Now that we have a day for the
Hall v. EORP decision to sink in, let's look at some of the issues:
Where's your money?: How and when effected members will be refunded their excess contributions is up to PSPRS. I have checked their
website,
Facebook page, and
Twitter page, and there is no information to members about what the next steps are. Once again, we are reminded of the complete lack of consideration PSPRS' management has for its members. They have gone into Veterans' Day, which I assume is a day off for them, leaving members with no information, despite knowing that this decision was coming yesterday and how eagerly anticipated it was by PSPRS members. I guess they were too busy planning what they were going to do over the long weekend to give even a brief statement about what we can expect. However, I did see that their spokesman, Christian Palmer, had time to speak to Howard Fischer of Capitol Media Services yesterday. You can see what Mr. Palmer had to say to Mr. Fischer in this November 10, 2016 article in the
Arizona Daily Star,
Arizona pension ruling could mean $220 million in refunds to some workers. I guess the rest of us can wait until Monday to maybe find anything out.
How much will you get? It will be difficult to figure an exact amount for several reasons. First, the contribution increases were done incrementally over a five-year period, increasing annually by 1%, 0.9%, 0.8%, 0.7%, and 0.6% to reach the full 4% increase from 7.65% to 11.65%. We are currently in the second fiscal year in which we are paying the full 4% increase, meaning since July 1, 2015, we have been paying the full 11.65%. Starting in fiscal year (FY) 2012, which started July 1, 2011 and ended June 30, 2012, the contribution rate was 8.65%, FY 2013 9.55%, FY 2014 10.35%, FY 2015 11.05%, and FY 2016 and after 11.65%. We are in FY 2017 now.
The second complication is that the rate changes were made in the middle of the calendar year, so you cannot simply look at your W-2 or last paycheck of the year and calculate what your excess contributions were. You would need to know what you made in each half year to get an accurate amount. Except for the current calendar year, you would have to look at all your paychecks to determine the excess contributions in 2011-2015.
Finally, you may have had changes in what was considered pensionable income over the years. Most notably would be if you were selling back sick leave. This was always forbidden by state law, but many employers did not enforce it until the Goldwater Institute sued and forced those allowing it to stop the practice. Depending on what was or was not pensionable at any particular time, your excess contributions may be impossible to determine without a detailed statement from your employer.
If your employer includes your year-to-date (YTD) pension contribution on your paycheck, you can easily calculate your excess contributions for 2016. This is because 2016 is the first calendar when the contribution rate did not change on July 1st. If you take your YTD pension contribution and multiply it 0.343 (4%/11.65%), you can determine your excess contribution in 2016 YTD. For instance, if you paid $5,000 to PSPRS so far this year, you will be owed about $1,716.
I did a calculation for someone with $60,000 in pensionable income over the five fiscal years between July 1, 2011 and June 30, 2016
here. The total excess would be $7,800, which is the sum of $600 (1% excess), $1,140 (1.9% excess), $1,620 (2.7% excess), $2,040 (3.4% excess), and $2,400 (4% excess). For ease of calculation, let's assume another $1,200 for the last six months of 2016. This would bring a total excess contribution amount of $9,000 for an individual making $60,000 in pensionable income a year since July 1, 2011, not including interest.
How much interest will you get? The opinion awards
pre-judgment interest and refers to
A.R.S. 44-1201 (F). Here is what that statute says:
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 placed in boldface the part that I believe is applicable as this was not a "loan, indebtedness, or other obligation." So I expect the rate to be one percent plus the prime rate. The
prime rate is currently 3.5%, so members should be paid 4.5% per year in interest. I do not know if this amount compounds annually, monthly, or daily. Using our previous example, I calculated, without compounding, 4.5% for each of the first five fiscal years and 2.25% over the last six months of the accumulated principal, the sum of 4.5% of $600, $1,740, $3,360, $5,400, and $7,800 and 5.25% of $9, 000. This conservative estimate of interest comes to $1,053, but of course, how they decide to calculate interest remains to be seen.
What about taxes? I would assume that refunds will come in a lump sum since the longer PSPRS holds on to the excess contributions, the more interest will accumulate. There is also a possibility that the Federal Reserve could raise the prime rate some time soon, which would raise the interest due. One month of 4.5% annual interest on $220 million would be $825,000, so I think payments will be here before the end of the year. I am guessing that interest is the Court's tool to keep PSPRS from dragging its feet on paying back members.
