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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...

Wednesday, March 29, 2017

PSPRS members: Another update on the Hall case

There is some new information from PSPRS, which appears directed at employers, not PSPRS members.  I don't know if it was sent out to everyone, so here is what came out today:
Notice to EORP, PSPRS employers on Reversion of Member Contribution Rates
The Arizona Supreme Court issued its mandate in the Hall v. EORP lawsuit for the Superior Court to begin implementing the remedies afforded by the ruling and it has been determined by the Board of Trustees that those remedies will also apply to the Parker lawsuit.
Therefore, effective immediately by Board action this afternoon, the employee contribution rates for all members hired on or before July 19, 2011, are to revert to the following rates at the beginning of the first complete pay period on or after April 1, 2017, or as soon as practicable after that.
  • EORP (Hall):  7.00%
  • PSPRS (Parker):  7.65%
Please notify our Active Member Department (ActiveMembersGroup@psprs.com) of which pay period will feature the lower contribution rates for impacted members. It is crucial that the rate revert at the beginning of a complete pay period as we will not be able to determine any excess contributions that would need to be refunded if the employee contribution rate is not reverted for an entire pay period.
It is still unknown as to when the excess contributions will be returned to impacted members but it cannot happen before the parties agree in Superior Court to a rate of interest, the time period for which that interest applies, and the methods for which the contributions may be returned.
However, reverting the contribution rates to the above amounts is the crucial first step before any calculation of excess contributions can be calculated. We will work with each employer, on an individual basis as necessary, to that successful end. Therefore, please contact PSPRS if you need help identifying those members who are affected.
Please remember that all EORP members hired on or after July 20, 2011, will continue to contribute at 13.00% and the employer will continue to contribute at 23.50% for all elected officials. Also, this change does not affect any of your members in the Elected Officials' Defined Contribution Retirement System.
For PSPRS members hired on or after July 20, 2011, the employee contribution rate will remain at 11.65% while employers must continue to pay their current individual employer contribution rate.
For any employers who may have members in the Corrections Officer plan, their employee contribution rate was never increased, so they are not affected by either lawsuit or entitled to refunds of excess contributions.
The Hall and Parker lawsuits will also result in retroactive permanent benefit increases (PBI) for impacted retirees in all three plans. However, the issue of interest must also be settled at the trial court level before retroactive payments can be made.
We will continue to provide information regarding the return of excess contributions to impacted members and the payment of retroactive PBIs to retirees as updates continue to develop.
Thank you for your help,
PSPRS Administrator Jared Smout

I also wanted to post this helpful comment from reader Dave Christian:
With respect to the actual mechanics of the refund, PSPRS is going to expect employers to refund the excess contributions once we have a calculation on the interest component. As you said, the excess contributions themselves are easy enough to calculate. Then the employers will get a 'credit' to use against remittance of current payroll. So the employers will put the funds on the employee paychecks. This means that they will be treated as a 'bonus' and taxed at a much higher tax rate. It will be up to the employer to facilitate employee's wishes to roll the money into another qualified plan. As a finance manager for a large fire district, I am currently in a holding pattern. There will be a ton of communication I need to get out to our employees about their options and I am anxious to get started. The waiting game never seems to end on this issue.
I would like to express my thanks to Mr. Christian for sharing this.  Once again, I am perplexed and disappointed, though not surprised, by the PSPRS administration and Board of Trustees.  If this is what PSPRS is telling employer representatives it seems to contradict what they say in their official missive, which says that the Superior Court must determine, "the methods for which the contributions may be returned."  I understand that interest payments will be an issue for debate.  However, it seems they already know how they plan to return active members' excess contributions to employers, and instead of being honest with PSPRS members, whose money it is they are holding, they prefer to play coy and leave members in the dark.  They know what they are going to present to the Superior Court judge when it comes to refunding excess contributions.  There is no reason to withhold this information from PSPRS members.

