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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...

Sunday, May 25, 2014

PSPRS investment returns through March 2014

The following table shows PSPRS' fiscal year investment returns (gross of fees*) versus the S&P 500 through the end of March 2014:
 

PSPRS PSPRS S&P 500 S&P 500
Report Date Month End Fiscal YTD Month End Fiscal YTD
7/31/2013 1.94% 1.94% 4.95% 4.95%
8/30/2013 -0.04% 1.90% -3.13% 1.67%
9/30/2013 1.98% 3.92% 2.97% 4.68%
10/31/2013 2.43% 6.44% 4.46% 9.35%
11/30/2013 0.54% 7.02% 2.80% 12.42%
12/31/2013 0.64% 7.70% 2.36% 15.07%
1/31/2014 -1.09% 6.53% -3.56% 10.97%
2/28/2014 2.43% 9.11% 4.31% 15.75%
3/31/2014 1.17% 10.39% 0.69% 16.55%
4/30/2014   ?     ? 0.62% 17.28%

As can be seen, PSPRS' investments had another good month.  PSPRS is still well ahead of its expected rate of return of 7.85%, and it is right on its benchmark target of 10.37%.  Hopefully, the last quarter of the fiscal year will continue along the same lines.

*It is always important to note when talking about investment returns that these returns are gross of fees.  Approximately 0.50%, representing fees paid to outside companies, should be subtracted from the fiscal YTD return.

Thursday, May 22, 2014

If sick and vacation leave sellback aren't pensionable, did employees and employers overpay into PSPRS?

As the debate over pension spiking heats up, things are bound to get more complicated.  To wit, the following passage comes from Tucson Councilmember Steve Kozachik's May 21, 2014 Ward 6 Newsletter:
Tangled Pension Web
In May of last year, Craig Harris was reporting in The Republic up in Phoenix about the Phoenix public safety pensionissue. This was before the Goldwater Institute had filed their lawsuit against the City of Phoenix over the issue of pension spiking with sick leave dollars. At the time the Pension Board system administrator, Jared Smout indicated that the City could avoid a legal judgment by voluntarily agreeing to change its policy. They didn’t and they’re being sued.
As I noted last week, we’re changing our policy to stop allowing unused sick leave to count as pensionable income. As I also mentioned, it’s my contention that we need to further protect ourselves from any claims, and protect the solvency of the public safety pension system by clawing back the money that has been used to spike employee pension benefits – for those workers who have not yet started collecting the benefits. We have the information – we need to disaggregate the unused sick leave dollars from the legitimate base pay.
I’m being told that we can’t do that, for two reasons. First, it’s the Pension Board who calculates the pensions. Second, the higher pension calculation formed the basis for the employee and employer contributions.
To the first point I’d simply say that it’s us who provides the Pension Board the data.  We can correct it. To the second point, everybody knows that pensioners will collect far more than they paid into the system. And if necessary, correct the overpayment by adjusting what they’re paying now, before they retire, or do it in their pension checks after they start collecting.
Jared Smout had suggested something similar last year as it related to recouping money that was improperly paid to the Phoenix police. It was his contention at the time that if Phoenix lost their lawsuit, the Pension Board would have to “figure out what their pension should have been, and any overpayment, and collect that. The way we typically collect is by reducing pensions.” He went on to say that “this potentially would affect a large amount of people.”
I think Smout’s wrong when he suggests that they reduce the pension payments to people who are already out receiving the benefits. That’s spilled milk. But for those not yet off the payroll and collecting benefits, we should absolutely correct the record and make sure what they eventually receive reflects what is allowed by State law. State law says “unused sick leave, payment in lieu of vacation, payment for unused compensatory time or payment for any fringe benefits” cannot be used as compensation to compute retirement benefits.
State law also says that only “base salary, overtime pay, shift differential pay, military differential wage pay, compensatory time used by an employee in lieu of overtime not otherwise paid by an employer and holiday pay” may be used to calculate pension benefits.  That’s pretty clear. We have the data. We need to claw back money improperly credited as pensionable.
This is a budget issue, and it’s an issue that addresses the long term health of the Pension system. If the current police and firefighters wanted to do their part in ensuring the viability of the PSPRS, they wouldn’t be pushing back against me as hard as they have been over fixing this. We should all be in this with a long term perspective, not just the here and now, and today’s all that matters.
This is an issue that I have been intrigued by ever since the legality of counting sick and vacation leave sellback as pensionable income was raised: if they are not pensionable, then shouldn't employees and employers be refunded any pension contributions previously paid on past sick and vacation leave sellback?

