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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, February 18, 2019

Will to power: New year, new chairman, and a PSPRS update for February 2019

Inflation and COLA's

Let's start with the topic that will interest retirees the most.  The Phoenix-Mesa CPI-U showed an annual average inflation for 2018 of 4.2%, 3.9% for the first half and 4.4% for the second half.  This well exceeds the 2% cap, so eligible retirees can expect a 2% increase in their monthly benefit starting in July 2019.  The 2017 average annual inflation for the Phoenix-Mesa area was 2.5%.

I was interested to see what the inflation rates were in other cities, and while the Bureau of Labor Statistics (BLS) does not appear to have a standard reporting schedule, it did have the average annual 2018 inflation the following places: San Diego - 3.4%, San Francisco - 3.9%, Los Angeles - 3.8%, Honolulu - 1.9%, Seattle - 3.2%, as well as the entire West Region - 3.3%.  I found it remarkable that the inflation in the Phoenix-Mesa is higher than traditionally expensive cities like San Francisco and Honolulu.

Regardless, we have another year in which retirees will see their purchasing power diminished.  This is especially harmful to recent retirees, who will see their purchasing power immediately decreased.  Someone in his mid to late 50's does not want to see his purchasing power decreased by 10-20% over the next 5-10 years when he is trying to remain active in retirement.  Those who had benefit increases under the old permanent benefit (PBI) formula had increases that were greater than the actual inflation rate, so as of now, they should have some protection of their purchasing power. 

Board of Trustees departures

The PSPRS Board of Trustees has seen three recent departures.  The best news is the departure of Chairman Brian Tobin.  Mr. Tobin, an assistant chief with the Phoenix Fire Department (PFD), is retiring from PFD in 2019 after a long and accomplished career there.  He has been on the Board since 2009 and been Chairman since 2010.  His current term was scheduled to end in January 2019.

To say that Mr. Tobin's tenure on the PSPRS Board of Trustees was a disappointment would be an understatement.  Defending the poorly performing management of PSPRS was always seemed his first priority.  Those like current PSPRS Administrator Jared Smout, who should have been forced out of PSPRS at the same time his former boss James Hacking was, and former Chief Investment Officer Ryan Parham, got fat off PSPRS members and taxpayers as some of the highest-paid non-University system employees in Arizona, while year in and year out underperforming the Arizona State Retirement System.  As one of the fire and law enforcement representative members on the Board, Mr. Tobin's role was to hold the likes of Mr. Smout, Mr. Parham, and the rest of the PSPRS management, who had no skin in the PSPRS game, accountable to the rest of us who did.  Sadly, Mr. Tobin failed to do this.  Even when Mr. Parham, PSPRS' Chief INVESTMENT Officer, publicly confessed in 2014 to low-balling PSPRS' returns to prevent paying permanent benefit increases (PBI's) to retirees, Mr. Tobin did nothing and even called Mr. Parham ". . . one of the best in the business for more than a decade," after he retired last year.

Alas, Mr. Tobin may be just be representative of many a public employee representative that sits on Trustee pension boards throughout the country.  See Step 2 in Ben Carlson's February 12, 2019 article, "How to Wreck a Pension Plan in 3 Easy Steps." at his website A Wealth of Common Sense, which says to "invest heavily in things you don't understand."  Modern Pension Diversification is the research paper on PSPRS' investment strategy.  Did Mr. Tobin understand this? Does Will Buvidas, a Phoenix police officer, who replaced Mr. Tobin as Board Chairman?  Do any of the the other three public safety Trustees?  I don't.  It could be complete and utter nonsense, but how would Mr. Tobin or Mr. Buvidas know if it was?  They know how to fight fires and enforce the law, not theoretical finance, much less how to discern whether a complex investment plan is feasible for PSPRS.  Who knows if even the authors or the peer review board members actually understand what they are proposing or reviewing?  (For some perspective, see here and here.)

I suspect, like many public employees who serve as trustees boards like PSPRS', Mr. Tobin, Mr. Buvidas, and the other two public safety representatives were chosen for their union ties.  I do not know Mr. Buvidas' background, but Mr. Tobin is a former president of the Professional Fire Fighters of Arizona.  He also has the added advantage of being the brother of Andy Tobin, a former Speaker of the Arizona House of Representatives, former Director of the Arizona Department of Insurance, and current Arizona Corporation Commissioner.  Union or political ties do not make one conversant, much less an expert, in finance, management, or actuarial science.  The Arizona State Retirement System (ASRS), due to the number and diversity of employers it covers, has a much broader pool of members from which to choose for its Board of Trustees, and even more important, this pool includes individuals with extensive professional and academic backgrounds in finance and management.

Four of the nine members of the PSPRS Board of Trustees are public safety personnel, which means nearly half the Board is beholden to PSPRS' management for clarification and assurance that PSPRS is being managed properly and its investments are sound.  Any time an investment firm, which likely knows down to the last penny how much of its own money it is risking in a deal, tries to sell the Board on a particular fund or other risky investment, say like Arizona shopping malls and housing developments, can these four public safety members make an informed decision, or do they simply rubber stamp the choices of PSPRS' management?  I fear that it is the later and will continue to be that way in the future.