Certainly, what Mr. Christian details seems to be the easiest way to refund excess contributions to active PSPRS members.  With so many different agencies, it would simply be too cumbersome and complicated for PSPRS to handle it themselves.  I, for one, would be relieved to have this done at the employer level with coordination and input from union locals to best meet employees' needs and desires, be they lump sum payments, transfers to tax-deferred accounts, payments over time, etc.  Active PSPRS members will be better off trusting those who actually have a history of trying to help them.  The PSPRS administration and Board of Trustees have been chronically contemptuous and dismissive of PSPRS members.  PSPRS members have good reason not to trust them.

Tuesday, March 28, 2017

PSPRS members: The wheels of justice are slowly turning in the Hall case (updated)

So we can finally see some movement in the Hall case at the Superior Court level.  The Maricopa County Superior Court case, CV2011-021234, shows the first update since June 2015.  On March 24, 2017, an "order of mandate" was filed.  As I always like to point out, I am not a lawyer, so I went to the Online Law Dictionary to get a definition.  Here is how it defines a "mandate":
A Judicial command or precept proceeding from a court or judicial officer, directing the proper officer to enforce a judgment, sentence, or decree. Seaman v. Clarke, 60 App. Div. 416, 69 N. Y. Supp. 1002; Horton v. State, 63 Neb. 34, 88 N. W. 146. In the practice of the supreme court of the United States, the mandate is a precept or order issued upon the decision of an appeal or writ of error, directing the action to be taken, or disposition to be made of the case, by the inferior court In some of the state jurisdictions, the name “mandate” has been substituted for “mandamus” as the formal title of that writ.
The term has different meanings in relation to other legal concepts, but the aforementioned definition appears to be the one relevant to the Hall case, especially when it shows the order came from the Arizona Supreme Court.  This appears to be the official document telling the Maricopa County Superior Court to enforce the judgment in the Hall case.  So what does this mean?  I think this means that there will be court dates set for the litigants to meet and agree to a resolution.  I have put in links in the sidebar to the Hall and Parker cases, as well as the latest Fields case.  As I mentioned in this March 14, 2017 post, the Rapplyea case was settled just 17 days after the first Fields case.  I expect that Parker will follow the same pattern and be quickly settled (for the most part) after Hall is finally resolved.

Speaking of Fields, I have to correct an error from the referenced post.  Here is a comment from a reader about the new Fields case:
The new Fields case revolves around the funding of the old EORP plan which was closed a few years ago not properly 124. The nuts and bolts are that when the plan was closed the legislatures artificially capped the max employer rate at around 27% even though the real rate needed is much higher. He is suing to force the state to pay the real costs and not allow the plan to go insolvent.
So thank you to that anonymous reader for his insight, and I apologize for the incorrect information.  My error is even worse since Proposition 124 does not even cover EORP, so Mr. Fields would have no reason to litigate it.  Here is the relevant portion of the EORP annual actuarial report warning about the future funding status of EORP:

The reversal of some of the provisions in SB1609 due to the Fields decision in 2014 resulted in a significant increase in the contribution rate. The statutory contribution of 23.50% of aggregate payroll was instituted prior to the Fields decision.  We recommend that the 23.5% statutory rate be reviewed to reflect the court rulings regarding benefit provisions.  If pending litigation in the Hall case is ruled in favor of the plaintiffs, contribution rates will increase again next year.  Absent the receipt of increased contributions, the System is expected to run out of money in 13 years.
The retired lives are less than fully funded on a funding value of assets basis, but are much less than fully funded based upon the market value of assets.  It is most important that this Plan receive contributions at least equal to the rates shown in this report
I do not believe that PSPRS has this problem, so the outcome of this case should not affect PSPRS members.  If there will be a constitutional challenge to Proposition 124's replacement of the old permanent benefit increase (PBI) formula with a capped COLA, it will have to come from a PSPRS member.  It is likely that in fiscal year 2017 PSPRS will exceed the 9% threshold that triggered PBI's under the old methodology.  Also, inflation has well exceed the new 2.0% cap on COLA's and is currently running at 2.7% for the past 12 months.  This could provide a lot of incentive for a PSPRS member, active or retired, to challenge Proposition 124.

