inform PSPRS members about a timeline for the final implementation of the remedies in Hall (EORP) and Parker (PSPRS).  (Remember that Parker is the actual lawsuit against PSPRS and was stayed until the resolution of Hall, as both contested the same issues about PBI/COLA changes and contribution rate changes.  It made no sense to litigate two virtually identical court cases, and the parties in Parker agreed to abide by the Hall decision.  This was also done in the Fields (EORP) and Rappleyea (PSPRS), cases that EORP and PSPRS retirees won several years ago.

While it is accurate that PSPRS is unable to move forward with the implementation of remedies while the motions for reconsideration remain unresolved, PSPRS looks to already be making excuses for delays after the final mandate is issued.  The Hall update referenced earlier says:
The issuance of the mandate will terminate the appeal process, and return jurisdiction to the Superior Court of Arizona, which only then can address the unresolved issues. These unresolved issues involve determining a method for restoration of excess contributions and unpaid PBI, allocation and amount of fees, and the question of prejudgment interest.
Philip Hall's lawsuit against EORP started in the Maricopa County Superior Court.  You can read Judge Randall Warner's decision in favor of Mr. Hall here.  I find it odd that among the unresolved issues that PSPRS list are fees and prejudgment interest.  While Mr. Hall won his case on constitutional grounds, Judge Warner ruled that he was not entitled to attorney's fees or prejudgment interest.  However, the Arizona Supreme Court ruled :
. . . we affirm the trial court’s judgment with respect to the unconstitutionality of the two provisions of the Bill at issue, but reverse with respect to the court’s denial of attorneys’ fees, prejudgment interest, and relief against the State.
If the Arizona Supreme Court allowed both attorney fees and prejudgment interest, how are these "unresolved issues"?  I suppose there could be a question about exactly how prejudgment interest will be calculated, but it is likely that there is precedent and that formulas already exist to calculate it.  Regardless, attorneys' fees and prejudgment are no longer on the table.

PSPRS also claims that "determining a method for restoration of excess contributions and unpaid PBI" is an "unresolved issue."  Judge Warner wrote in his decision that "The Elected Officials' Retirement Plan, shall within a reasonable time, remedy the above-described constitutional violations."   By calling this an "unresolved issue," PSPRS is implying that the Superior Court has some role in determining how to design and implement the refund of excess contributions and the payment of overdue PBI's.  As Judge Warner made clear in his decision, PSPRS is solely responsible for making this happen "within a reasonable time."  Judge Warner's decision was two years ago.  I would say a reasonable time has long since passed, and PSPRS should be ready to make payments the minute they leave court for the final time in this case.

PSPRS is breaking new ground here when it comes to failing its members.  They are now making disingenuous, preemptive excuses for their failures.  It's a brilliant strategy that combines a can't-do attitude with a buck-stops-somewhere-other-than-here sense of responsibility.  This strategy will allow us all to better appreciate all the things PSPRS doesn't do for its members.  After all, if you don't expect too much from PSPRS, you won't be disappointed.

Sunday, January 29, 2017

PSPRS investment returns through November 2016

The following table shows PSPRS' investment returns, gross of fees*, versus the Russell 3000 through November 2016, the fifth 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%
8/30/2016 1.76% 3.40% 0.26% 4.23%
9/30/2016 0.71% 4.14% 0.16% 4.40%
10/31/2016 -0.27% 3.86% -2.16% 2.14%
11/30/2016 1.17% 5.07% 4.48% 6.71%

There is usually about a two-month lag in PSPRS reporting its investment returns, though PSPRS waited until January 2017 to report the September, October, and November 2016 returns.

The last three months have been an interesting time for the markets.  The domestic stock market has so far reacted favorably to the election of Donald Trump.  We are also seeing an increase in inflation with the annual inflation rate at the end of 2016 reaching 2.1%.  This is the first time the annual inflation rate has been over 2.0% since 2011.  The Federal Reserve has also taken a more hawkish stance and increased interest rates in December 2016.  This was the first increase in a year with three more increases anticipated in 2017.

Looking at PSPRS' current fiscal year returns, we see the same pattern as we have seen in the past.  PSPRS tends to beat the Russell 3000 when the Russell 3000 has low or negative returns as in August, September, and October, but PSPRS greatly lags the Russell 3000 when the Russell 3000 has high returns as in July and November.  The good news is that PSPRS it has shown positive returns in nine of the ten investment classes for the fiscal year-to-date (YTD).  Only the risk parity class has shown a lost for the current fiscal year.  Six of the nine asset classes with positive returns beat their fiscal YTD benchmarks.  The markets continued upward since November, so we will be able to see if the pattern continues with PSPRS falling further behind the Russell 3000 in December 2016 and January 2017. 