As these refunds will be lump sum payments, it is likely that they will be subject to a 25% withholding. This is not the tax rate, just what I suspect the IRS would withhold from a lump sum refund of excess contributions. We must remember that these payments (minus interest) are wages so they will be subject to income tax at your particular tax bracket. This is one reason why it is important for PSPRS to expedite the refunds (and why interest will work as a good incentive). If PSPRS were to delay payments until next year, members could pay a 25% withholding early in 2017 and not receive a refund for overpaid taxes until a year or more later when they get their 2017 tax refunds.
If there is an issue with a PSPRS member receiving such a large refund that it changed him or her into a higher tax bracket, there might be some way to alleviate this by breaking up the refund payment over two calendar years, perhaps with one payment in December 2016 and the other in January 2017, or to transfer some of the money into a tax-deferred account. Hopefully, this will not be an issue for very many members.
What happens to our employers? The referenced article by Mr. Fischer states that the
Hall decision will increase pension liabilities for EORP and PSPRS by $1.3 billion. As of FY 2016, EORP had only 738 active members versus 18,409 for PSPRS, so it is safe to assume that nearly all of that $1.3 billion in increased liabilities belongs to PSPRS, though I do not know how many of the 18,409 joined PSPRS in 2012 or later and are not affected by the decision. Furthermore, EORP was closed to new members starting in 2014 and has not been incurring liabilities for any new members since 2013.
It is important to note that the increase contributions required by SB 1609 were
not paying part of the employer's contributions. PSPRS still calculated the annual required contribution (normal cost plus the cost of accrued unfunded liabilities) as it always had, and employees were still charged 7.65%, while employers had to pay what was left. The additional employee contributions were
in addition to the employees' 7.65% contribution and the full employer contribution. There should be no misconception that employees were paying any part of their employer's share. Employers have been paying full freight the whole time SB 1609 has been in effect.
The
Hall decision is going to blow big holes in employer budgets throughout the state. I was able to find an actuarial study from June 2014 that included the possible effects the
Fields and
Hall decisions would have on PSPRS' aggregate funded ratio and aggregate employer contribution rate as of June 2013. This study stated that PSPRS' aggregate funded ratio would drop about 3% from 52.8% to 48.9%. The aggregate employer contribution rate would increase over 6% from 36.17% to 42.49%. This was a while ago, so who knows how accurate these numbers are. As of June 30, 2015, PSPRS was funded at 49.0% with an aggregate employer contribution rate of 42.36%. This is very disturbing since these were last fiscal year's numbers, and they are almost right on with what the actuary predicted in 2014 if the plaintiffs in
Hall won, except for the fact that the worsening funded status and employer contribution rate occurred before
Hall was even decided! Who knows how much worse
Hall will make things now.
In the end, employees are going to pay for the
Hall decision in the long run, most likely in the form of lower paychecks, but also in other ways as well. I saw that Mesa voters handily rejected Question 1 this past Tuesday by 53%-46%. Question 1 would have raised the sales tax 0.4% in order:
to fund Mesa Police and Mesa Fire and Medical personnel, equipment, facilities and other services, and governmental and economic development projects, including the ASU project and other post-secondary educational projects.
This ballot initiative was supported by a host of
Mesa's elite, including Bryan Jeffries, who is President of the Professional Fire Fighters of Arizona and, I believe, the Mesa firefighters local. Apparently, none of Mesa's leading lights considered (or admitted) the costs
Hall would impose on their city, or that much of the new revenue from the sales tax increase would be eaten up by increased pension costs. The Mesa Fire and Police Departments' pensions are 54.5% and 51.1% funded, respectively, as of last fiscal year end. At least when the City of Prescott asked for a sales tax increase last year, they were honest enough to say that the new revenue would be used to pay down pension debt. Prescott voters defeated that initiative as well. And for all you conspiracy theorists out there, I am sure it seems oddly coincidental that word of the
Hall decision came out the day after the election. I suspect that if the
Hall decision had come down before the election, Question 1 would have been defeated by an even greater margin by even angrier voters.
There should be more to discuss in the coming days. To all the past and present service members out there, Happy Veterans' Day, and thank you for your service.