Of course, we already have a PSPRS member suing over the change, the Parker case, so it will be interesting to see if this issue is brought up when Parker returns to the trial court as that court originally decided in favor of the Hall plaintiffs when it came to the PBI issue for employees active when SB 1609 went into effect.  Parker never went to trial at the Superior Court level and was stayed pending the Hall decision.  This was prior to the passage of Proposition 124, which allowed a one-time exception to the Pension Protection Clause.  The Hall case did not have to consider the Contracts Clause of the Arizona Constitution since Proposition 124 did not affect EORP members, and the Supreme Court panel declined the motion for reconsideration that would have looked at the constitutionality of benefits changes when considered under the Contracts Clause.  I have no idea what could happen with this issue when the trial judge considers it, and it should probably be the subject of a future post.  I suppose worst case scenario would be that the judge in Parker declares the post-retirement benefit changes of Proposition 124 unconstitutional under the Contracts Clause, and the case has to work its way back up to the Arizona Supreme Court again for another decision.  Regardless, it should not affect the highest priority issue for most members, the refund of excess contributions, which should go forward regardless of the status of PBI's and COLA's.

I would recommend that everyone interested in Hall and any future litigation involving PSPRS read  the comments in that March 14, 2017 post.  Some of the information is interesting and may help you plan for the near future.  Of course, we are still waiting for something official from PSPRS, so stayed tuned.

Friday, March 17, 2017

Brian's Song: Why the PSPRS Board of Trustees Chairman toes the line for PSPRS' administration


Before we get into other issues, let's talk about PSPRS' returns.  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%
12/31/2016 1.30% 6.43% 1.95% 8.79%

There is usually about a two-month lag in PSPRS reporting its investment returns.   Another good month for both PSPRS and the Russell 3000.  PSPRS lags the Russell 3000, but a 6.43% return for the first half of the fiscal year is terrific.  As of yesterday the Russell 3000 is, coincidentally, up exactly 6.43% for the first two and a half months of 2017, so there should, hopefully, be more gains for PSPRS in February and March 2017.  The only question is how closely PSPRS' gains will correlate to the Russell 3000's.

The handful of readers who have followed this blog for the past few years know that most of my criticism is directed at state-level union leaders and the PSPRS administration and Board of Trustees.  This is because they are the ones who are supposed to be looking out for PSPRS members.  While I do criticize state and local politicians, they have other constituents, namely taxpayers and citizens, whose interests they are supposed to take into account.  This is not so with union leaders and PSPRS' administration and Board of Trustees, who primarily have PSPRS members as their only constituents.

This is why it is so disappointing to see this editorial by PSPRS Board of Trustees Chairman Brian Tobin that appeared in the March 10, 2017 Prescott Daily Courier newspaper.  According to PSPRS' biographical blurb, Mr. Tobin joined the Phoenix Fire Department in 1983 and has been a Deputy Chief since 2007.  He is also a past president of the Professional Fire Fighters of Arizona (PFFA), the state-level firefighters' union, and the brother of former Arizona House Speaker and current Arizona Corporate Commissioner Andy Tobin.  Brian Tobin's position on the Board of Trustees is as one of the employee representatives for the state's firefighters.

In his editorial Mr. Tobin repeats the company line that we continually hear from PSPRS' administration: PSPRS is doing very well when we look at their own self-chosen metrics.  Mr. Tobin puts no hard numbers in his piece, but I do not doubt that, in any economic environment, he and PSPRS' administration can handpick the necessary data to show that PSPRS is doing great.  However, the rest of us would like to see a more objective measure of PSPRS' performance, rather than take on faith what PSPRS and the Board of Trustees has to say.

