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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, 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.

Best,
Bryan Jeffries
President
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.

Sunday, July 3, 2016

PSPRS investment returns through April 2016

The following table shows PSPRS' investment returns, gross of fees, versus the Russell 3000 for April 2016, the tenth month of the current fiscal year (FY), with the fiscal year 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%

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.

There is nothing new from last month.  PSPRS is still beating the Russell 3000 by about the same percentage it did last month, though the Russell 3000 did finally climb back into the black for the first time since November of last year.  The Russell 3000 returned 1.79% in May 2016 and 0.21% in June 2016; its fiscal year 2016 return was 2.14%.

As for the individual asset classes, we can still see that PSPRS' fiscal YTD returns are mostly driven by private equity and real estate.  Of the ten major categories, five have negative returns for the fiscal YTD.  Private equity has earned 12.89% and real estates has earned 7.95% in the fiscal YTD; the three other positive classes, fixed income, private credit, and real assets, have earned 3.22%, 3.75%, and 0.83%, respectively for the fiscal YTD.  Also, among the ten major asset classes, only three, non-US equity, private equity, and private credit, are surpassing their benchmarks for the fiscal YTD.

It will be interesting to see how the fiscal year ends for PSPRS.  Brexit turned out to be a non-event as to its effect on the Russell 3000.  We will have to wait until August to see if it had any effect on PSPRS' investments.  PSPRS' next Board of Trustees meeting is scheduled for July 20, 2016.

 * 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.

Wednesday, June 1, 2016

What's next for PSPRS now that Proposition 124 has passed and other questions we would like to see answered


Now that Proposition 124 has passed, what happens now?  The transparency-challenged organization that is PSPRS has deigned to give us this bit of information:


PROPOSITION 124 What does it mean to the retired membership?

On May 17, 2016, the State of Arizona voters had an opportunity to cast their ballots on Prop 124, regarding a COLA (Cost-of-Living Adjustment) for the Public Safety members of the pension fund. The Proposition passed and the new law itself determines the payment schedule and defines the calculation of the new COLA payment. Please note that the passage of Proposition 124 does not affect the members of the Elected Officials’ Retirement Plan (EORP) or the Corrections Officer Retirement Plans (CORP). Here are some questions and answers as to the timeline and other information concerning the COLA:


  • When should we expect to see the first COLA payment? 

  • The first payment will be made with the July 2018 benefit check.



  • Why do we have to wait until July 2018?

  • Proposition 124 becomes law August 6, 2016. The law states that we must prefund this new COLA with a full year of contributions before any payment is made to the members.The contribution rates that will reflect this prefunding will not be published until mid-to-late fall 2016, effective for the fiscal year beginning July 1, 2017. One full year of these contributions ends June 30, 2018. So, the first time we are legally able to pay this COLA will be with the July 2018 benefit check.



  • How is the COLA amount determined?
  • The COLA amount is determined by the change in the Consumer Price Index (CPI) for the metropolitan phoenix-mesa area for the calendar year ending just prior to each July payout.



  • What is the CPI?
  • “The consumer price index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living.” (www.investopedia.com)



  • What percentage or dollar amount will be awarded?

  • The law states that the COLA is up to a 2% cap. For example, if the CPI is 1.8% for theyear, we will award the COLA at 1.8%. If the CPI is 5.2%, we will grant a COLA of only 2% due to that cap. Understand that this means that the percentage, or COLA, will fluctuate each year with the CPI results.
    JaredSig.bmp
    Jared A. Smout
    Administrator

    My favorite part of this series of FAQ's is the last question, which amounts to Mr. Smout telling retirees that they are assured of becoming slowly poorer through their golden years.  If we go to US Inflation Calculator, we can see that between 2001-2015 inflation has been over 2% nine out of the fifteen fiscal years with only one year showing deflation.  In the ten years prior to 2001, inflation was over 2% nine out of the ten years.

    Mr. Smout does not mention that COLA's will now be calculated on a retiree's individual benefit, not the average normal retirement benefit.  This means that those retirees with smaller benefits will no longer see their checks increase at a higher percentage rate than those with higher benefits as the average normal retirement benefit increases over the years.  A benefit check will never change in terms of purchasing power, except that everyone will see their spending power decrease at the same rate via the capped COLA.