Investment Returns through November 2018

The following table shows PSPRS' investment returns, gross of fees*, versus the Russell 3000 through November 2018, the fourth month of fiscal year (FY) 2019, with the past five FY end returns included for comparison:

Report PSPRS PSPRS Russell 3000 Russell 3000
Date Month End Fiscal YTD Month End Fiscal YTD
6/30/2014 0.78% 13.82% 2.51% 25.22%
6/30/2015 -0.73% 4.21% -1.67% 7.29%
6/30/2016 -0.32% 1.06% 0.21% 2.14%
6/30/2017 0.22% 12.48% 0.90% 18.51%
6/30/2018 -0.66% 7.76% 0.66% 14.78%





7/31/2018 1.03% 1.03% 3.32% 3.32%
8/31/2018 0.94% 1.98% 3.51% 6.95%
9+10/2018 -2.57% -0.59% -7.63% -0.68%
11/30/2018 0.95% 0.36% 2.00% 1.32%

There is usually about a two-month lag in PSPRS reporting its investment returns.  The PSPRS Board of Trustees did not hold meetings in October 2018 or December 2018.  The total return for the September/October period are extrapolated from the August and Novemer figures.

As I am sure most of us remember, October 2018 began a period of extreme volatility in financial markets. September was the last period of relative calm. The Russell 3000 lost about 9.3% in December 2018 and ended the 2018 calendar year down about 5.25%.  However, the markets have shown a gradual increase from the lows of December and, as of last Friday, the markets have recouped much of the loss suffered in December.  PSPRS still lags the Russell 3000 as of November 2018, but it will be interesting to see what the numbers show for December 2018 and January 2019.

Individual Employer Actuarials

PSPRS has individual employer actuarials available here.  PSPRS' consolidated annual financial reports and actuarial reports give an aggregate contribution rate and funded level, but if you want to know how your own employer is doing, follow the link.  The important thing to remember is that many employers chose to reamortize their unfunded actuarial accrued liability (UAAL).  The UAAL is the unfunded portion of their pension liabilities for pensions that are less than 100% funded.  PSPRS allowed employers an opportunity to reset the existing amortization period back to 30 years.  I believe the existing amortization period had 19 years remaining of the original 30 years.  If your employer did this, just like refinancing a house to another 30 year loan, it lowered the current payments but increased the total cost that will need to be paid over the life of the loan.

This is important to keep in mind if you see a reduction in your employer's contribution rate, as it likely is due to the reamortization and not any change in your UAAL.

PSPRS Newsletter and CAFR

If you have not seen it yet, the PSPRS third quarter newsletter is available.  The FY 2018 Consolidated Annual Financial Report is also available.  While the entire CAFR is 156 pages long, readers may find PDF pages 10-14 and 70-71 of interest.

Tier 1b DROP and Service Purchases

According to the January 13, 2019 PSPRS Board of Trustee meeting notes, there are 900 active Tier 1b DROP participants and "roughly 450" Tier 1b DROP members who have left employment and already been paid their accumulated DROP benefits and employee contributions.  The active Tier 1b members need to be refunded any employee contributions they made during their time in the DROP with interest, and those Tier 1b members who participated in the DROP and have already retired are owed a higher interest rate on their DROP benefits.  PSPRS is supposed to be calculating these payments and asks anyone affected to be patient, but there is no timeline for payments or updating eligible members.

In the same notes, it states that 97 members purchased service at the incorrect discount rate, meaning they paid more for their service time than the should have.  If you purchased service time after July 1, 2017, you may be due a refund.  Once again, there is no timeline for refunds or updating eligible members.

Needless to say, no one should trust PSPRS to look out for them. It appears that PSPRS has not updated its DROP calculator nor its service purchase estimator.  I am not sure how members are supposed to verify what they may be owed or even if they are eligible for a refund.  This seems like a perfect opportunity for PSPRS new Chairman to let PSPRS' management know he is going to take his oversight responsibilities seriously.  We can only hope.

* Returns, gross of fees, are used because PSPRS usually does not report returns, net of fees paid to outside agencies, except on the final report of the fiscal year.  Returns, gross of fees, are used in the table for consistency.  Returns, net of fees, were 13.28% in FY 2014, 3.68% in FY 2015, 0.63% in FY 2016, 11.85% in FY 2017, and 7.07% in FY 20

3 comments:

  1. Has anyone played around with the new calculator on the PSPRS website? There is virtually no difference and definately not discounted for Tier 1 employees from when the rate was raised in July 2017 . However the cost for Tier 2 employees is less than half of what it costs Tier 1. How is this possible?

    ReplyDelete
    Replies
    1. I did a quick check and I found about a 30% difference today. I am not sure why you would have a problem if you used the same figures in both calculations.

      Delete
    2. Drop Zone,
      You are correct it is about 20% to 30% difference from July 1, 2017 until now. I was talking about pre-July 1, 2017. I was under the impression that the rates were going back to that amount. For instance back then a topped out officer in my department was only paying between 65k-85k to buy back 4 years. Even with this new calculation it’s telling me it would cost me 200 K to buy back 4 years. Also nothing against tier 2 or 3 folks but when I enter all of my information and change it from tier 1 to tier 2 It is saying it would only cost 82K to buy back my time. I don’t know if I am missing something but I’m curious why tier 2 would get a lower rate to buy back their time.

      Delete

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