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

If you were wondering how much your refund from PSPRS was going to be, reader Rick Radinksy has discovered a relatively simple method of cal...

Friday, June 9, 2017

***Hall v. EORP is finally concluded and the lower pre-judgment interest awarded***

Judge Thomason has reached a decision in Hall v. EORP.  Plaintiffs will not receive the higher 10% rate as if the settlement were based on a loan, indebtedness, or other obligation.  There is not an actual interest rate attached to the judgment, but it should be around 5% based on the current prime rate.

This should end the Hall v. EORP case, unless the plaintiffs decide to appeal the interest rate decision, as attorneys' fees were awarded and the judgment was also upheld.  The final decision in this case should apply in Parker v. PSPRS as well, at least as it pertains to a pre-judgment interest rate.  I do not know if the plaintiffs will challenge the constitutionality of the change in the PBI/COLA formula implemented last year by Proposition 124.

You can read the full decision here.

Thursday, June 8, 2017

The lastest on refunds of excess contributions in the Hall v. EORP and Parker v. PSPRS cases (Update 2)

I would like to thank the anonymous commenter who provide information and a link in the last post.  The comment pertains to the rate of interest and references a May 11, 2017 appellate decision in Arizona State University Board of Regents v. Arizona State Retirement System (ASU v. ASRS).  The case in question has some interesting similarities and differences from Hall v. EORP that could influence the decision in Hall and Parker.

Like Hall and Parker, ASU v. EORP involves and overpayment of contributions, but the contributions in ASU v. EORP appear to be employer contributions for an unfunded actuarial liablity claimed by ASRS.  ASRS demanded a payment of over $1 million from ASU with a penalty of 8% annual interest on any amount not paid within 90 days.  ASU made the payment but sued ASRS over the claim and won.  This reversed the debtor/creditor relationship, and ASRS had to refund the payment.  As in Hall, the final sticking point was over how much interest to charge.  The Superior Court judge order the judgment rate of "the lesser of ten percent per annum or at a rate per annum that is equal to one percent plus the prime rate as published by the board of governors of the federal reserve system," rather than the ten percent per annum rate on "any loan, indebtedness, or other obligation."  The rate awarded at the time was 4.25%, less than half what would have been awarded on a loan, indebtedness, or other obligation.

ASU disputed this interest rate, in particular because it was based solely on a judgment.  They prevailed in this argument and have been awarded the ten percent rate.  The Appeals Court decision is only six pages long, but the gist of it is that ASRS treated the original demand for payment like an indebtedness, which included a punitive interest rate for any delay in remittance, that was required to pay an actuarial unfunded liability.  If this was the case when ASRS was the creditor, it was equally applicable when ASRS became the debtor and had to pay the same money back to ASU.  This certainly seems like a fair and reasonable rationale.

The question for us is would this be applicable in Hall and Parker?  While there was no formal demand for payment from PSPRS to employees for the extra contributions, employees had no choice but to pay them, and the extra money was just taken from them whether they consented to it or not.  Employees did not formally agree to give or loan money to PSPRS.  The government used its power to extract it from their paychecks.  As ASU did, employees paid it then went to court to challenge the additional amount.  If we look at page 14 of PSPRS' 2016 Consolidated Actuarial Valuation, it describes the additional 4% paid (the excess contributions) in that fiscal year as a "portion used to pay down unfunded liability."  So we see that PSPRS members unjustly had a part of their earnings taken (no threat of punitive interest was necessary as they had no choice in whether to make the additional contributions) to pay an unfunded PSPRS liability.  Now like in ASU v. ASRS, we see the script flipped and the debtor and creditor switching places.

However, this is no slam dunk for an award of ten percent per annum interest.  ASU v. ASRS was a dispute between two parties over a specific issue involving 17 individuals taking part in a termination program.  In the judgment of ASRS, ASU was in arrears to ASRS.  ASU disagreed and the court agreed with them.  In regards to the Hall and Parker cases, EORP and PSPRS were making no demands on their respective employees and were simply following the requirements of SB 1609, for which the Arizona legislature was responsible.  This major difference seems likely to reduce the chances that PSPRS members are awarded a ten percent per annum rate of pre-judgment interest.

