Featured Post

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...

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. 


  1. Some of us entered the DROP recently and are under the program where we still contribute to PSPRS, but the contributions are returned to us when we terminate our employment, along with interest. As a result of this court decision, will we also get our excess contributions returned to us, as we are contributing at the current rate.

    1. It would only seem fair that you would receive a refund, just like anyone else. If PSPRS took anything over 7.65% and are holding it while you are in the DROP, that amount should be refunded to you. Not only that, you should get the pre-judgment interest on those excess contributions at 4.5%, which is more than double the 2% PSPRS pays on the contributions they hold while you are in the DROP.

    2. My situation, as well. Wondering if we should expect a refund of our continued contributions (plus interest) and not just the excess we paid (first 3 years in my case)?

      That was another SB 1609 change...

    3. I think that your continued contribution rate would decrease to 7.65% of your pay instead of 11.65%, and would be this rate until you leave the job. When you finally leave the DROP, you would have those accumulated returned to you along with 2% interest.

  2. Would the PSPRS consider paying time instead of money? This might appeal to a lot of people, and might save the system some money, might also help municipalities...

    1. I do not believe that PSPRS can make that decision and that the Legislature would have to change the conditions for buying service time. I suppose that they could do that, but it would have to be done quickly as the interest meter is running. I don't believe there would be any political will to do this, especially when we don't know exactly what all this is going to cost employers.

  3. If I am a tier one (20yr retirement elligible) with a date of hire of 7/8/11 with my employer and entered psprs in November 2011, does the ruling in Hall effect me at all? I am being told no by my union. If this is so, why, and if it was against the law to add the excess contributions to those hired before 7/1/11, why is it not against the law for the extra contributions to be added to those hired after, especially if the member is tier one in psprs?

    1. You are a Tier 2a based on your hire date, not a Tier 1 member, because you entered PSPRS before 1/1/2012 but had less than 20 years service as of 1/1/2012. A Tier 1 member had 20 years of PSPRS time before 1/1/2012. Here is a link to the AZ FOP website that explains the different tiers:


      When I first read your question, I thought that you were covered under Hall because I was under the impression that all changes in SB 1609 were effective 1/1/2012, but after re-reading SB 1609, it appears that there is some ambiguity because it says contribution changes are retroactive to 7/1/2011. See this legislative summary:


      I would not want to comment any further about what this means for you since I do not have the expertise to interpret legislation. I hope that for your sake that this is just an administrative procedure that was required because PSPRS' fiscal year starts 7/1 but laws do not go into effect at the start of a new calendar year. I don't know why this one change would have a different effective date than every other change in SB 1609.

      That a small group of members that entered PSPRS between the short interval between 7/1/2011 and 12/31/2011 are not covered by Hall and not entitled to a refund of excess contributions seems like an injustice to me. This will cost someone like you thousands over your career. I hope there is a clear resolution of this for you and others. I hope you have good union representatives. Good luck and please update us if you get a definitive answer, which would most likely come in the form of a refund from PSPRS.

  4. If a PSPRS member downloads their contribution history to Excel, they can easily get an accurate amount of what they paid above 7.65%. Simply starting in FY2012 (July 2011) create a cell with a formula that divides the contribution amount by the contribution taken, then multiply that by the difference between that taken and the 7.65% For instance:
    =(Dxxx/.0865)*(.0865-.0765) where xxx is the row number
    Copy that down for all of FY2012. Then change .0865 in both places to .0955, .1035, .1105, and .1165 for their respective fiscal years (2013, 2014, 2015, 2016). Sum up that column and that is the total paid over 7.65%. If you multiply that result by .75, that would approximate the post withholding amount, if your assumptions are correct.

    1. That is great! I did not notice that you could export your contribution record to a spreadsheet. I hope you don't mind if I post this to the blog (crediting you, of course). I am sure many people would be interested in this.

    2. That was very helpful, thank you.

    3. I don't mind at all. Hope you don't mind my clown friends completely taking over your facebook feed on this.

    4. I knew there had to be at least one other person in public safety that was interested in the numbers. Thanks again.

    5. This comment has been removed by the author.

    6. Rick, Can I get you to check my logic on a spreadsheet?

    7. Any further updates?

  5. I believe I know the answer to this all ready, however..
    Will this decision effect the calculations from above for a member who bought $140,000 in military time during this five year period?

  6. PSPRS just posted something on their website, along with the 2017 and 2018 contribution rates. Big increases in 2018 as expected. Looks like we are a long ways out from seeing any refunds anytime soon and they almost make it sound like it may not even happen. Thoughts?

  7. I recently noticed that there has been several motions filed, to include a motion to reconsider, which will require a response from the plaintiffs. This could drag on for some time. Is it correct that this will then need to go back down the lower court for the final remedies? I thought they would have returned the contribution rate back to the original amount, but that has not changed either. Thoughts?

    1. Annoying that they didn't at least return our contributions to the proper rate. Seems you'd want to at least stop the bleeding.


Relevant comments are welcome, but please adhere to the following rules:

1. No profanity or vulgarity.
2. No spam or advertising.
3. No copyrighted material may be posted unless you are the copyright owner.
4. Stay on topic.
5. Disagreement is fine, but please avoid ad hominem attacks.

Comments reflect the views of the authors alone, and do not reflect the opinion of this website.