 * 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.

Monday, November 14, 2016

PSPRS members: How to calculate what you paid in excess contributions to PSPRS

Reader Rick Radinksy has discovered a relatively simple method of calculating one's excess PSPRS contributions, and he was kind enough to share it with all of us.  The method requires three things:
  • Access to your PSPRS account
  • Excel spreadsheet software
  • A basic familiarity with how to use Excel.
Mr. Radinsky gave a quick explanation of how to find one's excess contributions in the comments of the previous post, but I have taken the liberty of writing some more detailed instructions on how to do it:
  1. Access your PSPRS account, hit the Access tab, then hit the Contribution History on the left side.
  2. At the top of that window, you'll see a drop down menu where you can choose to "select a format."  Choose Excel, then click on the blue "Export" to the right of the drop down menu.
  3. Your computer should give you the option to open the exported file in Excel.  Choose that option, and the file should open in Excel.
  4. Enable editing with the button at the top.  This spreadsheet will show all your contributions to PSPRS since you joined the system.  What you are concerned with are the columns that show amount and (fiscal) year.  This will tell you how much you have contributed in each fiscal year.
  5. Now you need to separate the following fiscal years (FY's) out: 2012, 2013, 2014, 2015, and 2016 and later.  You can do this by separating each FY out to get a total of all that fiscal year's contributions.  For example, FY 2012 ran from 7/2/2011 to 6/30/2012 on my contribution history.  I found it easiest to cut all the data from each FY's pay periods and paste them in a separate sheet.
  6. Once you have a FY's contributions separated out, all you have to do is use the autosum function to total all the contributions for that FY.  Do the same thing for FY's 2013, 2014, and 2015 to get each of those FY's total contributions .  Anything in FY 2016 and 2017 can be lumped together as they have the same contribution rate.
  7. In order to determine the excess contributions for each fiscal year, you will need to know how much of the total contributions for each year was excess.  You can use the following percentages to determine the excess portion:
    • FY 2012: 11.56% excess (1% / 8.65%)
    • FY 2013: 19.90% excess (1.9%/9.55%)
    • FY 2014: 26.09% excess (2.7%/10.35%)
    • FY 2015: 30.77% excess (3.4%/11.05%)
    • FY 2016 and later: 34.33% excess (4%/11.65%)
       8. Multiply these percentages by each FY's total contributions.
       9. The sum of all these amounts is your total excess contributions. 

The excess contributions should be your refunded "principal."  If you have no access to Excel, you can do these by hand, though it will be a bit cumbersome.  Mr. Radinsky notes that you can multiply your total refund by 75% to see what you will be paid, less withholding, assuming a 25% withholding rate.  These totals do not include any pre-judgment interest owed to members.

Thanks again to Mr. Radinsky for sharing this with us.  I am sure many people will find this very helpful.

***Here is some more helpful information from Mr. Radinsky from the comments:

The only thing I would add is that Excel itself isn't necessary. Microsoft has an accessible online version. Also Google Sheets would work, as well as the Apple spreadsheet equivalent.

Friday, November 11, 2016

Après Hall, the déluge: What comes next for PSPRS members

Now that we have a day for the Hall v. EORP decision to sink in, let's look at some of the issues: 

Where's your money?: How and when effected members will be refunded their excess contributions is up to PSPRS.  I have checked their website, Facebook page, and Twitter page, and there is no information to members about what the next steps are.  Once again, we are reminded of the complete lack of consideration PSPRS' management has for its members.  They have gone into Veterans' Day, which I assume is a day off for them, leaving members with no information, despite knowing that this decision was coming yesterday and how eagerly anticipated it was by PSPRS members.  I guess they were too busy planning what they were going to do over the long weekend to give even a brief statement about what we can expect.  However, I did see that their spokesman, Christian Palmer, had time to speak to Howard Fischer of Capitol Media Services yesterday.  You can see what Mr. Palmer had to say to Mr. Fischer in this November 10, 2016 article in the Arizona Daily Star, Arizona pension ruling could mean $220 million in refunds to some workers.  I guess the rest of us can wait until Monday to maybe find anything out. 

How much will you get?  It will be difficult to figure an exact amount for several reasons.  First, the contribution increases were done incrementally over a five-year period, increasing annually by 1%, 0.9%, 0.8%, 0.7%, and 0.6% to reach the full 4% increase from 7.65% to 11.65%.  We are currently in the second fiscal year in which we are paying the full 4% increase, meaning since July 1, 2015, we have been paying the full 11.65%.  Starting in fiscal year (FY) 2012, which started July 1, 2011 and ended June 30, 2012, the contribution rate was 8.65%, FY 2013 9.55%, FY 2014 10.35%, FY 2015 11.05%, and FY 2016 and after 11.65%.  We are in FY 2017 now.