This is all in the hands of Judge Thomason now.  The latest information on the Hall case says that the matter is under advisement, meaning the judge is making his decision.  Once again, I would like to thank the reader who referenced this case.  It is often difficult to keep up with everything that is going on, and any help that can be provided is greatly appreciated.

Wednesday, June 7, 2017

The lastest on refunds of excess contributions in the Hall v. EORP and Parker v. PSPRS cases (Update 1)

Here is the latest, albeit minimal, information on the Hall v. EORP case that was posted on PSPRS' Facebook page:
Hall-Parker non-update update: The issue of interest was not settled during yesterday's trial court hearing for the Hall lawsuit. The court is expected to issue an order in the following days although the ruling will pertain to EORP. 
Applicable interest for PSPRS members impacted by the Parker lawsuit is expected to be determined sometime next month. 
However, PSPRS is working to soon provide employers with itemized lists of impacted employees and the pre-judgment (without interest) amounts owed to each individual.
This paves the way for member refunds as soon as possible, followed by separate payments to cover any interest awarded by the court. 
PSPRS will continue to provide updates as they develop.
Obviously, the plaintiffs and EORP do not agree on what a fair interest rate should be.  It would be intersting to know how far apart the parties are and on what rationale each side is basing its proposed interest rate.  We previously discussed what a fair interest rate might be in this post, which as of the end of January 2017 was an annualized rate of 5.42%, which is what I estimated PSPRS had actually earned on members' excess contributions.  This would mean that PSPRS would neither lose nor gain money on the excess contributions during the period they were being taken.  The latest annualized rate will be somewhat higher since PSPRS earned over 1% per month in February and March 2017.  It is possible that the plaintiffs could be arguing for a much higher interest rate by pointing to the S&P 500 or some other stock index or combination of indices as a baseline for what they could have earned if the excess contributions had never been taken from members.  However, this would be unfair to several groups, including employers, taxpayers, PSPRS members, and PSPRS itself, all of whom had no responsibility for SB 1609, and should not be punished for following through on its implementation.

Today's PSPRS post says that a decision should be coming in "the following days," which could be tomorrow or anytime in the future.  I believe that a decision should be relatively quick, though, since it is a specific number that the judge believes will deliver a fair amount of interest.  I do not see any legal nuance to this, and the judge has already had time to review the motions from both plaintiffs and defendants and heard their oral arguments advocating their respective positions.

It appears that the pre-judgment interest rate for EORP plaintiffs will be used up until Judge Thomason issues his final ruling in Hall v. EORP and that post-judgment interest has not been accruing since the Arizona Supreme Court decision in November 2016.  The next scheduled court date in Parker v. PSPRS is on July 12, 2017.  Though there is a different judge presiding over that case, I do not see why that judge would order a different pre-judgment interest rate as EORP and PSPRS invest their contributions in the same large pool of investments.  Employers were just given the go-ahead to start refunding excess contributions on May 31, 2017, and assuming there is a final judgment in Hall prior to July 12, 2017, this gave employers only six weeks to set up a system for refunding excess contributions to affected employees and retirees before post-judgement interest, which can be as high as 10%, begins to accrue on employers.

If we look at the PSPRS Return of Contributions Memo from the May 31, 2017 Board of Trustees meeting, it includes a legal opinion about how to return excess contributions from both Hall and Parker.  That legal opinion is dated May 25, 2017, only six days before the meeting and over six months since the Arizona Supreme Court decision in Hall.  PSPRS' post from today states that they are "working to soon provide employers with itemized lists of impacted employees and the pre-judgment (without interest) amounts owed to each individual."  So PSPRS has not yet gotten individual amounts to employers, even though employers will soon begin accruing post-judgment interest on unpaid excess contributions?  PSPRS also advises employers to give employees a chance to change their withholding rates and contribution amounts to tax-deferred accounts.  Nevermind, the time necessary for consultations to take place between employers and their union representatives, who then have to get answers out to their membership.

