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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, April 5, 2017

Special interest: What would be a fair interest rate for PSPRS members on their excess contributions?

PSPRS has told us that among the issues still up in the air is the calculation of interest payments on excess contributions.  This makes sense, but it should have nothing to do with refunding excess contributions since there is no uncertainty as to how much members are owed.  If you want to know what your refund will be, you can calculate it using the method explained here.  These amounts could be refunded to members now, and though I do not know if it would require the Superior Court's approval, it does not seem likely, since PSPRS is lowering the contribution rates without having gone to court first.  So what could be the reason for the delay in refunding excess contributions?  If PSPRS is incurring interest, it would make sense that they would want to expedite repayment.  Let's start looking at this by first trying to get an idea about how much interest members will receive.

The Arizona Supreme Court awarded pre-judgment interest, which is covered under under A.R.S. 44-1201 (A) and (B).  They state:
44-1201. Rate of interest for loan or indebtedness; interest on judgments
A. Interest on any loan, indebtedness or other obligation shall be at the rate of ten per cent per annum, unless a different rate is contracted for in writing, in which event any rate of interest may be agreed to. Interest on any judgment that is based on a written agreement evidencing a loan, indebtedness or obligation that bears a rate of interest not in excess of the maximum permitted by law shall be at the rate of interest provided in the agreement and shall be specified in the judgment.
B. Unless specifically provided for in statute or a different rate is contracted for in writing, interest on any judgment shall be at the lesser of ten per cent per annum or at a rate per annum that is equal to one per cent plus the prime rate as published by the board of governors of the federal reserve system in statistical release H.15 or any publication that may supersede it on the date that the judgment is entered. The judgment shall state the applicable interest rate and it shall not change after it is entered.
I have no idea how the judge might rule, but I think that PSPRS members would be covered under subsection B.  PSPRS did not sign off "any loan, indebtedness or other obligation" and was simply following the laws enacted by the Arizona Legislature.  There was no intent on their part to ignore or violate a binding contract.  This was the reason why the trial court judge initially turned down the plantiffs' request for interest.

Of course, this does not mean members should have to suffer financially either.  They were faultless and are the wronged party in this case, and they should be remunerated for the lost buying power and/or potential earnings on their back wages.  This is why subsection B seems like the most likely remedy for PSPRS members due a refund.  It would make members whole on their money but not be a punitive measure directed against PSPRS.  This, of course, leaves us to figure out what a fair interest rate would be.

If we consider subsection B to be the likely remedy, it would be interesting to see what the interest rate might be under different scenarios.  I have been paying the higher rate since it was raised in July 2011, and my total overpayment through January 2017 was $11,177.  The breakdown of my fiscal year overpayments is as follows:

Fiscal Excess
Year Paid
2012     $695
2013   $1,294
2014   $2,029
2015   $2,280
2016   $3,047
Jan 2017   $1,832
Total $11,177

The following table shows PSPRS' actual fiscal year rates of return and what they have earned year-to-date through January 2017. Even though we are in April 2017, the rate of return through January 2017 is the latest information available from PSPRS' meeting notes.  The table also shows the actual prime rate during those fiscal years.  I lowered PSPRS' fiscal 2017 year-to-date rate by 0.52% to account for investment fees:

Fiscal PSPRS Prime
Year Actual Rate
2012 -0.79% 3.25%
2013 10.64% 3.25%
2014 13.28% 3.25%
2015 3.68% 3.25%
2016 0.63% 3.25-3.50%
2017 7.00% 3.50-4.00%

I was interested to see what PSPRS actually earned on my overpayments versus what they would actually pay me in interest if they used the subsection B formula, which is the prime rate plus 1%.     The prime rate was unchanged at 3.25% for seven years between December 2008 until December 2015.  It was raised in December 2015 (3.50%), December 2016 (3.75%), and March 2017 when it reached its current rate of  4.00%. 

