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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, June 28, 2017

PSPRS members: A preliminary estimate on how much pre-judgment interest you will receive on your excess contributions

Like many people, I am interested in how much pre-judgment interest will be paid.  This calculation is, unfortunately, not as simple as determining your principal owed, a figure now available on your PSPRS account.  However, I was able to calculate some rough estimates based on what we know now.

What I have heard is that pre-judgment interest will be simple interest, meaning that interest will not be earned on interest, only principal.  The formula I used was to take the expected interest rate, likely 5% per year, and divide it by the 26 biweekly excess contributions that were collected by PSPRS since the start of fiscal year (FY) 2012.  This biweekly interest (0.05/26) is 0.00192308.  So this is how much interest one would earn every two weeks on their accumulated excess contributions.  If we start with my very first excess contribution of $25 in July 2011, I would have earned $0.05 in interest two weeks later.  Assuming my next excess two weeks later remained $25, I would earn simple interest on $50, which would be about $0.10.  My cumulative interest after four weeks would then be $0.15.  On $75, I would earn $0.14 for a cumulative interest of $0.29 ($0.05 + $0.10 + $0.14).  Additional interest would be earned every two weeks all the way up until a final judgment on the excess contribution portion of Parker v. PSPRS, which may come July 12, 2017, the next court date in Parker.

My final refund total was right around $12,000, so every two weeks I will earn an additional $23.08.  This biweekly pre-judgment interest amount will not change as no more excess contributions are being taken by PSPRS.  However, it is possible that the rate could change to a post-judgment rate of 10% per year after the final judgment on the excess contribution portion of Parker.   The biweekly interest rate earned would double to over $46.  I suspect that there will not be any difference in the pre-judgment rate between Hall and Parker as the parties in Parker agreed to abide by the decision in Hall, but since they are two different cases, there still must be a formal decision in Parker by the judge in that case.  I also do not know if the plaintiffs in Parker are going to challenge the constitutionality of Proposition 124, which changed the permanent benefit increase (PBI) formula via voter referendum last year, as a violation of the contracts clause of the Arizona and US Constitutions.  Regardless, any unresolved constitutional issues will not affect the excess contributions issue.

So what was the final pre-judgment interest I figured for myself as of the end of June 2017 with the method I described?  I have an estimate of $1,420 total prejudgment interest at the 5% annual rate.  If I increase the interest rate to 5.25%, which would be 1% plus the prime rate in effect today (The Federal Reserve raised interest rates 0.25% on June 14, 2017, several days after the final decision in Hall.),  it will increase to about $1,489.  I would have preferred to create a table with different excess contributions amounts and estimated pre-judgment interest totals, but I feel that everyone's situation is probably so unique that it will give an inaccurate picture of their pre-judgment interest amount.   There are just too many different factors in how the excess contribution grew over time to make a generic table for everyone.  However, if you have been paying the excess contributions for the full time and are somewhere around $12,000 in total excess, $1,300 to $1,500 in pre-judgment interest is probably a good preliminary estimate at 5% per year.  Of course, this is just my methodology on pre-judgment interest.  It remains to be seen what PSPRS will actually do.

Friday, June 9, 2017

***Hall v. EORP is finally concluded and the lower pre-judgment interest awarded***

Judge Thomason has reached a decision in Hall v. EORP.  Plaintiffs will not receive the higher 10% rate as if the settlement were based on a loan, indebtedness, or other obligation.  There is not an actual interest rate attached to the judgment, but it should be around 5% based on the current prime rate.

This should end the Hall v. EORP case, unless the plaintiffs decide to appeal the interest rate decision, as attorneys' fees were awarded and the judgment was also upheld.  The final decision in this case should apply in Parker v. PSPRS as well, at least as it pertains to a pre-judgment interest rate.  I do not know if the plaintiffs will challenge the constitutionality of the change in the PBI/COLA formula implemented last year by Proposition 124.

You can read the full decision here.