We once again see the unprofessional and shabby treatment by PSPRS of its stakeholders.  To be so out of touch with the realities faced by PSPRS local boards, employers, and union locals, those they are supposed to serve, is a disgrace.  PSPRS needlessly imposes costly financial deadlines on employers and administrative burdens on local boards and union locals all while they dilly-dally and move with no sense of urgency on their end.  PSPRS literally had years to figure out what they were going to do if Hall was decided in favor of the plaintiffs, but they never established any timelines to aid this process once the decision came down.  Of course, if you really want to get a true picture of PSPRS' management and Board of Trustees, we can always look to their own words.  This appears in the Return of Contributions Memo:
Furthermore, it is my recommendation that should an employer choose to utilize contribution credits that we allow pre-judgment interest to be included in those credits.  However, due to the complexity of tracking and coordinating the amounts with the employers, I do not recommend that post-judgment interest be included in the credits so as to entice the employers to return the excess contributions as quickly as possible. (italics mine)
I do not know who the "I" in this passage, but it takes an especially arrogant and clueless individual to imply that employers, who will be doing all the hard work of getting refunds out to employees and were given a short timeframe to do so and very little assistance from PSPRS, need to be incentivized to do the right thing.

Wednesday, May 31, 2017

The lastest on refunds of excess contributions in the Hall v. EORP and Parker v. PSPRS cases

In case you have not seen this, PSPRS posted this to their website today:

Board of Trustees takes action on Hall-Parker payments
PSPRS to pay PBIs and provide refund amounts
The PSPRS Board of Trustees today voted to recommend that employers begin refunding employee contributions related to the Hall and Parker lawsuits. The decision impacts certain active and retired members of EORP and PSPRS, but does not settle what interest will be owed to members of either plan.

Per federal regulations, the refunds cannot be paid back by PSPRS to members, but instead must be done by the employers. However, PSPRS will allow for employer contribution credits in the amount to be paid back to help employers who need to use that method to free up funds. PSPRS will soon provide employers with the names of impacted employees and retirees, as well as itemized lists of contribution amounts owed to each individual. When determined, pre-judgment interest will be allowed in the employer contribution credits, but post-judgment interest will not.

In the interim until individual contribution amounts are provided, the PSPRS Board of Trustees also strongly recommended that employers work closely with their Local Boards to decide on the method and manner of repayment that is in the best interest of the employees and employers.

Additionally, all contributions being returned are considered wages and must be taxed as such. However, the forthcoming interest payments are not considered wages and do not need to be taxed by the employer, provided the employer receives a Form W-9 for each affected employee. Therefore, it is strongly recommended that employees be given the opportunity to adjust their tax withholdings and deferred compensation arrangements.

Furthermore, the Board directed staff to pay out the retroactive permanent benefit increases for those PSPRS, CORP and EORP retirees entitled to increased benefits before the end of June. Again, these retroactive increases will not include any interest at this time.

PSPRS will continue to provide pertinent updates to members, employers and local boards. Interest rates to be applied to Hall-Parker lawsuit contribution refunds and retroactive permanent benefit increase may or may not be settled through a June 6 Maricopa County Superior Court hearing.
Please see the following document for the in-depth report provided to the PSPRS Board of Trustees on this issue.
There is a 22-page report linked to this message, so there will be more to talk about this after we all have a chance to take a closer look at it.  My immediate takeaway is that this is a recommendation to employers and, based on the steps PSPRS is encouraging employers to take during this process, there still seems to be a lot more work to do before money can even begin to start coming back to effected PSPRS members.  While the PSPRS Board of Trustees crows that they are taking "action on Hall-Parker payments," this seems like another case of PSPRS blindsiding employers and local employee representatives with a sudden decision that leaves them scrambling to get this completed.