If we look at the current fiscal year (FY 2014) that started July 1, 2013, the employee contribution rate for all PSPRS members is 10.35%.  (This will go up another 0.70% on July 1 of this year and top out at 11.65% starting July 1, 2015.)  If a hypothetical employee sells back $3,000 of sick leave this fiscal year, she would pay a pension contribution of $311 on this amount.  If she had been selling back the same amount of sick leave in past fiscal years, she would have paid $296 in FY 2013 (9.55%), $260 in FY 2012 (8.65%), and $227 in FY 2011 (7.55%) and prior FY's.  If she had been selling back sick leave for five years, she would have paid a total of $1,321 in pension contributions on the $15,000 in sick leave sellback pay.

If Councilmember Kozachik is correct that employers should be allowed to claw back excess pension contributions that employers paid, employees should get their talons in there too.  In the case of our hypothetical employee, she should be refunded $1,321, plus some amount of interest, for the contributions on income that is now deemed non-pensionable.  Refunds should, at the very least, cover any employee contributions on sick or vacation leave sellback made in the last eight years since the law passed making those forms of compensation non-pensionable.

Where this gets more interesting is when we look at employer contributions.  Using the same $3,000 annual sick leave sellback, we can see what each of the ten largest employers would have to pay in FY 2014 pension contributions for our hypothetical employee:





FY 14
 FY 14 


 Members 
Rate
 Contribution 
Phoenix Police
         2673
34.50%
 $    1,035.00
Phoenix Fire
         1391
34.95%
 $    1,048.50
DPS
           926
51.99%
 $    1,559.70
Tucson Police
           856
45.75%
 $    1,372.50
Mesa Police
           696
31.21%
 $        936.30
Maricopa Sheriff
           594
35.87%
 $    1,076.10
Tucson Fire
           511
46.77%
 $    1,403.10
Pima Sheriff
           487
35.29%
 $    1,058.70
Glendale Police
           382
27.98%
 $        839.40
Scottsdale Police
           360
26.44%
 $        793.20

From this table we can see how much more the employer has to pay versus the employee, anywhere from 2.5 to 5 times as much.  Remember that these amounts represent only the current fiscal year's contribution.  Past years' contributions would be lower as employer contribution rates have been increasing annually, but future years are likely to be higher than the FY 2014 rate.  For an employer that currently counts sick and vacation leave sell back as pensionable, we can begin to see some pretty large amounts that could be clawed back from PSPRS, depending on the contribution rate and the aggregate sick leave sold back.  If 400 members, approximately 10%, of Phoenix Police and Fire members are selling back an average of $3,000 a year in sick and vacation leave, this would be over $400,000 in pension contributions that could be refunded to the City of Phoenix.  Going back five years, this is around $2 million that could be returned to a city currently dealing with a budget deficit.  This would be in addition to savings going forward on all future sick and vacation leave sold back.

With Arizona's two largest cities having budget deficits, how attractive is this found money going to be if, and most likely when, the Goldwater Institute wins its lawsuit?  Tucson's City Attorney has declared sick and vacation sellback non-pensionable, and as Councilmember Kozachik writes, the City of Tucson has already changed its policy.  I would see it as almost a legal requirement that they pull those excess contributions back and request that PSPRS refund employees their excess contributions as well.  What it comes down to is that types of income are either pensionable or not.  If the policy can change arbitrarily, then employees' income will never be safe.  What if they decide later to not count overtime as pensionable?  Will all the contributions paid on past overtime be forfeited into PSPRS?  Neither employers (i.e. taxpayers) nor employees ever agreed to donate money to PSPRS, which is essentially what they would be doing if they were forced to relinquish past contributions on income that was later declared non-pensionable.  This would certainly be a great way to eliminate funding shortfalls in PSPRS but not right or fair.