Let's start by referencing this excellent article, How the Bogle Model Beats the Yale Model, by Ben Carlson, CFA from his blog, A Wealth of Common Sense.  I recommend reading his short piece for yourself, but to summarize, Mr. Carlson used fiscal year-end data as of June 30, 2016 to compare the 3-year, 5-year, and 10-year annualized returns of more than 800 college and university endowments against the returns of a portfolio of three Vanguard index funds he calls the Bogle model after Vanguard founder John Bogle.  What he found is that the Bogle model not only beats the average endowment returns but even the top decile of endowments as well.  Mr. Carlson points out that many of these endowments are run by top-level investment professionals who utilize complicated, non-traditional, multi-asset strategies.  The following table shows Mr. Carlson's numbers as well as returns from other funds closer to home, the Arizona State Retirement System (ASRS) and PSPRS' own Cancer Insurance Plan (CIP), as of June 30, 2016:
 
Fund 3-year 5-year 10-year
PSPRS 5.71% 5.40% 4.45%
CIP 6.24% 5.49% 5.69%
ASRS 7.10% 7.10% 6.00%
Endowments


Average 5.20% 5.40% 5.00%
Top quartile 6.30% 6.20% 5.30%
Top decile 6.60% 6.60% 5.40%
Bogle Model 6.40% 6.50% 6.00%

Looking at all these returns, we see that PSPRS' returns most closely match those of the average endowment.  However, what is most disturbing is how much PSPRS lags both ASRS and its own CIP.  The CIP is a very simple portfolio made up of approximately 25% US Equity, 25% non-US equity, 30% fixed income, 10% inflation-linked securities, 5% commodities, and 5% short-term investments.  No private equity, no real estate, no global tactical asset allocation, etc.and yet, this portfolio beat PSPRS in every time period.  ASRS, a more actively managed fund, bests PSPRS by even larger margins.  The three-index fund Bogle model also outperforms PSPRS in all three periods.

The 10-year period is most instructive since it includes both a horrendous downturn and an extended bull market, and any strategy utilized during that time will have been tested at both market extremes.  PSPRS has the worst 10-year annualized returns.  So we can see Mr. Tobin does not need to look far and wide for comparative data; he can just look in PSPRS' own offices or cross town at ASRS.  He does not need to selectively choose data to produce a measure of PSPRS' performance; Mr. Carlson has already given him a good baseline to use.  And for goodness sake, he and PSPRS should stop giving comparisons of how much better PSPRS' portfolio would have done than the actual portfolio during past market downturns.  This is idiotic. Anyone could design a better portfolio if he or she knows what is going to happen in the future.  The numbers do not lie, and objective criteria shows that PSPRS performance is mediocre at best.  Even against simple index funds, PSPRS lags behind.  So why would Mr. Tobin offer such a full-throated defense of PSPRS' investment strategy?

For those of you who are interested, you can the find a theoretical foundation of PSPRS' current investment strategy in a paper entitled Modern Pension Fund Diversification, which among its authors are current and former members of PSPRS' administration.  The abstract alone is very complicated, never mind the entire 16-page paper that you can download.  That uneasy feeling you may be getting right now is understandable when you realize that your future paychecks and future retirement security are based on an academic experiment conducted by individuals whose own paychecks and retirements are unaffected by the results of the experiment.  This might explain the bizarre, unshakable insistence by PSPRS' administration that everything is going well with their strategy.

I make no claim of understanding Modern Pension Fund Diversification, but should we take it for granted that Mr. Tobin or any of the other Trustees do either?  It would seem that one would need an extensive background in mathematics, statistics, finance theory, and/or economics to even begin to understand it.  The PSPRS employee representatives on the Board of Trustees know law enforcement and firefighting, not finance theory, so they are overly dependent on PSPRS' staff for information and guidance.  This traps the Board in an environment in which the people they are tasked to oversee have become the de facto decision-makers.  When comes to investment decision, PSPRS' administration is insulated from oversight behind an intellectual moat that the Board is unable to cross.