Wednesday, May 3, 2017

Smouting off: The PSPRS Administrator shows Arizona how arrogant and out of touch he is

PSPRS Adminstrator Jared Smout has taken his crybaby act public with his May 1, 2017 editorial in the Arizona Republic.  Mr. Smout is again complaining about the Pew Charitable Trust's April 12, 2017 report on state pensions' use of alternative investments, and in particular, the Arizona Republic's article about the Pew report.  He takes issue with how the Republic interpreted data in the Pew Report and feels that this gave a misleading impression of PSPRS' investment performance.  This is funny coming from the leader of an organization that routinely cherry-picks data to make its performance look good and self-selects which peers to compare itself against and what date ranges to assess its returns.  Mr. Smout apparently got upset when a news organization took what an independent organization found and reported it to its readers, rather than taking what PSPRS says as the only "real" version of the facts.

However, we should be fair to Mr. Smout and PSPRS and look a little closer at the data in the Pew Report.  If we go to the Public Pension Investment Metrics table ("the metrics table") on pages 4-10 of the report, we see what are the most important numbers, the 10-year annualized returns through FY 2015.  These returns allow us to see how the 73 state pension funds, which represent 95% of all state pension fund investments, compare to each other on the most objective metric.  The only problem with the metric table is that not all of the returns are reported net of fees.  Mr. Smout makes a big deal about this problem in his editorial writing, "A full one-third of the 73 pensions examined didn’t even bother to report their fees," so I wanted to see how much this affected PSPRS' ranking among the 73 funds.

The Republic appears to get its third-worst ranking from Figure 11 on page 22 of the report, which ranks those plans that reported returns, net of fees.  Figure 12 on the next page ranks plans that reported returns, gross of fees.  Using the metrics table, irrespective of whether 10-year annualized returns were gross or net of fees, we can see that there are actually five state pension funds that performed worse than PSPRS.  27 state pension funds reported returns gross of fees, including the Retirement Systems of Alabama, which was one of the five that did worse than PSPRS.  11 of the 27 had returns at 7.00% or higher, 12 of the 27 had returns between 6.00% and 6.99%, and 4 of the 27 had returns between 5.00% and 5.99%.  PSPRS' 10-year annualized return, net of fees, was 5.22%

Since we cannot determine from the Pew report how fees affected each of these 27 state pensions' returns, we will have to utilize our own method.  Since PSPRS has the highest percentage of alternative investments and likely the highest percentage of returns paid out in fees, we can look at PSPRS' fees to get a number we can use.  In FY 2014, 2015, and 2016, the difference between PSPRS' gross and net returns was 0.54%, 0.53%, and 0.43%, respectively.  To be safe, let's use 0.60% as the percentage in aggregate fees paid by those state pensions that did not report returns, net of fees.

Using this 0.60% fee percentage, 23 of the 27 of the pension funds reporting returns, gross of fees, still outperformed PSPRS, as they earned at least 6.00%.  Of the remaining four pension funds that reported returns, gross of fees, three had returns lower than PSPRS' 5.22%, one of which was the aforementioned Retirement System of Alabama.  In total, regardless of whether returns were reported gross or net of fees, a total of seven state pension funds performed worse than PSPRS in 10-year annualized returns.  Two state pension funds, the Pennsylvania State Employees Retirement System and the Vermont Teacher Retirement System, were just barely being beaten by PSPRS by 0.02% and 0.05%, respectively.  (In reality, though it is likely my 0.60% fee percentage estimate is too high and means they almost certainly outperformed PSPRS as well.)  So, using the Public Pension Investment Metrics table, if we want to correct the Arizona Republic, we can see that PSPRS is actually the eighth-worst performing state pension fund, although I did not see Mr. Smout mention this in his editorial.  