The second complication is that the rate changes were made in the middle of the calendar year, so you cannot simply look at your W-2 or last paycheck of the year and calculate what your excess contributions were.  You would need to know what you made in each half year to get an accurate amount.  Except for the current calendar year, you would have to look at all your paychecks to determine the excess contributions in 2011-2015.

Finally, you may have had changes in what was considered pensionable income over the years.  Most notably would be if you were selling back sick leave.  This was always forbidden by state law, but many employers did not enforce it until the Goldwater Institute sued and forced those allowing it to stop the practice.  Depending on what was or was not pensionable at any particular time, your excess contributions may be impossible to determine without a detailed statement from your employer.

If your employer includes your year-to-date (YTD) pension contribution on your paycheck, you can easily calculate your excess contributions for 2016.  This is because 2016 is the first calendar when the contribution rate did not change on July 1st.  If you take your YTD pension contribution and multiply it 0.343 (4%/11.65%), you can determine your excess contribution in 2016 YTD.  For instance, if you paid $5,000 to PSPRS so far this year, you will be owed about $1,716.

I did a calculation for someone with $60,000 in pensionable income over the five fiscal years between July 1, 2011 and June 30, 2016 here.  The total excess would be $7,800, which is the sum of $600 (1% excess), $1,140 (1.9% excess), $1,620 (2.7% excess), $2,040 (3.4% excess), and $2,400 (4% excess).  For ease of calculation, let's assume another $1,200 for the last six months of 2016.  This would bring a total excess contribution amount of $9,000 for an individual making $60,000 in pensionable income a year since July 1, 2011, not including interest.

How much interest will you get?  The opinion awards pre-judgment interest and refers to A.R.S. 44-1201 (F).  Here is what that statute says:
A. Interest on any loan, indebtedness or other obligation shall be at the rate of ten per cent per annum, unless a different rate is contracted for in writing, in which event any rate of interest may be agreed to. Interest on any judgment that is based on a written agreement evidencing a loan, indebtedness or obligation that bears a rate of interest not in excess of the maximum permitted by law shall be at the rate of interest provided in the agreement and shall be specified in the judgment.
B. Unless specifically provided for in statute or a different rate is contracted for in writing, interest on any judgment shall be at the lesser of ten per cent per annum or at a rate per annum that is equal to one per cent plus the prime rate as published by the board of governors of the federal reserve system in statistical release H.15 or any publication that may supersede it on the date that the judgment is entered. The judgment shall state the applicable interest rate and it shall not change after it is entered.
I have placed in boldface the part that I believe is applicable as this was not a "loan, indebtedness, or other obligation."  So I expect the rate to be one percent plus the prime rate.  The prime rate is currently 3.5%, so members should be paid 4.5% per year in interest.  I do not know if this amount compounds annually, monthly, or daily.  Using our previous example, I calculated, without compounding, 4.5% for each of the first five fiscal years and 2.25% over the last six months of the accumulated principal, the sum of 4.5% of $600, $1,740, $3,360, $5,400, and $7,800 and 5.25% of $9, 000.  This conservative estimate of interest comes to $1,053, but of course, how they decide to calculate interest remains to be seen.

What about taxes?  I would assume that refunds will come in a lump sum since the longer PSPRS holds on to the excess contributions, the more interest will accumulate.  There is also a possibility that the Federal Reserve could raise the prime rate some time soon, which would raise the interest due.  One month of 4.5% annual interest on $220 million would be $825,000, so I think payments will be here before the end of the year.  I am guessing that interest is the Court's tool to keep PSPRS from dragging its feet on paying back members.

As these refunds will be lump sum payments, it is likely that they will be subject to a 25% withholding.  This is not the tax rate, just what I suspect the IRS would withhold from a lump sum refund of excess contributions.  We must remember that these payments (minus interest) are wages so they will be subject to income tax at your particular tax bracket.  This is one reason why it is important for PSPRS to expedite the refunds (and why interest will work as a good incentive).  If PSPRS were to delay payments until next year, members could pay a 25% withholding early in 2017 and not receive a refund for overpaid taxes until a year or more later when they get their 2017 tax refunds.

If there is an issue with a PSPRS member receiving such a large refund that it changed him or her into a higher tax bracket, there might be some way to alleviate this by breaking up the refund payment over two calendar years, perhaps with one payment in December 2016 and the other in January 2017, or to transfer some of the money into a tax-deferred account.  Hopefully, this will not be an issue for very many members.