This could explain the defensive and arrogant tone of Mr. Tobin's editorial since he can only parrot what the PSPRS administration tells him and trust that it is accurate.  PSPRS' investment strategy is working because PSPRS' administration says it is working, and he has no other choice but to concur with that assessment.  The natural, common sense questions that the layperson might ask are dismissed as ignorant and naive.  If someone were to ask, "Why hasn't PSPRS performed as well as the CIP or ASRS over the years?," Mr. Tobin can only respond with bits of insight like this:
". . . our investment returns are elite among pensions that operate with a similar risk-averse strategy." 
"We outperform index funds (even after fees), in which we also invest."
"Our plan also stacks up well against private sector investment funds."
 "PSPRS, like any institutional investor, suffered heavily from Dot.Com crash of 2001-02 and the housing market crash of 2007-2008."
I will leave it to the reader to judge the accuracy, relevance, and/or usefulness of those statements.  Does Mr. Tobin speak for the entire Board of Trustees?  If he does, it appears the Board has relinquished its oversight role of PSPRS, at least when it pertains to investments.  I can only hope that the new members who have recently joined the Board will not allow themselves to be co-opted by the PSPRS administration like Mr. Tobin has.  PSPRS members need watchdogs to look our for their interests, not cheerleaders for the PSPRS administration.

Tuesday, March 14, 2017

The end is near (or is it?): More speculation on the Hall v. EORP case

The legal issues in Hall v. EORP have now all been settled.  All that is left is the implementation of the decision.  Today, we can look a little closer into what PSPRS has told us last week, which by the way, is essentially nothing different than what we were told back in November 2016 when the Arizona Supreme Court issued its decision.  Unfortunately, we are left to speculate on what comes next, so let's discuss some of what we may expect to happen.

1. Contribution rates for active Tier 1 employees:  This is probably the easiest thing to predict.  Active Tier 1 employees should see their paychecks increase very shortly.  I would not expect that any Tier 1 employee would still be paying 11.65% to PSPRS after March 2017.  There is no justifiable reason for PSPRS to take the excess 4% from members any longer, and they should be telling employers today to stop remitting the extra 4% to them.  Hopefully, all our employers are ready to make this change in their payroll systems.

2. Employer contributions should remain unchanged: The extra 4% that was being paid by Tier 1 employees did not cover any share of the employers' contributions.  The 4% was in addition to the full annual required contribution (ARC) from employees and employers.  For example, if PSPRS calculated a 50% ARC for a public safety agency, employees would be responsible for 7.65%, and the employer would be responsible for the other 42.35% of the ARC.  Employees were not paying 11.65%, while the employer's share dropped to 38.35%.  Employers always paid their full share, while employees were contributing the extra 4% to help pay down the unfunded liability.  There should be no short-term effect for employers, though long-term, it will take longer to pay down the unfunded liability, which will likely cause employer shares of the ARC to increase.

3. How the Hall case relates to Parker: As it stands right now, PSPRS members have not actually "won" their case because the Hall decision only affects EORP members.  Parker v. PSPRS is the case relevant to PSPRS members.  PSPRS gives the impression in its press release that there is some potential problem here.  There isn't because Parker was over the exact same issues as Hall, only the parties were changed.  We had a similar situation in the Fields v. EORP and Rappleyea v. PSPRS cases where the plaintiffs in Rappleyea stayed their case pending the outcome of the Fields case.  There was no reason to have concurrent cases, duplicating costs and work, over the same legal issues.

