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Was it constitutional for Proposition 124 to replace PSPRS' permanent benefit increases with a capped 2% COLA?

In this blog I and multiple commenters have broached the subject of the suspect constitutionality of PSPRS' replacement of the old perma...

Thursday, July 13, 2017

The lastest in Parker v. PSPRS: The prejudgment interest rate has still not been determined

Here is the latest from the July 12, 2017 status conference in Parker v. PSPRS:
The parties previously agreed to abide by the decisions in the Hall and Fields cases.  The Court is advised that the trial court in the Hall case has ruled on what prejudgment interest rate to apply and entered a final judgment.  It is unknown whether the Plaintiffs in the Hall case will be appealing the ruling.  The Phoenix Law Enforcement Association ("PLEA") would like this Court to independently decide what prejudgment interest rate to apply.  However, PLEA will discuss same with Defense counsel and determine whether it will wait to see if there is an appeal in the Hall case, or file its own motion.
The parties will also work together to draft a stipulated judgment for the Court’s review and approval.
IT IS ORDERED setting a further Telephonic Status Conference on September 20, 2017 at 9:00 a.m. (time allotted: 15 minutes) in this Division, before Honorable Judge Rosa Mroz . . .
If the parties reach an agreement before the Status Conference and would like to the Court to sign the stipulated judgment expeditiously, the parties are encouraged to contact this Division’s judicial assistant . . .to alert her of the filing.
So there is still some discussion over the final interest rate to be applied.  PLEA obviously does not agree with the rate of interest applied in Hall, but they and PSPRS may be able to work something out before the next court date.  This explains the delay in setting a rate and paying interest.  As I have written before, the right and fair thing for PSPRS to do is pay members what it actually earned on the excess contributions.  This rate is likely to be higher than the prime rate + 1% awarded in Hall, but lower than the 10% the Hall plaintiffs wanted.  PSPRS exists to serve members, not use them as a source of income  Earning some profit off the spread between actual returns and the statutorily required prejudgment interest of rate is immoral.  Applying PSPRS' actual rate return as the prejudgment rate seems like a good compromise to me, and it would settle this matter quickly.

There is no mention of PBI's, so it does not appear that Mr. Parker and his fellow plaintiffs will be contesting the constitutionality of Proposition 124. 

Addendum:

A commenter asked what PSPRS' actual rate of return has been and how that translated into actual dollars.  I went back to a spreadsheet I used for this post that estimated prejudgment interest on a $12,000 refund.  I changed it up by using the actual net rates of return for the following fiscal years (FY's):


 Rate of
 FY Return
2012 -0.79%
2013 10.64%
2014 13.28%
2015 3.68%
2016 0.63%
2017* 10.26%

The rate of return for FY 2017 are only through April 2017, which is the latest PSPRS has provided, and a half-percent was subtracted from the gross return to keep it consistent with the net returns for the other FY's.  As before, I divided the annual rate of return by 26 pay periods and ran a running total of the simple interest.

The $12,000 in excess contributions generated $1,420 in simple interest at 5.0% and $1,489 at 5.25%, as of the end of June 2017.  The prime rate at the time of the Hall decision was 4.0%, but it increased to 4.25% several days after the decision.  I do not know which rate will be used if they use prime rate + 1%.  Using PSPRS actual rates of returns generated $2,223 in prejudgment interest, a significant increase of around $735 or $800, depending on which prime rate we use.

Prejudgment interest of $2,223 would produce an annualized rate of 8.1% going back the full six year period to July 2011, so we can see the incentive PSPRS has to keep the rate at the much lower prime rate + 1%.  The spread was higher than I thought it would be, but this is due to the high returns in the current FY, which is when the refund amount was largest.  If PSPRS maintains an annual rate of 10.26%, about $58 will be earned every pay period on the $12,000 refund amount versus only about $24 at 5.25%.

14 comments:

  1. What would thay rate be? The actual return rate you mentioned and how woild that translate into dollars?

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    1. I addressed your question as an addendum to the post.

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  2. Bummer. Was hoping pbi's to be addressed.

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  3. Me too. I asked someone from PLEA if they were going to support that and they said no.

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    1. I think it is unlikely that any organized labor group would bring a lawsuit over Proposition 124. It would have to be an individual or a retiree group, if there is such a thing for public safety. If anything, I suspect the unions will oppose any challenge to Proposition 124 and take the side of the State and PSPRS.
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  4. Drop Zone appreciate the info you always put out. Thanks for taking the time to inform us.

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  5. You're welcome. Thanks for reading.

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  6. Just curious, what about post judgement interest? Has that been determined? Thanks

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    1. Per statute, post-judgement interest is 10% per year. The question is what is the benchmark for pre- and post-judgment. I don't know if this goes from the trial court decision or all the way back to the Supreme Court decision last November. Hall already has a final trial court decision, but PSPRS members are still in limbo. My feeling is that post-judgment interest will not start until after the trial court decision. As most PSPRS members will probably already have been refunded their excess contributions before a final trial court decision, post-judgment interest will be a moot point.

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  7. I like how many on here want a challenge to prop 124. Hey bankroll it yourself if you think it's such a sure thing. I mean many of you have huge drop accounts thanks to those unions. Maybe the unions realize that for the greater good of everyone including future employees that the pbi was bankrupting psprs. Current employees in phoenix haven't had a raise in 10 years. New hires would have only a 401a plan if it wasn't for the unions. But hey give me my 4% oh yeahbi might not have a pension in 10 years but who cares.

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    1. Here's a thought: For those who don't want the 4 percent or their refund of their own money, they can write a check to their respective cities or to PSPRS. Wonder how many will do that? The 4 percent was money that was being returned to members because it was illegally taken. While it wasn't a raise, its most likely the only money you have seen in the past ten years, especially if you work for Phoenix. With that said, heres another idea: how about if the cities and state raise taxes and divert that money directly to public safety. Then they will have the money to contribute to the pension system. Phoenix had the 2 percent food tax but politicians chose their careers over public safety and eliminated the tax. In order to have the public safety that is necessary it has to be paid for. It would also help if cities didn't spend money on stadiums, artwork, motels and other unnecessary "investments" that don't earn any money. And the unions being the saviors? They didn't give us our pensions and as a matter of fact jumped right on the Prop 124 bandwagon to sell out the future public safety employees. One shouldn't only look at the PBI and COLA changes but also the other items that came with Prop 124 such as defined contribution plans and age 55 to collect even one dime of pension. And by the way, there won't even be close to a chance for COLA's under the new CPI formula because the system must be funded at 90 percent to receive 2 percent, 80 percent to receive 1.75, and 90 percent to receive the 2 percent maximum. And then there is also the fact that one has a waiting period and/or age trigger to even get the COLA. So the PBI formula while not perfect is the only option and most importantly another contractual benefit that was illegally taken away by the legislature. It will be litigated, so for those who disagree start giving your unwanted money back to your cities.

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    2. As a correction to your comment, per statute, the sliding COLA scale based on PSPRS' funded ratio only affects Tier 3 members, who obviously won't be retiring 25 years or more from now. Tier 1 and 2 members' COLA's will be the lower of 2% or the local CPI, whichever is lower, regardless of PSPRS' funded ratio.

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  8. Agreed!! Would be the dumbest law suit ever, board would just make investments to never go above 9%, and no one would get cola's/pbi anymore. Atleast now your almost guaranteed to get something

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