For ease of calculation, I broke down each full fiscal year overpayment into 12 equal payments and compounded them monthly at four different interest rates.  For fiscal year 2017, I broke the overpayment into seven equal payments.  Here is what I found:


Payout Interest
Overpayment  $11,177           - 
PSPRS Actual  $12,869    $1,692
Prime + 1%  $12,487    $1,310
Fixed 5.00%  $12,725    $1,548
Fixed 10.00%  $14,559    $3,382

If we use a strict interpretation of the prime rate plus 1% formula stated in subsection B of A.R.S. 44-1201, this would use the prime rate + 1% in effect at the time of each overpayment.  This would produce an interest payment of $1,310.  If we used the current prime + 1% (5.00%) and fix it retroactively to July 2011, we get an interest payment of $1,548.  As can be seen, both of these interest payments are less than what PSPRS actually earned on the overpayments.  A fixed 10% payment would produce an interest payment much higher than what PSPRS actually earned.  The annualized rate for PSPRS actual returns was approximately 5.42%

So what would be a fair interest rate?  As of January 2017, I would say that 5.42% would be fair.  This would be a wash for both parties.  It would not be right for PSPRS to keep the gains earned off members' money they should not have had in the first place.  Conversely, PSPRS should not be punished for simply following the conditions imposed on it by SB 1609, though PSPRS as an entity will not be punished, as any interest in excess of what they actually earned will hurt employers and employees long-term via higher contribution rates. Of course, this 5.42% interest rate will change depending on what PSPRS earns between January 2017 and whenever the excess contributions are finally refunded to members.

Since we do not know what is going on, we are once again left to speculate.  Will the judge just mandate an interest rate?  Will each side's attorneys argue for the rate most favorable to their clients?  If I was the plaintiff's attorney, I would be willing to accept the actual annualized rate up through March 31, 2017 since this was when the Supreme Court returned the case to the trial court judge.  (This actual annualized rate is likely to be higher than the 5.42% we mentioned earlier.) However from April 1, 2017 onward, I would only accept an interest rate that is the higher of either the actual annualized rate as of March 31, 2017 or PSPRS' real rate of return.  This would force PSPRS to pay members what it actually earns on their money, but it would prevent PSPRS from passing on to members any losses it might incur in the interim.

In answer to the question we asked earlier, the only logical reason for PSPRS to delay refunds to members would be if they were currently earning more than they expect to pay in interest.  For fiscal year 2017, PSPRS is earning nearly 1% per month through January 2017.  If this rate were to continue for the next five months, PSPRS would have a fiscal year rate of return of about 12.40%.  This is why it is critical that conditions are created where PSPRS has an incentive to return members' money as soon as possible.  They are earning a lot on our money right now, and members need protections to keep them from being cheated.

5 comments:

  1. Excellent breakdown and analysis. Thank you. I'm guessing PSPRS believes they'll be paying Prime + 1%, so why not hold on to the money as long as possible. As you've shown, if that is indeed the rate they are required to pay, they will offset some of what they will have to refund. Will be interesting to see how this pans out.

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    Replies
    1. Thank you for the comment. I know you understand the numbers as well as anyone. The sheer audacity of PSPRS' actions is surpassed only by their lack of accountability. It is bad enough that PSPRS will likely try to shortchange members on the interest rate, but they are shafting employers as well.

      Refunds for active employees (and maybe even retirees) are to come through employers. However, PSPRS plans to issue "credit memos" to employers in place of full payments of the excess contributions PSPRS is holding. This means employers may have to pay full refunds to affected employees while employers draw down against this credit by withholding regular biweekly contributions.

      This is another instance where PSPRS is unjustly passing a cost on to someone else. PSPRS gets to hold on to the ill-gotten money for as long as possible and foist the immediate financial burden of paying full refunds to employers. PSPRS will continue to earn on the $200-250 million it owes to employees while employers have to scramble to find those millions to pay back to affected members.

      I don't know why The League of Arizona Cities and Towns does not sue to force PSPRS to pay full cash refunds to employers to pass on to their employees, but I really don't understand why PSPRS is allowed to get away with a lot of what it does.

      Thanks again for reading and any input you can provide.

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    2. Is it possible for the plaintiff attorneys to to request an intimidate full payout at the conclusion of the case? IMHO it is a criminal travesty that PSPRS would be allowed to hold members money so it can make a return. Would another lawsuit have to be filed to demand a full intimidate payout of the excess contributions?

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  2. I see they set a date for Oral Argument in June. This takes forever.

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