Parker is being heard by a different judge, the Honorable John Rea, and the case had been granted a stay pending the appeals in Fields and Hall since February 26, 2013, which was agreed to by both parties to the case, and the stay was continued by Judge Rea on April 8, 2015.  In the Fields case, there appeared to be an issue with the attorney's fees, which were denied by Arizona Supreme Court.  The question of attorneys' fees was resolved as follows:
. . . the members of the class are responsible for a pro-rated share of the fees. Pro-rated is defined as their respective share of the payments that each member received made over the common fund amount. That percentage will be used to calculate the fee that each member of the class owes to Plaintiffs’ counsel.
This was necessary for Mr. Fields, otherwise he would have been responsible for the full cost of his attorneys' fees.  I assume that these fees were withheld from the retroactive COLA's owed to members of the class.  Fortunately for all of us, the Supreme Court awarded attorneys' fees to the plaintiffs in Hall, so this should not cause any delays.  The Supreme Court decided for Mr. Fields on February 20, 2014.  After the legal wrangling over attorneys' fees, a final judgment was reached July 18, 2014.  A final judgment was rendered in Rappleyea on August 6, 2014.  The final judgment in Rappleyea was only 17 days after the final judgment in Fields, so there should be a minimal delay between the final judgment in Hall and the final judgment in Parker.

* There will be more to say about Mr. Fields a little later.

4. Pre-judgment interest: To me pre-judgment interest seems to be the issue that could be most problematic.  Refunding excess contributions should be not challenge since its calculation is simple and straightforward, and even now, any of us can determine our own excess contribution amount.  However, calculating the interest owed will be more difficult.  The A.R.S statute says that prejudgment interest will be at a rate of 1% over the prime rate.  The prime rate is currently 3.75%, which is 0.25% higher than when Hall was decided in November 2016.  It is nearly certain that the prime rate will increase again tomorrow after the next Federal Open Market Committee meeting.

I don't know if there is a standard procedure for calculating pre-judgment interest.  Will they use the actual rate at the time, and raise or lower it according to how it changed between 2011 and now? Could they use the current rate retroactively to 2011?  Or could the judge order PSPRS to pay the actual earnings rate for each fiscal year, as this is what PSPRS actually earned on the excess contributions?  This could be a wide range as, in just the past three years alone, PSPRS' rate of return was as high as 13% in FY 2014 and as low as 0.60% in FY 2016.

PSPRS will likely ask for the lowest percentage rate it can calculate, while the plaintiffs will try to get the highest rate.  Of course, the prime rate plus 1% formula may be locked in order to prelude this type of legal back-and-forth and get the case settled as quickly as possible.  Regardless, there is no reason to delay the refund of excess contributions as there is no question as to those amounts.

5. The form of refunds: The easiest thing for PSPRS to do would be to simply cut checks to everyone owed a refund and interest.  The important thing to remember here is that the refund of excess contributions is refunded wages, which makes them subject to federal income tax withholding.  How much you are taxed will depend on your own personal tax rate.  I am not sure how any interest will be taxed since it is not wages.  If PSPRS were simply to refund the whole amount, there would likely be a uniform withholding rate.  I believe that 25% is the standard income tax withheld from lump sum payments, though what provisions are made in the tax codes for this particular situation, where wages were unconstitutionally withheld, are unknown to me.  We should also keep in mind that we are only talking about withholding, not the actual tax amount.  Whatever is withheld will have to be reconciled with your 2017 taxes in early 2018 to determine your actual personal tax rate for 2017 and whether you will get a tax refund or have to pay additional taxes.  One of the justifications for the 25% withholding rate on lump sums is to preclude large tax bills hitting unsuspecting taxpayers, who may not have the funds available to pay an unexpected tax bill. 

Simply writing a check is likely the only option for refunds to those who are already retired.  For those who are still active members, the payment could come back through their regular paychecks. My personal preferred option would be to allow the entire refund of excess contributions to go straight into a 457 account so that there is no tax issue, as the funds will be going from one tax-deferred vehicle to another tax-deferred vehicle.  Any transfer to a 457 will have to keep your total annual contributions, which includes any amount you have already contributed via payroll deduction, under the 457 maximum for 2017 ($18,000 or $24,000 for those 50 or over), in order to stay tax-deferred.  In the end, all that matters is what you get to keep, not how you get paid.

