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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 14, 2016

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 calculating one's excess PSPRS contributions, and he was kind enough to share it with all of us.  The method requires three things:
  • Access to your PSPRS account
  • Excel spreadsheet software
  • A basic familiarity with how to use Excel
Mr. Radinsky gave a quick explanation of how to find one's excess contributions in the comments of the previous post, but I have taken the liberty of writing some more detailed instructions on how to do it:
  1. Access your PSPRS account, hit the Access tab, then hit the Contribution History on the left side.
  2. At the top of that window, you'll see a drop down menu where you can choose to "select a format."  Choose Excel, then click on the blue "Export" to the right of the drop down menu.
  3. Your computer should give you the option to open the exported file in Excel.  Choose that option, and the file should open in Excel.
  4. Enable editing with the button at the top.  This spreadsheet will show all your contributions to PSPRS since you joined the system.  What you are concerned with are the columns that show amount and (fiscal) year.  This will tell you how much you have contributed in each fiscal year.
  5. Now you need to separate the following fiscal years (FY's) out: 2012, 2013, 2014, 2015, and 2016 and later.  You can do this by separating each FY out to get a total of all that fiscal year's contributions.  For example, FY 2012 ran from 7/2/2011 to 6/30/2012 on my contribution history.  I found it easiest to cut all the data from each FY's pay periods and paste them in a separate sheet.
  6. Once you have a FY's contributions separated out, all you have to do is use the autosum function to total all the contributions for that FY.  Do the same thing for FY's 2013, 2014, and 2015 to get each of those FY's total contributions .  Anything in FY 2016 and 2017 can be lumped together as they have the same contribution rate.
  7. In order to determine the excess contributions for each fiscal year, you will need to know how much of the total contributions for each year was excess.  You can use the following percentages to determine the excess portion:
    • FY 2012: 11.56% excess (1% / 8.65%)
    • FY 2013: 19.90% excess (1.9%/9.55%)
    • FY 2014: 26.09% excess (2.7%/10.35%)
    • FY 2015: 30.77% excess (3.4%/11.05%)
    • FY 2016 and later: 34.33% excess (4%/11.65%)
       8. Multiply these percentages by each FY's total contributions.
       9. The sum of all these amounts is your total excess contributions. 

The excess contributions should be your refunded "principal."  If you have no access to Excel, you can do these by hand, though it will be a bit cumbersome.  Mr. Radinsky notes that you can multiply your total refund by 75% to see what you will be paid, less withholding, assuming a 25% withholding rate.  These totals do not include any pre-judgment interest owed to members.

Thanks again to Mr. Radinsky for sharing this with us.  I am sure many people will find this very helpful.

***Here is some more helpful information from Mr. Radinsky from the comments:

The only thing I would add is that Excel itself isn't necessary. Microsoft has an accessible online version. Also Google Sheets would work, as well as the Apple spreadsheet equivalent.

Friday, November 11, 2016

Après Hall, the déluge: What comes next for PSPRS members

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. 

Thursday, November 10, 2016


Opinion in Hall v. EORP case has been issued.  Here is the relevant passage of the 42-page decision:
Upon transfer from the court of appeals, we affirm the granting of summary judgment to the employed Plan members . As we held in Fields, the Bill’s change to the benefit increases formula violates the Pension Clause because it “diminishes and impairs” the employed members  pension benefits. The Bill’s changes to the benefit increases formula and the contribution rate also violate our holding in Yeazell because the Legislature cannot unilaterally change the terms of the members’ pension contracts once their rights to those terms have vested at the beginning of the members’ employment.  Contrary to the trial court’s ruling, however, we find that the employed members are entitled to attorneys’ fees and prejudgment interest and that the judgment must run against the State as well as the Plan.

Obviously, there will be more to follow.

Countdown to the Hall opinion: Where you will likely see the decision posted first

I am not certain, but I believe that the Hall v. EORP opinion will be available here after 10:00 AM.   That is the Arizona Supreme Court's 2016 opinion search page.  Like everyone else, I would like to read the opinion as soon as it comes out and not have to wait for it to be reported in the media, so I have my fingers crossed that the opinion is ready to be posted online as soon as the clock turns 10:00.

This feels like Tuesday night all over again, doesn't it?

Wednesday, November 9, 2016

***** BREAKING: A decision in Hall v. EORP has been reached. BREAKING *****

The court opinion we have all been waiting for is expected to be announced tomorrow, November 10, 2017, at 10:00 AM in the Hall v. EORP case.  The 24-hour pre-notice of the opinion is available here.  Obviously, there will be more to discuss once we know what the decision is.