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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...

Monday, November 30, 2015

Worse than it seems: PSPRS' 2015 Actuarial Valuation

The PSPRS Actuarial Valuation as of June 30, 2015 (Fiscal Year 2015) is now available on the PSPRS website.  The actuarial reports for individual employers have not been released, but if you would like to know what your employer's funded ratio is it can be found in Appendix III starting on PDF document page 75.  Your employers contribution rate for the next fiscal year starting July 1, 2016 can be found in Appendix IV starting on PDF document page 81.

Some of the highlights (or lowlights as the case may be) of the report are:
  • The aggregate funded ratio dropped from 49.2% to 49.0%.
  • The aggregate non-phased-in contribution rate increased from 41.08% to 42.36%.  Employers who chose to pay a lower phased-in rate to help pay the increased costs caused by the Fields case have a lower rate that will be made up in future years.
  • PSPRS' total assets increased about $199 million from $6.018 billion to $6.217 billion.
  • PSPRS' total liability increased about $453 million $12.233 billion to $12.686 billion.
  • PSPRS' total unfunded liability increased about $254 million from $6.229 billion to $6.483 billion.
  • The actuary projects the aggregate contribution rate to stay between 42 and 43 percent through 2027, though this is likely to be too low since the actuary used the old 7.85% expected rate of return (ERR) and not the current 7.5% ERR.
  • There were 18,409 active, contributing members of PSPRS at the end of FY 2015 versus 18,526 at the end of FY 2014, a decrease of 117.
  • There were 11,034 retirees and beneficiaries and 1,675 Deferred Retirement Option Plan (DROP) members for a total of 12,709 non-contributing members of PSPRS at the end of FY 2015.  This is an increase of 626 from the 12,083 (10,524 + 1,559) non-contributing members at the end of FY 2014.  (Depending on when a member entered the DROP, the member may make no contributions to PSPRS while in the program, or the member may continue to contribute to PSPRS while in the program then receive a full refund of the accrued contributions and 2% interest when the member finally leaves work.  Regardless, PSPRS ends  with no employer or employee contributions for the up-to-five years a member is in the DROP.)
  • The FY 2015 ratio of active, contributing members to non-contributing members dropped to 1.45.  Last fiscal year the ratio was 1.53.
  • The average annual pay for an active, contributing member increased from $75,048 to $76,114.
  • The average annual retirement benefit for retirees and beneficiaries increased from $51,616 to $51,833.
  • The average annual pay for a member in the DROP increased from $64,173 to $64,659.
  • Employers contributed about $448 million to PSPRS in FY 2015 versus about $414 million in FY 2014.
  • Employees contributed about $165 million to PSPRS in FY 2015 versus about $152 million in FY 2014.
The decreased funded ratio and increased employer contribution rate speak for themselves, but it is actually worse than it seems.  Even though the funded ratio dropped only 0.2% and the employer contribution rate increased by only 1.28%, we have to remember how PSPRS recognizes its investment gains and losses.  PSPRS uses a seven-year smoothing period to lessen the impact that extraordinarily good or bad years may have on PSPRS' funding ratio and the subsequent calculation of employer contribution rates.  If you are interested in a more detailed explanation of the smoothing period, please see this post.

The Great Recession gave PSPRS two large investment losses in FY 2008 and FY 2009, but these two losses are far enough in the past that they are now beginning to fall out of the seven-year smoothing period.  The FY 2008 smoothed loss of about $119 million was eliminated from the calculation of the FY 2015 funded ratio and replaced by a smaller loss incurred in FY 2015.  This dropped PSPRS' recognized loss over the seven-year period by about $82 million from $282 million to $200 million, and yet, PSPRS' funded ratio continued to drop and the employer contribution rate continued to rise.  This means that liabilities are continuing to grow faster than assets, even as the negative impact of the Great Recession begins to lose some of its effect on PSPRS.

In one of the few years when we could expect to see some improvement in PSPRS finances we instead have another disappointing year.  What do we have to look forward to in the near future?  PSPRS' lowering of its ERR from 7.85% to 7.50% will raise the aggregate employer contribution rate 3%, and a plaintiff victory in the Hall case could raise it another 6% on top of that.  So we could see the aggregate employer rate increase by as much 9% over the next year.  Of course, who knows what is really going to happen next year.  The only certainty is that no matter what happens PSPRS and its Board of Trustees will be there to tell us all how great a job they are doing.

Thursday, November 26, 2015

What will PSPRS look like the next time we celebrate Thanksgiving?

As most of us are aware, 2016 will be a watershed year for PSPRS.  The panel of judges selected by the Arizona Supreme Court to adjudicate the Hall case (CV-15-0180-T/AP) will hear oral arguments on February 18, 2016 and will probably deliver a final decision sometime before the end of the current fiscal year.  If you would like to read updates on the case, though there should be no more coming until after oral arguments are heard, you can follow the Pension Litigation Tracker link or go to the Arizona Supreme Court case page directly then click on the active civil cases link and search that page for the word "Hall."

We also have that other branch of government involved too.  This AP story, Lawmakers work on public safety pension system overhaul plan, by Bob Christie appeared in the November 26, 2015 Arizona Daily Star.  It gives tantalizing clues to some of the changes to PSPRS that the Arizona Legislature will be considering in the next legislative session.  Among these are:
  • Changes to how permanent benefit increases (i.e. COLA's) are calculated
  • Income level caps for pension calculations to combat pension spiking
  • Having equal contribution rates for employees and employers
There is not a lot of detail in the article, but it appears that the Legislature is incorporating some ideas from both the League of Arizona Cities and Towns' Pension Task Force Report and the Professional Fire Fighters of Arizona's (PFFA) awful plan.  Mr. Christie attempted to get a comment from PFFA President Bryan Jeffries for his article, but he declined to comment.  Whatever comes out of the Legislature will have to be referred to the voters for final approval, and it seems likely that they would want to do this in November 2016 during a presidential election year when voter turnout will be the highest.

I hope everyone has a safe and enjoyable Thanksgiving this year.  Next Thanksgiving may find all of us in a very different pension system. 

Wednesday, November 25, 2015

PSPRS investment returns through September 2015

The following table shows PSPRS' investment returns, gross of fees*, versus the Russell 3000 for September 2015, the third 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%

There is usually about a two-month lag in PSPRS reporting its investment returns.  PSPRS again outperformed the Russell 3000 in a negative month, suffering about 35% of the loss of the Russell 3000.  As in August, both US and non-US equity were the big September losers with US equity down 3.04% and non-US equity down 4.63%.  The Russell 3000 returned an incredible 7.90% in October 2015, and through November 24, 2015, the Russell 3000 has a more modest 0.80% return.  It will be interesting to see what PSPRS' returns are in October 2015 and how much it recoups of the current year's losses, particularly in comparison to the Russell 3000.

Looking at PSPRS' annualized 5-year rate of return, we can see that during the first quarter of the current fiscal year it has dropped from the 9.2%, gross of fees, that it had as of June 30, 2015 to a current rate, gross of fees, of only 7.04%, well below PSPRS' expected rate of return (ERR) of 7.50%.  Since November 2014, this is the first time the annualized 5-year rate has dropped below the ERR.  It does not bode well for the future if PSPRS cannot achieve its ERR during a 6 1/2 year long bull market in which the Russell 3000 earned 13.28% over the same annualized 5-year period.

* 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.