Of course, there will be numerous "what if" questions from members with different situations.   If I did not maximize my 457 contributions in past years but are maximizing them now, will I be able to go over the tax-deferred limit and count it for previous years?  Similarly, if I am retired, can I put some of the excess contribution refund in a 457 if I did not maximize my contributions when I was working?  Can I take the refund in smaller payments over a year to break it up over two or more tax years to avoid such a large tax bite on a lump sum payout?  Can I use the payment to buy service time since it is permitted to use funds from a tax-deferred account like a 457 to buy service time?  These are all questions only PSPRS can answer, likely in consultation with the Arizona Legislature, the IRS, and Arizona Department of Revenue.

I did want to make one point about service time.  I have heard different rumors about service time purchases.  While I cannot speak for PSPRS or the Legislature or know what they are planning, as it stands now PSPRS members are not permitted to purchase "phantom time," which is time that is not included in any of the categories already designated by PSPRS, such as military time.  I think that this policy is extremely unlikely to change.  If you do not have time from these designated categories, I think it is a safe bet that you will not be able to buy any time.

The unknown timeline: This is the most frustrating part of it all.  The PSPRS administration's and its Board of Trustees' has always treated its members indifferently, but now their attitude seems to border on contempt.   How else do you characterize last year' service time buyback fiasco where members who had planned for years to buy back time at a certain cost were blindsided by new calculations that were double what they had been previously told?  This was explained away as an oversight when a change in laws went unnoticed by PSPRS' administration.  Oops, we're sorry if you aren't able to retire like you planned or have to pay thousand more than you expected.  If that is there level of concern about their members over a matter like that, I guess we shouldn't expect PSPRS to keep us informed about the timeline of Hall's resolution.

The disregard of PSPRS members by the likes of PSPRS Administrator Jared Smout or Chief Investment Officer Ryan Parham could be explained away by the fact that all of us law enforcement and firefighting personnel, active and retired, are an abstraction to them.  Any particular person's retirement or financial situation means nothing to them; they will still get paid and not have to suffer the uncertainty that their retirements may be reduced one day.  But what should we make of the public safety personnel representatives on the Board of Trustees like Chairman Brian Tobin?  They seem to have gone native, defending the PSPRS administration rather than looking out for their own public safety constituents.  For just the latest example of Mr. Tobin's excuses for PSPRS, you need to look no further than his March 10, 2017 editorial in the Prescott Daily Courier.  Based on his past behavior, we should probably not rely on Mr. Tobin to hold PSPRS' feet to the fire when it comes to keeping us up-to-date on the progress of the Hall case. 

* I started this post saying that all the legal issues were resolved, but in researching this post, I found this new Maricopa County Superior Court case, CV2017-001200, filed by Kenneth Fields against EORP on January 31, 2017.  I have not seen the actual court filings, but I think it is safe to assume that this is the same Mr. Fields who was the lead plaintiff in Fields v. EORP.

I will have to go back through some of PSPRS' Board of Trustees meeting materials to see if they mention this case.  Regardless, this lawsuit by Mr. Fields indicates that things are not quite resolved yet.  I am pretty certain that he is suing to overturn Proposition 124, which passed 70% to 30% in May 2016.  Proposition 124 eliminated the old, unsustainable permanent benefit increase (PBI) formulation that required half of any earnings over 9% to be placed in a Fund for Future Benefit Increases from which PBI's were paid.  COLA's are now funded annually through ARC's and limited to the lesser of 2% or the CPI.

Mr. Fields is likely suing over a violation of contracts clause of the Arizona Constitution, the issue that EORP wanted the Supreme Court to reconsider in Hall.  As discussed in a recent post, the motion to reconsider was not to overturn Hall, but to get some guidance and clarification as to the relevancy of the contracts clause as it pertains to the EORP pension.  This explains some of what has gone on recently.  A PSPRS member would have to also sue (like Rapplyea or Parker) to make it relevant for PSPRS members, but this is likely to happen if Mr. Fields wins his case.  A more involved discussion will be for a later post, but it is important to note that if Mr. Fields wins this case, it will have enormous implications for PSPRS and all of the state's pensions.  This might be something that PSPRS might want to keep members informed about, but you know, it is PSPRS were talking bout here, so don't hold your breath.

