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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...

Wednesday, March 29, 2017

PSPRS members: Another update on the Hall case

There is some new information from PSPRS, which appears directed at employers, not PSPRS members.  I don't know if it was sent out to everyone, so here is what came out today:
Notice to EORP, PSPRS employers on Reversion of Member Contribution Rates
The Arizona Supreme Court issued its mandate in the Hall v. EORP lawsuit for the Superior Court to begin implementing the remedies afforded by the ruling and it has been determined by the Board of Trustees that those remedies will also apply to the Parker lawsuit.
Therefore, effective immediately by Board action this afternoon, the employee contribution rates for all members hired on or before July 19, 2011, are to revert to the following rates at the beginning of the first complete pay period on or after April 1, 2017, or as soon as practicable after that.
  • EORP (Hall):  7.00%
  • PSPRS (Parker):  7.65%
Please notify our Active Member Department (ActiveMembersGroup@psprs.com) of which pay period will feature the lower contribution rates for impacted members. It is crucial that the rate revert at the beginning of a complete pay period as we will not be able to determine any excess contributions that would need to be refunded if the employee contribution rate is not reverted for an entire pay period.
It is still unknown as to when the excess contributions will be returned to impacted members but it cannot happen before the parties agree in Superior Court to a rate of interest, the time period for which that interest applies, and the methods for which the contributions may be returned.
However, reverting the contribution rates to the above amounts is the crucial first step before any calculation of excess contributions can be calculated. We will work with each employer, on an individual basis as necessary, to that successful end. Therefore, please contact PSPRS if you need help identifying those members who are affected.
Please remember that all EORP members hired on or after July 20, 2011, will continue to contribute at 13.00% and the employer will continue to contribute at 23.50% for all elected officials. Also, this change does not affect any of your members in the Elected Officials' Defined Contribution Retirement System.
For PSPRS members hired on or after July 20, 2011, the employee contribution rate will remain at 11.65% while employers must continue to pay their current individual employer contribution rate.
For any employers who may have members in the Corrections Officer plan, their employee contribution rate was never increased, so they are not affected by either lawsuit or entitled to refunds of excess contributions.
The Hall and Parker lawsuits will also result in retroactive permanent benefit increases (PBI) for impacted retirees in all three plans. However, the issue of interest must also be settled at the trial court level before retroactive payments can be made.
We will continue to provide information regarding the return of excess contributions to impacted members and the payment of retroactive PBIs to retirees as updates continue to develop.
Thank you for your help,
PSPRS Administrator Jared Smout

I also wanted to post this helpful comment from reader Dave Christian:
With respect to the actual mechanics of the refund, PSPRS is going to expect employers to refund the excess contributions once we have a calculation on the interest component. As you said, the excess contributions themselves are easy enough to calculate. Then the employers will get a 'credit' to use against remittance of current payroll. So the employers will put the funds on the employee paychecks. This means that they will be treated as a 'bonus' and taxed at a much higher tax rate. It will be up to the employer to facilitate employee's wishes to roll the money into another qualified plan. As a finance manager for a large fire district, I am currently in a holding pattern. There will be a ton of communication I need to get out to our employees about their options and I am anxious to get started. The waiting game never seems to end on this issue.
I would like to express my thanks to Mr. Christian for sharing this.  Once again, I am perplexed and disappointed, though not surprised, by the PSPRS administration and Board of Trustees.  If this is what PSPRS is telling employer representatives it seems to contradict what they say in their official missive, which says that the Superior Court must determine, "the methods for which the contributions may be returned."  I understand that interest payments will be an issue for debate.  However, it seems they already know how they plan to return active members' excess contributions to employers, and instead of being honest with PSPRS members, whose money it is they are holding, they prefer to play coy and leave members in the dark.  They know what they are going to present to the Superior Court judge when it comes to refunding excess contributions.  There is no reason to withhold this information from PSPRS members.

Certainly, what Mr. Christian details seems to be the easiest way to refund excess contributions to active PSPRS members.  With so many different agencies, it would simply be too cumbersome and complicated for PSPRS to handle it themselves.  I, for one, would be relieved to have this done at the employer level with coordination and input from union locals to best meet employees' needs and desires, be they lump sum payments, transfers to tax-deferred accounts, payments over time, etc.  Active PSPRS members will be better off trusting those who actually have a history of trying to help them.  The PSPRS administration and Board of Trustees have been chronically contemptuous and dismissive of PSPRS members.  PSPRS members have good reason not to trust them.


  1. The employer refunding excess payments, as Mr. Christian speculates, is fine for current active PSPRS members. What about those of us who have already retired? Everything you write seems to forget about us. Anyone who retired between June 2011 and today also contributed the higher amounts, but are not mentioned in regards to the Parker suit.

    1. The Parker case covers anyone who was active when SB 1609 went into effect. I believe Philip Hall, who filed his case as an active judge, has since retired from the bench, so he is in the same boat as you. No one, active or retired, has gotten any of their excess contributions back. I cannot know how PSPRS plans to pay excess contributions to those who are already retired or pay out retroactive PBI's to those eligible for them. I can only pass on the information available.

  2. So let me make sure I understand.....PSPRS broke the law, took our money over the last six years and now when its paid back, it is a BONUS? I understand when it was taken it was pre-tax but the last thing this is, is a bonus as it was ours!