In the end, this issue raises a lot of questions.  What would clawing back this money do to an employer's PSPRS funding level and annual required contribution?  Will there be long-term savings to employers that more than offset short-term costs?  How does this affect those working on their high-three years? What about those who have already DROPped?  Will they have their final pensions recalculated and their DROP payouts correspondingly downsized?  Who (else) is going to sue (because someone always does)?  This post really only deals with the issue of what is fair and right, so I have no answers to these questions.  I guess this is why Councilmember Kozachik called his post "Tangled Pension Web."

Tuesday, May 20, 2014

An evolving position (or how I was against PSPRS pension reform before I was for it)

I would like to present the following with a minimum of commentary:

Here is a passage from a May 16, 2011 Arizona Republic editorial by Tim Hill, president of the Professional Fire Fighters of Arizona (PFFA), entitled "Hill: No fix is needed for police, fire pensions":
As president of the Professional Fire Fighters of Arizona, I find myself on the verge of admiration for our state's Legislature and its session recently past. It's not often you can fix something that isn't broken and punish every firefighter and police officer in Arizona - and earn congratulations from the state's largest newspaper in the process.
In the world of Arizona politics, I have to imagine that's what they call a "win-win-win."
Unfortunately, the Legislature's so-called pension reform is bad news for more than 20,000 public-safety workers in Arizona, notwithstanding The Republic's editorial thumbs-up. Let me explain.

Despite the politicians' sound bites, the manufactured "think tank" studies and the ensuing headlines, Arizona's Public Safety Personnel Retirement System has never been at a "financial precipice," nor on the verge of bankruptcy.
Now this from Mr. Hill's President's Message in the April 2014 issue of the Professional Fire Fighters of Arizona Magazine:
Earlier I mentioned stopping our opponents by winning hearts and mind and doing everything we can to better educate citizens, our own members, the media and elected officials.  This effort will continue to take a number of paths, including leveraging the unbiased and educated opinions of academics like Dr. David Wells of the non-partisan Grand Canyon Institute.  As a respected, non-partisan institution and public watchdog, GCI is everything the Goldwater Institute is not.  That's why we were so gratified to read Wells' January 2014 study entitled "Arizona's Pensions: On Track to Financial Sustainability with Retirement Security."
So what does the Grand Canyon Institute, a self-described think tank, say in the executive summary of "Arizona's Pensions: On Track to Financial Sustainability with Retirement Security":
Arizona lawmakers showed great foresight in strengthening the financial situation of the state's pensions with Senate Bill 1609 passed in 2011.  The 2011 reforms, and other modifications to the Arizona State Pension plan since 2004, curtailed the growth of future pension liabilities, and increased cost-sharing with employees.  While the benefits to taxpayers are already being felt, bigger gains will be seen in coming decades, as many changes impact new enrollees more than current enrollees.
Mr. Hill is certainly allowed to change his position when that position has been later proven to be wrong, though if I was a member of the Arizona Republic or Arizona legislature I wouldn't hold my breath waiting for an apology.  Mr. Hill states in his President's Message that he can not go into what the PFFA is currently doing behind the scenes to "fix our pension system."  However, there was no concern shown by unions in 2011 for the effects of pension reform on future hires (those hired in 2012 or later), who are now subject to SB 1609 reforms regardless of any pending court cases.  Now we have unions that represent active workers intimately involved in pension reform.  Among the three groups of PSPRS members affected by pension reform, those hired in 2012 or later have already been dealt with, active employees are negotiating the reforms, and then there are the retirees.  I will let readers decide who they think will take the brunt of any upcoming reform proposals.

Sunday, May 11, 2014

PSPRS members: Even if numbers don't lie, will they always tell the truth?

"There are three types of lies: lies, damned lies, and statistics."        Mark Twain

The PSPRS website has recently linked to this March 7, 2014 opinion piece in the Arizona Capitol Times, Retirement system steadily climbing back to financial health, by PSPRS Board of Trustees Chairman Brian Tobin.  The bulk of the piece is a response to what some people believe are questionable practices in how PSPRS' values its real estate holdings.  I have previously written about this valuation issue (see: Notes on a (PSPRS) scandal) and view it as a distraction from more serious issues affecting PSPRS.