Thursday, June 8, 2017

The lastest on refunds of excess contributions in the Hall v. EORP and Parker v. PSPRS cases (Update 2)

I would like to thank the anonymous commenter who provide information and a link in the last post.  The comment pertains to the rate of interest and references a May 11, 2017 appellate decision in Arizona State University Board of Regents v. Arizona State Retirement System (ASU v. ASRS).  The case in question has some interesting similarities and differences from Hall v. EORP that could influence the decision in Hall and Parker.

Like Hall and Parker, ASU v. EORP involves and overpayment of contributions, but the contributions in ASU v. EORP appear to be employer contributions for an unfunded actuarial liablity claimed by ASRS.  ASRS demanded a payment of over $1 million from ASU with a penalty of 8% annual interest on any amount not paid within 90 days.  ASU made the payment but sued ASRS over the claim and won.  This reversed the debtor/creditor relationship, and ASRS had to refund the payment.  As in Hall, the final sticking point was over how much interest to charge.  The Superior Court judge order the judgment rate of "the lesser of ten percent per annum or at a rate per annum that is equal to one percent plus the prime rate as published by the board of governors of the federal reserve system," rather than the ten percent per annum rate on "any loan, indebtedness, or other obligation."  The rate awarded at the time was 4.25%, less than half what would have been awarded on a loan, indebtedness, or other obligation.

ASU disputed this interest rate, in particular because it was based solely on a judgment.  They prevailed in this argument and have been awarded the ten percent rate.  The Appeals Court decision is only six pages long, but the gist of it is that ASRS treated the original demand for payment like an indebtedness, which included a punitive interest rate for any delay in remittance, that was required to pay an actuarial unfunded liability.  If this was the case when ASRS was the creditor, it was equally applicable when ASRS became the debtor and had to pay the same money back to ASU.  This certainly seems like a fair and reasonable rationale.

The question for us is would this be applicable in Hall and Parker?  While there was no formal demand for payment from PSPRS to employees for the extra contributions, employees had no choice but to pay them, and the extra money was just taken from them whether they consented to it or not.  Employees did not formally agree to give or loan money to PSPRS.  The government used its power to extract it from their paychecks.  As ASU did, employees paid it then went to court to challenge the additional amount.  If we look at page 14 of PSPRS' 2016 Consolidated Actuarial Valuation, it describes the additional 4% paid (the excess contributions) in that fiscal year as a "portion used to pay down unfunded liability."  So we see that PSPRS members unjustly had a part of their earnings taken (no threat of punitive interest was necessary as they had no choice in whether to make the additional contributions) to pay an unfunded PSPRS liability.  Now like in ASU v. ASRS, we see the script flipped and the debtor and creditor switching places.

However, this is no slam dunk for an award of ten percent per annum interest.  ASU v. ASRS was a dispute between two parties over a specific issue involving 17 individuals taking part in a termination program.  In the judgment of ASRS, ASU was in arrears to ASRS.  ASU disagreed and the court agreed with them.  In regards to the Hall and Parker cases, EORP and PSPRS were making no demands on their respective employees and were simply following the requirements of SB 1609, for which the Arizona legislature was responsible.  This major difference seems likely to reduce the chances that PSPRS members are awarded a ten percent per annum rate of pre-judgment interest.

This is all in the hands of Judge Thomason now.  The latest information on the Hall case says that the matter is under advisement, meaning the judge is making his decision.  Once again, I would like to thank the reader who referenced this case.  It is often difficult to keep up with everything that is going on, and any help that can be provided is greatly appreciated.

Wednesday, June 7, 2017

The lastest on refunds of excess contributions in the Hall v. EORP and Parker v. PSPRS cases (Update 1)