    1. It's important to remember that we are talking about a withholding rate, not the actual tax rate, which would vary based on your total income at the end of the year. You are certainly correct that this is not a "bonus", or supplemental wages, and in fact, are back wages that were taken unconstitutionally. The bonus term is the common term used for this tax treatment of supplemental wages. This tax treatment may be necessary because of the size of the payment, and it may protect employees from a sizable tax underpayment at the end of the year.

    2. No kidding. The employer will probably try to spin it to be a COLA. This is pathetic. What a pathetic way to treat the hard working folks who worked for years for this state. Only to be lied to PSPRS, who are supposed to be looking out solely for the PSPRS members.

    3. It is not bonus or supplemental wages. It was wages earned and taken unlawfully. It should not be subject to the 25% bonus rate and the employee should be the one to determine their withholding rate for this refund.

  3. This is all so confusing to me. How will this affect members who retired prior to July 2011. Will our PBI be calculated on the old formula or new COLA formula?

    1. I find it confusing as well because it all deals with dates. To the best of my knowledge, there should only be a handful of retirees eligible for retroactive PBI's. Those would be individuals who retired in FY 2012 or 2013 and were not covered under the Fields decision. This small group now is eligible for PBI's from those years, if they met the eligibility requirements in place at that time. Those who covered under Fields, those retired before SB 1609 went into effect, would have already been paid retroactive PBI's for those fiscal years. Since then there have been no more excess earnings to pay PBI's and no more PBI's.

      As I said before, it all depends on when certain things happened and what were the requirements at that time. Now, of course, all PSPRS retirees are under the new COLA formulation, which awards the lower of 2% of your individual benefit or the CPI. This is the law unless someone decides to challenge it in court.

  4. They would have to challenge the changes by the voter referendum violate the contract the Hall decision ruled could not be breeches by the employer or state and ruled was effective the date of hire. Seems like it would support a new lawsuit claiming the public can't breech it either because after all their representatives were the ones who entered into the contract on their behalf.

    1. There is a multi-million dollar question still hanging in the air. Contracts can be violated but it is under strict conditions. The state tried to argue that the dire financial status of the pension met those conditions. The courts disagreed. The fact that the pension was not earning enough was not a reason to violate the contract employers and PSPRS had made with employees when they joined PSPRS. Otherwise, the state could modify conditions any time the pension was not performing like it needs to.

      The new question is whether voters can, via referendum, alter that contract. I agree that this question should be settled once and for all, and the state did try to get the Supreme Court to consider the Contracts Clause, though they refused. If voters can, why couldn't voters make other changes to the contract in the future, especially if there is another financial market downturn.

  5. Does anyone know if the DROP contribution rate is going back to ZERO like it was before SB1609? It seems inconsistent with the court's logic to have DROP contribution "revert" to a rate that didn't exist before 1609.

    1. I don't believe anything will change with the DROP. The only change that occurred with the DROP was that Tier 1 employees without 20 years (Tier 1b) on 12/31/11 get a rate based on the average annual return of PSPRS, currently 4.5%, not the expected rate of return, currently 7.4%, that Tier 1a members (20 years of service as of 12/31/11) receive. Also, the Tier 1a employees do not pay contributions to PSPRS, while Tier 1b continue to pay employee contributions during the time they are in the DROP but receive a refund of these contributions, plus 2% interest, when they finally leave employment.

      These were minor changes not worth contesting. I also do not believe that the DROP constitutes a retirement benefit. It is a longevity incentive that could be (and should have been) eliminated. It would be better to let sleeping dogs lie than to challenge these minor changes and risk the entire program's elimination.

  6. Question about your last post Drop. If somone was in Drop during the last 2 years and was still contributing the high rate. Those contributions were going to be returned when the employee is done along with 2%. Now if there is a refund does PSPRS have to return the excess contributions to that employee and the remaining balance with interest re configured ?

  7. Yes, I think that PSPRS would have to return to you anything you paid to them over 7.65% both before and after you dropped. They would also have to pay you whatever the pre-judgment interest that is mandated by the judge, which by law should be more than double the 2% you will receive on your member contributions paid while in the DROP.

  8. It looks like contribution rates and refunds for overpayments do see the light of day. Does anyone have a timeframe for PBIs and refunds for retirees. Is there a hearing set. "The Hall and Parker lawsuits will also result in retroactive permanent benefit increases (PBI) for impacted retirees in all three plans. However, the issue of interest must also be settled at the trial court level before retroactive payments can be made".

  9. In light of the Hall and Parker decisions, do you anticipate or have you heard of any reversal of the service time buy-back changes that capped it at 5 years? I purchased some of my service time when I moved to Arizona in 2008 with the expectation of buying the remainder at a later date. That option was removed near or at the time of the Legislative changes to the contribution rates.


    1. It is always difficult to get a feel for what is happening. In the last PSPRS meeting notes, I did not see any legislative changes affecting service purchases. There is an active lawsuit against PSPRS (Russo v. PSPRS) challenging changes to A.R.S. 38-853.01, which is the statute affecting service purchases. However, I do not know exactly what changes he is claiming are unconstitutional as I do not have access to the actual court documents. I have posted a link in the sidebar to his case. Oral arguments are set for 5/4/17. Hopefully, something will come out after that. I am sorry that I do not have more information than that. I know that this is just one more issue that has added uncertainty and frustration for a lot of PSPRS members.


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