What happens to our employers?  The referenced article by Mr. Fischer states that the Hall decision will increase pension liabilities for EORP and PSPRS by $1.3 billion.  As of FY 2016, EORP had only 738 active members versus 18,409 for PSPRS, so it is safe to assume that nearly all of that $1.3 billion in increased liabilities belongs to PSPRS, though I do not know how many of the 18,409 joined PSPRS in 2012 or later and are not affected by the decision.  Furthermore, EORP was closed to new members starting in 2014 and has not been incurring liabilities for any new members since 2013.

It is important to note that the increase contributions required by SB 1609 were not paying part of the employer's contributions.  PSPRS still calculated the annual required contribution (normal cost plus the cost of accrued unfunded liabilities) as it always had, and employees were still charged 7.65%, while employers had to pay what was left.  The additional employee contributions were in addition to the employees' 7.65% contribution and the full employer contribution.  There should be no misconception that employees were paying any part of their employer's share.  Employers have been paying full freight the whole time SB 1609 has been in effect.

The Hall decision is going to blow big holes in employer budgets throughout the state.  I was able to find an actuarial study from June 2014 that included the possible effects the Fields and Hall decisions would have on PSPRS' aggregate funded ratio and aggregate employer contribution rate as of June 2013.  This study stated that PSPRS' aggregate funded ratio would drop about 3% from 52.8% to 48.9%.  The aggregate employer contribution rate would increase over 6% from 36.17% to 42.49%.  This was a while ago, so who knows how accurate these numbers are.  As of June 30, 2015, PSPRS was funded at 49.0% with an aggregate employer contribution rate of 42.36%.  This is very disturbing since these were last fiscal year's numbers, and they are almost right on with what the actuary predicted in 2014 if the plaintiffs in Hall won, except for the fact that the worsening funded status and employer contribution rate occurred before Hall was even decided!  Who knows how much worse Hall will make things now.

In the end, employees are going to pay for the Hall decision in the long run, most likely in the form of lower paychecks, but also in other ways as well.  I saw that Mesa voters handily rejected Question 1 this past Tuesday by 53%-46%.  Question 1 would have raised the sales tax 0.4% in order:
to fund Mesa Police and Mesa Fire and Medical personnel, equipment, facilities and other services, and governmental and economic development projects, including the ASU project and other post-secondary educational projects.
This ballot initiative was supported by a host of Mesa's elite, including Bryan Jeffries, who is President of the Professional Fire Fighters of Arizona and, I believe, the Mesa firefighters local.  Apparently, none of Mesa's leading lights considered (or admitted) the costs Hall would impose on their city, or that much of the new revenue from the sales tax increase would be eaten up by increased pension costs. The Mesa Fire and Police Departments' pensions are 54.5% and 51.1% funded, respectively, as of last fiscal year end.  At least when the City of Prescott asked for a sales tax increase last year, they were honest enough to say that the new revenue would be used to pay down pension debt. Prescott voters defeated that initiative as well.  And for all you conspiracy theorists out there, I am sure it seems oddly coincidental that word of the Hall decision came out the day after the election.  I suspect that if the Hall decision had come down before the election, Question 1 would have been defeated by an even greater margin by even angrier voters.

There should be more to discuss in the coming days.  To all the past and present service members out there, Happy Veterans' Day, and thank you for your service. 

Thursday, November 10, 2016


Opinion in Hall v. EORP case has been issued.  Here is the relevant passage of the 42-page decision:
Upon transfer from the court of appeals, we affirm the granting of summary judgment to the employed Plan members . As we held in Fields, the Bill’s change to the benefit increases formula violates the Pension Clause because it “diminishes and impairs” the employed members  pension benefits. The Bill’s changes to the benefit increases formula and the contribution rate also violate our holding in Yeazell because the Legislature cannot unilaterally change the terms of the members’ pension contracts once their rights to those terms have vested at the beginning of the members’ employment.  Contrary to the trial court’s ruling, however, we find that the employed members are entitled to attorneys’ fees and prejudgment interest and that the judgment must run against the State as well as the Plan.

Obviously, there will be more to follow.

Countdown to the Hall opinion: Where you will likely see the decision posted first

I am not certain, but I believe that the Hall v. EORP opinion will be available here after 10:00 AM.   That is the Arizona Supreme Court's 2016 opinion search page.  Like everyone else, I would like to read the opinion as soon as it comes out and not have to wait for it to be reported in the media, so I have my fingers crossed that the opinion is ready to be posted online as soon as the clock turns 10:00.

This feels like Tuesday night all over again, doesn't it?