Mr. Tobin's piece does include this quote by the late, great Senator Daniel Patrick Moynihan, "You're entitled to your own opinions, but you are not entitled to your own facts," which I would like to juxtapose with this paragraph by Mr. Tobin:
Of course, facts that fail to square with the opinion that PSPRS is in a shambles often get conveniently buried these days. Did you know the fund’s $6 billion in investments earned a 14 percent return last year? Probably not. Have you heard that when ranked against our 58 peer public funds, the total performance of PSPRS over the past three fiscal years ranks in the top 10 percent nationwide? Doubtful.
This is where I find a problem with Mr. Tobin's piece.  He states that PSPRS' investments "earned a 14 percent return last year."  The problem with this statement is that it does not specify to what year he is referring.  PSPRS earned a return of 11.48%, gross of fees, in fiscal year 2013, which ended June 30, 2013.  This is the rate of return that truly matters since it is used to determine the PSPRS' funded ratio, the annual required contributions (ARC) from employers, and any amounts that will go to the fund that pays COLA's to retirees.  I think he must be referring to the 2013 calendar year.  Board of Trustees' meeting materials show that PSPRS earned 13.26%, gross of fees, for the 2013 calendar year.  This is closer to his 14% figure but still three-quarters of a percent lower.

Whether PSPRS earned 13.26% or 14% in the 2013 calendar year is irrelevant since, as mentioned earlier, the only rate that matters is the one at the end of the fiscal year, not the calendar year.  PRPRS' rate of return fluctuates from month to month, and a casual reader might assume that PSPRS is producing better returns than it actually is.  Gross of fees, PSPRS' earned 10.98% 11.48% during the last fiscal year; this is a fine return that bested the 7.85% expected rate of return (ERR) by 3.13% 3.63%, but it is also 3% 2.5% less than the 14% referred to by Mr. Tobin.  As seen in the last post, PSPRS has a fiscal year to date return as of 2/28/2014 of 9.11%.  This is great, but a down month or two or three could easily push PSPRS' rate of return below the ERR by the end of the fiscal year.  This would mean a lower funded ratio and higher ARC's for employers in coming years.  Will anyone care what PSPRS' rate of return for the 2013 calendar year was on June 30, 2014 if PSPRS ends the fiscal year with a rate of return less than 7.85%?  Probably not.

Mr. Tobin also writes, "Have you heard that when ranked against our 58 peer public funds, the total performance of PSPRS over the past three fiscal years ranks in the top 10 percent nationwide?"  I think it is necessary to parse this statement.  Here the term "fiscal year" is specifically used, so looking back to the end of the last fiscal year on 6/30/2013, PSPRS had a three-year rate annualized rate of return of 9.38%, gross of fees, but as of  the last calendar year end of 12/31/2013, PSPRS had a three-year annualized rate of return of 7.74%, gross of fees.  (Remember that these numbers are both "gross of fees," meaning that they do not include fees paid to outside investment firms.  From what I can see, returns that are "net of fees" are about 0.50% lower.  Returns net of fees are the true returns, but PSPRS does not always include them in its reports.  I am using rates that are gross of fees for purposes of consistency.)  9.38% is a good rate of return since it is more than PSPRS' ERR of 7.85%.  However, 7.74% is not good as it is below the ERR.  Once again, we see a big difference when we compare fiscal and calendar year returns.  Yet in one short paragraph, both are strategically utilized in an attempt to highlight how well PSPRS' investments are doing.  A consistent use of terminology would give a more mixed picture of PSPRS' investment returns.

Furthermore, Mr. Tobin boasts about PSPRS' standing compared to 58 peer public funds.  What was the range of returns between the top peer public fund and number 58.  What was the average return?  What was the median return?  Without context, saying PSPRS is in the top 10% is meaningless.  A fund can lose money and still be in the top 10% or exceed its ERR and still be in the bottom 10%.  It all depends on your data.  Regardless, will anyone care where PSPRS ranks among its peers if it can not achieve its ERR on a consistent basis?  Doubtful.

If Mr. Tobin truly believes that no one is entitled to their own facts, he might want to be more cautious in his own use of statistics.  While all his numbers are factual, their selective use produce an inaccurate picture.  I think that PSPRS is in a stronger financial position now thanks to Mr. Tobin, the other Trustees, Administrator James Hacking, and the rest of the PSPRS staff.  How the investigations shake out is anyone's guess, but why in the world would Mr. Tobin send out information like this to the public and PSPRS members when the organization he represents is already trying to prove that it can be trusted to fairly value its investments?