Thursday, March 9, 2017

*** Arizona Supreme Court denies EORP's motion for reconsideration in Hall ***

This just came down from PSPRS:
Supreme Court sends Hall lawsuit to trial court
EORP refund method to be determined, impact on PSPRS lawsuit still unknown
ARIZONA – The Arizona Supreme Court today declined to address a motion for reconsideration of the Hall v. Elected Officials Retirement Plan filed by attorneys for EORP and the state of Arizona. The motion was filed in response to the court’s November ruling that several 2011 pension reforms were unconstitutional.

The decision remands the lawsuit to the trial court level to determine how and when excess employee contributions and retroactive pension increases to impacted members of EORP must be made. The court also must decide whether Hall-style refunds will be applied to public safety employees impacted by the Parker v. Public Safety Personnel Retirement System.

Last year, the Arizona Supreme Court determined that 2011 legislative reforms that increased EORP employee contribution rates and created modest conditions to pension benefit increases were unconstitutional. The court’s ruling impacts EORP-covered employees who were already hired but not yet retired by the effective date of the 2011 law.

In response to the ruling, EORP must return excess contributions to impacted members who under the contested law had their retirement contribution rates rise above the existing 7 percent level. Likewise, those who retired after the effective date of the 2011 legislation may be owed retroactive benefit increases calculated under the previous permanent benefit increase (PBI) formula.

The motion for reconsideration filed by EORP and the state sought an expanded explanation of the high court ruling for the purposes of receiving clear guidance on future legislation. The Hall lawsuit does not directly impact members of PSPRS or the Corrections Officers Retirement Plan.
In November, Brian Tobin, chairman of the PSPRS Board of Trustees, said the reforms deemed unconstitutional in the Fields and Hall lawsuits were the results of “good faith efforts to put Arizona public safety retirement plans on a stable and sustainable path forward.”

PSPRS urges members of its plans to avoid making major financial decisions based on expectations of refunds related to the Hall and Parker lawsuits.

It is not immediately clear when impacted members of EORP can expect to receive refunds of excess contributions or retroactive pension increases. In the event the same full refund and retroactive payment remedy is applied to the Parker lawsuit that impacts PSPRS-covered public safety employees, PSPRS estimates combined expenses of roughly $200 million.

However, pension reforms passed in 2016 that impact PSPRS would still offset potential losses from the Parker lawsuit and save an estimated $475 million in long-term costs. Reforms have not been implemented for EORP, which remains the least funded of three retirement plans managed by PSPRS. 

The combined assets of the PSPRS, Corrections Officer Retirement Plan (CORP) and the Elected Officials Retirement Plan (EORP) are currently valued at $9.1 billion.
The gist of this is that we are back to where we were in November.  The case will have to go back to the Maricopa County Superior Court where the implementation, as referenced in the press release, will have to be finalized.

The passive tone of this press release gives the impression that the helpless PSPRS is at the mercy of the court, as to the timeline of future events.  PSPRS has had plenty of time to prepare for this eventuality, years in fact, and has known that it was a happening for certain since last November.  The Superior Court judge will likely say to PSPRS, "Where's your implementation plan and give me the day you will be issuing refunds."  PSPRS should be ready to issue checks, with pre-judgment interest, now.  Excess contributions from current checks should be stopped immediately.  Any delay in getting excess contributions back to members will be PSPRS' responsibility, not the Court's.

If there is something more complicated here, utilizing other options for refund payouts, PSPRS should already be informing members.   I have heard rumors about other options, such as direct transfers into 457(b) accounts, an alternative retirement contribution into a 401(a), or service time purchases, but nothing has come directly from PSPRS.  Of course, these are all just rumors and perhaps just wishful thinking.  Regardless, the onus is on PSPRS to be ready with a plan, whether simple or complicated, when they return to trial court.

This matter should be resolved quickly with PSPRS members kept up-to-date as to what is happening.  Anything else is unacceptable.  It will be interesting to see how PSPRS performs.