    We should also keep in mind that the Federal Reserve's official inflation goal is 2%.  This is the Fed's rationale for this 2% target inflation:
    The Federal Open Market Committee (FOMC) judges that inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures, or PCE) is most consistent over the longer run with the Federal Reserve's mandate for price stability and maximum employment. Over time, a higher inflation rate would reduce the public's ability to make accurate longer-term economic and financial decisions. On the other hand, a lower inflation rate would be associated with an elevated probability of falling into deflation, which means prices and perhaps wages, on average, are falling--a phenomenon associated with very weak economic conditions. Having at least a small level of inflation makes it less likely that the economy will experience harmful deflation if economic conditions weaken. The FOMC implements monetary policy to help maintain an inflation rate of 2 percent over the medium term.
    While this seems justifiable in the macroeconomic sense, this will be of no comfort to those living in the most microeconomic of worlds: retirees on fixed incomes.  So what happens if the Fed overshoots its target and inflation is 3%, instead of 2%?  That extra 1% means that after 20 years an item that cost $100 the first year will be $122 in year 20.  If inflation is 4%, the extra 2% will add over $48 to the cost of the item.

    As we have discussed here before, inflation is great if you are a debtor like PSPRS, which owes billions of dollars to its members.  Inflation will allow it to pay back retirees with cheaper dollars, while it reaps the benefits of higher returns on less risky investments.  Inflation is the magic elixir that will cure all of PSPRS' underfunding.  Of course, it will be on the backs of its retirees.  The defunct excess earnings formula took into account the potential devastation of high inflation, but it was horribly designed and sat like a ticking time bomb that would (and did) eventually wreak havoc on PSPRS.  Now we have another time bomb, only this one will blow up in the face of retirees.

    I did not see the film version of Michael Lewis' excellent book The Big Short, but the book tells how one of the protagonists would refuse to commit to a trade until the salesman explained to him how he was going to f*** him in the deal.  Well, the last FAQ in Mr. Smout's list should have been this same question.  So how is PSPRS going to f*** retirees? The answer is with inflation and a capped COLA.

    Finally, I have one last question for Mr. Smout and Chief Investment Officer (CIO) Ryan Parham.  If you remember, Mr. Parham penned an editorial for the Arizona Capitol Times in December 2014 entitled, "The truth about PSPRS investment performance."   It includes this revealing passage by the man in charge of PSPRS investments:
    PSPRS wants its retirees to enjoy increases, but we are incentivized to seek lower returns in the range of 9 percent to maximize earnings that can be applied to cover – and hopefully reduce – unfunded liabilities.
    It is this flawed mechanism that serves as the main contributor to PSPRS’ funding drop, and unless changed by a vote of the people or the Legislature and upheld by the courts, we are powerless to slow the decline.
    The insistence on assigning blame on PSPRS investment performance – and by extension our employees – for diminishing funding ratios is inaccurate and misleading and a disservice to policymakers, our beneficiaries and the public alike.
    Given the evident constraints they must operate under, our nationally and internationally recognized investment team deserves appreciation for its service to our state, not derision that has no basis in fact.
    Let us ignore the obvious questions about fiduciary duty contained within the CIO's admission that PSPRS was trying to lowball its own investment returns to circumvent the payment of COLA's under the old excess earnings formula.  I think what every PSPRS stakeholder would like to know is: when will Mr. Parham and his crack investment staff begin to produce the higher returns he implies they are capable of achieving now that the excess earning formula is no longer holding them back?

    Mr. Smout and Mr. Parham, we await your answer.










    Friday, May 27, 2016

    PSPRS investment returns through March 2016

    The following table shows PSPRS' investment returns, gross of fees, versus the Russell 3000 for March 2016, the ninth month of the current fiscal year (FY), with the fiscal year 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%

    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 finally crossed into positive territory in 2016.  PSPRS is also showing a positive return for the fiscal YTD while the Russell 3000 is still showing a loss for the fiscal YTD.


    Looking at the breakdown of PSPRS' returns YTD, PSPRS has shown positive returns in only four of its ten major investment classes with the bulk of its gains coming in two asset classes, private equity and real estate, earning fiscal YTD 12.65% and 7.71%, respectively.  Private equity has the second highest concentration of assets at 15.73%, behind only domestic equity at 16.31%.  Real estate makes up just over 11% of PSPRS’ total assets, making it the fourth highest concentration of assets.

    I was interested to see the specific breakdown of PSPRS' individual investments in the private equity and real estate classes.  However, PSPRS did not give such a breakdown in the private equity, absolute return, real assets, and real estate classes, though it does give such breakdowns of the other six major categories.  Valuations of private equity and real estate investments are less straightforward than classes like equities and fixed income investments, and with private equity and real estate making up over a quarter of PSPRS' total investments, full disclosure of these portfolios would show whether PSPRS' returns are too reliant on one particular investment or too concentrated with one particular firm.

    You would think with PSPRS' sketchy past history with its real estate investments the powers that be would be more open about all their investments.  Past Boards of Trustees (and the Fund Managers that preceded the institution of the Board) were abysmal in their oversight of PSPRS' investments, and the current Board inspires no confidence in their oversight abilities.  This makes it all the more crucial that all information about PSPRS' investments be made public so that there are no repeats of the investment disasters of the past.

     * 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.