Here is the latest, albeit minimal, information on the Hall v. EORP case that was posted on PSPRS' Facebook page:
Hall-Parker non-update update: The issue of interest was not settled during yesterday's trial court hearing for the Hall lawsuit. The court is expected to issue an order in the following days although the ruling will pertain to EORP. 
Applicable interest for PSPRS members impacted by the Parker lawsuit is expected to be determined sometime next month. 
However, PSPRS is working to soon provide employers with itemized lists of impacted employees and the pre-judgment (without interest) amounts owed to each individual.
This paves the way for member refunds as soon as possible, followed by separate payments to cover any interest awarded by the court. 
PSPRS will continue to provide updates as they develop.
Obviously, the plaintiffs and EORP do not agree on what a fair interest rate should be.  It would be intersting to know how far apart the parties are and on what rationale each side is basing its proposed interest rate.  We previously discussed what a fair interest rate might be in this post, which as of the end of January 2017 was an annualized rate of 5.42%, which is what I estimated PSPRS had actually earned on members' excess contributions.  This would mean that PSPRS would neither lose nor gain money on the excess contributions during the period they were being taken.  The latest annualized rate will be somewhat higher since PSPRS earned over 1% per month in February and March 2017.  It is possible that the plaintiffs could be arguing for a much higher interest rate by pointing to the S&P 500 or some other stock index or combination of indices as a baseline for what they could have earned if the excess contributions had never been taken from members.  However, this would be unfair to several groups, including employers, taxpayers, PSPRS members, and PSPRS itself, all of whom had no responsibility for SB 1609, and should not be punished for following through on its implementation.

Today's PSPRS post says that a decision should be coming in "the following days," which could be tomorrow or anytime in the future.  I believe that a decision should be relatively quick, though, since it is a specific number that the judge believes will deliver a fair amount of interest.  I do not see any legal nuance to this, and the judge has already had time to review the motions from both plaintiffs and defendants and heard their oral arguments advocating their respective positions.

It appears that the pre-judgment interest rate for EORP plaintiffs will be used up until Judge Thomason issues his final ruling in Hall v. EORP and that post-judgment interest has not been accruing since the Arizona Supreme Court decision in November 2016.  The next scheduled court date in Parker v. PSPRS is on July 12, 2017.  Though there is a different judge presiding over that case, I do not see why that judge would order a different pre-judgment interest rate as EORP and PSPRS invest their contributions in the same large pool of investments.  Employers were just given the go-ahead to start refunding excess contributions on May 31, 2017, and assuming there is a final judgment in Hall prior to July 12, 2017, this gave employers only six weeks to set up a system for refunding excess contributions to affected employees and retirees before post-judgement interest, which can be as high as 10%, begins to accrue on employers.

If we look at the PSPRS Return of Contributions Memo from the May 31, 2017 Board of Trustees meeting, it includes a legal opinion about how to return excess contributions from both Hall and Parker.  That legal opinion is dated May 25, 2017, only six days before the meeting and over six months since the Arizona Supreme Court decision in Hall.  PSPRS' post from today states that they are "working to soon provide employers with itemized lists of impacted employees and the pre-judgment (without interest) amounts owed to each individual."  So PSPRS has not yet gotten individual amounts to employers, even though employers will soon begin accruing post-judgment interest on unpaid excess contributions?  PSPRS also advises employers to give employees a chance to change their withholding rates and contribution amounts to tax-deferred accounts.  Nevermind, the time necessary for consultations to take place between employers and their union representatives, who then have to get answers out to their membership.

We once again see the unprofessional and shabby treatment by PSPRS of its stakeholders.  To be so out of touch with the realities faced by PSPRS local boards, employers, and union locals, those they are supposed to serve, is a disgrace.  PSPRS needlessly imposes costly financial deadlines on employers and administrative burdens on local boards and union locals all while they dilly-dally and move with no sense of urgency on their end.  PSPRS literally had years to figure out what they were going to do if Hall was decided in favor of the plaintiffs, but they never established any timelines to aid this process once the decision came down.  Of course, if you really want to get a true picture of PSPRS' management and Board of Trustees, we can always look to their own words.  This appears in the Return of Contributions Memo:
Furthermore, it is my recommendation that should an employer choose to utilize contribution credits that we allow pre-judgment interest to be included in those credits.  However, due to the complexity of tracking and coordinating the amounts with the employers, I do not recommend that post-judgment interest be included in the credits so as to entice the employers to return the excess contributions as quickly as possible. (italics mine)
I do not know who the "I" in this passage, but it takes an especially arrogant and clueless individual to imply that employers, who will be doing all the hard work of getting refunds out to employees and were given a short timeframe to do so and very little assistance from PSPRS, need to be incentivized to do the right thing.