By my count, 53 of the 73 state pension funds had, at least, a 10-year annualized return of 6.00%, net of fees.  (As earlier, subtracting 0.60% from any pension fund that reported returns, gross of fees)  Of the 65 state pension funds that outperformed PSPRS, 53 outperformed PSPRS by over 0.78%.  For some perspective, if that additional 0.78% was compounded annually over 10 years on PSPRS' $9 billion fund, it would have earned PSPRS an additional $650 million.  If PSPRS had earned the 6.90% 10-year annualized returns of the Arizona State Retirement System, PSPRS would have earned an extra $1.045 billion.  Once again, Mr. Smout fails to bring this up in his editorial.

I think we can all see the bigger problem here.  Despite all his indignation and outrage, Mr. Smout can only criticize the Republic for its different interpretations of parts of the Pew report, not any deliberate falsehoods or misrepresentations, and make more tired excuses for PSPRS' poor returns.  At best, he can now proclaim that PSPRS is actually only the eighth-worst state pension fund in America, not the third-worst as the Arizona Republic reported.  In his own whiny way, Mr. Smout shows the neutral stance of the Pew report, which made no conclusions about the efficacy of alternative investments or what, if any, amount of alternative investments was ideal.  It gave recommendations and objective data for readers to interpret and draw conclusions.  It is from this objective data that we get the negative picture of PSPRS, and that is what the Republic reported.
When we see the arrogant, defensive, and hair-splitting reaction of the leader of PSPRS, we can get a window into the culture of PSPRS management.  The editorial written by Mr. Smout did nothing to prove anything, except that the writers and staff of the Republic should question the credibility Mr. Smout, other members of the PSPRS administration, and its Board of Trustees.  If you want another peek into that culture, look at the reaction the Republic got when they initially questioned PSPRS spokesman Christian Palmer about the Pew Report:
When Republic reporter Craig Harris asked Palmer about higher fees and more specifically which company gets the highest fee for its performance for the trust, Palmer said the reporter’s question “ignores a fundamental of alternative investments” and referred The Arizona Republic to an online tutorial on investing.
The reality is that PSPRS' managment is failing PSPRS members, taxpayers, and employers.  The Pew report is just more evidence of that.  Yet, according to Mr. Smout, "Great things are happening at PSPRS as we leave the past behind and move forward. We invite you to join us."  I suppose if I was completely out of touch and made $200,000+ a year, regardless of my job performance, things would look pretty great to me as well.  I guess he was told by someone to try to end to his editorial on a positive note.  Maybe it was the ghost of Marie Antoinette.

Sunday, April 30, 2017

PSPRS investment returns through February 2017

The following table shows PSPRS' investment returns, gross of fees*, versus the Russell 3000 through February 2017, the eighth 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%
12/31/2016 1.30% 6.43% 1.95% 8.79%
1/31/2017 1.03% 7.52% 1.88% 10.84%
2/28/2017 1.17% 8.78% 3.72% 14.96%

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

PSPRS had another 1%+ return for February 2017, and fiscal YTD has earned 8.78%.  However, the Russell 3000 has pulled more than 6% ahead of PSPRS.  For the fiscal YTD, PSPRS is earning 58.68% of the Russell 3000.  This fits the recent performance of PSPRS, which has usually earned 50-60% of the Russell 3000. 

Based on calendar date YTD returns, it looks as if the Russell 3000 had a small gain in March 2017, but it was up another 1.06% percent in April 2016.  Looking at this month's returns, private equity returned only 0.11% and has earned 11.51%, gross of fees, for the fiscal YTD.  This is funny timing, considering how much effort PSPRS just put into explaining how great their private equity returns have been.  One would expect private equity returns to show higher returns in a bull market, and PSPRS uses the Russell 3000 + 100 basis points as its benchmark.  The lag between PSPRS' private equity returns and the Russell 3000 gives us an indication of how unpredictable and risky private equity investments can be.

 * 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.