If you feel confident that your state constitution will protect your pension from being reduced, see this story by Nathan Bomey of the Detroit Free Press. U.S. Bankruptcy Court Judge Steven Rhodes today ruled that Detroit's pensions have no special status in a municipal bankruptcy, in spite of a clause in the Michigan Constitution which forbids their diminishment or impairment. Arizona has a similar clause in its Constitution.
Of course, there will be more legal wrangling, but this a very important precedent that will likely carry over state lines.
Tuesday, December 3, 2013
Thursday, November 21, 2013
Pennywise and pound-foolish: PSPRS staff raises versus the DROP
This article by Craig Harris of the Arizona Republic details the somewhat controversial decision by the Board of Trustees to give raises to several members of PSPRS' staff. The motion passed by a vote of 4-3 and awards a combined total of $81,696 in raises to five PSPRS employees. Neither PSPRS Administrator Jim Hacking nor Chief Investment Officer Ryan Parham received raises. These raises come on the heels of a more recent controversy over bonuses due to PSPRS staff and the subsequent cancellation of those bonuses.
I have already written about how the bonus controversy is an unnecessary distraction from PSPRS' real problems, and these raises are even more irrelevant to PSPRS' finances. Mr. Hacking states that while these employees are getting raises, there will not be a net increase in PSPRS' payroll because three other employees recently resigned. These employees, who the article states "quit in protest following disputes with Hacking over whether trust management inflated the values of real-estate holdings," gave PSPRS $363,300 in salary savings. Mr. Hacking justified the raises as fair compensation for the remaining employees' increased workload.
Even though PSPRS' payroll will still be $281,604 lower, this did not stop criticism. The article's reader comments are unanimously negative. The article itself has only one quote expressing displeasure about the raises. The article states:
The latest PSPRS actuarial report gives us the following data about Arizona DPS and GPD. DPS and GPD pensions are both underfunded; DPS is badly underfunded at 46.10%, while GPD is only 54.60% funded. DPS has 141 DROP participants, while GPD has 25. Looking at the highest officer salaries in each department we find that a topped-out, step 9 DPS officer makes $62,660 in base pay. A topped-out, step 8 GPD officer makes $72,861 in base pay. The current fiscal year employee contribution rate for all employers is 10.35%.
Participants in the DROP either make no employee contribution (if they had 20 years of service before January 1, 2012) during their time in the DROP, or they receive their accumulated employee contributions back plus interest after they finally leave the job (if they were hired before January 1, 2012 but did not have 20 years of service as of that date). So in either situation, PSPRS will not be benefiting from employee contributions during their time in the DROP. Using the DPS data, we can see that the 141 members in the DROP X topped-out officer base salary of $62,660 X 10.35% employee contribution rate = $914,429 a year in funds not going into DPS' underfunded pension. For GPD, the same calculation would show $191,115 a year not reaching GPD's underfunded pension.
Remember these calculations use only a topped-out officer's base salary. We did not include in our calculations either higher-paid employee salaries or payments in addition to base salary like overtime, shift differential, and sick leave sellback. If we were to include these, the amounts not being contributed to the DPS and GPD pensions by DROPped member are likely to be much higher.
Between just the two departments Mr. Edwards is associated with, PSPRS is deprived of over $1.1 million a year by members who are in the DROP. This $1.1 million is not only lost, but it will never have a chance to compound over time. At PSPRS' current expected rate of return of 7.85%, $1.1 million would earn $86,350 in a year. Between all entities comprising PSPRS, there were 1,482 members in the DROP. If we use a modest $50,000 per year average salary, those 1,482 members alone are depriving PSPRS of $7,669,350 per year in funding.
For Mr. Edwards and others who see something wrong with a few PSPRS employees getttng raises, how can they not be equally offended by the DROP? No matter how one tries to justify it, the DROP does two of the same things that have outraged the Arizona Republic and other critics of PSPRS' management. The DROP gives both a raise through the elimination of the employee's contribution, and it pays a bonus by allowing the employee to earn up to five years of his retirement while still drawing his regular pay. Worst of all, the DROP does all this while harming PSPRS' long-term financial sustainability. While it is easy to use PSPRS' management as the scapegoat for everything wrong with PSPRS, we should be honest about where the real damage to PSPRS is being done.
I have already written about how the bonus controversy is an unnecessary distraction from PSPRS' real problems, and these raises are even more irrelevant to PSPRS' finances. Mr. Hacking states that while these employees are getting raises, there will not be a net increase in PSPRS' payroll because three other employees recently resigned. These employees, who the article states "quit in protest following disputes with Hacking over whether trust management inflated the values of real-estate holdings," gave PSPRS $363,300 in salary savings. Mr. Hacking justified the raises as fair compensation for the remaining employees' increased workload.
Even though PSPRS' payroll will still be $281,604 lower, this did not stop criticism. The article's reader comments are unanimously negative. The article itself has only one quote expressing displeasure about the raises. The article states:
Rich Edwards, a retired Arizona Department of Public Safety officer who now is a Glendale police officer, called the board’s actions “ridiculous and crazy.” He said it was surprising the board would grant the raises when retirees had their pensions frozen.On the face of it this seems like a fair comment, but what do the numbers say? Since Mr. Edwards has a connection to both the Arizona Department of Public Safety (DPS) and the Glendale Police Department (GPD), let's take a quick look at the Deferred Retirement Option Plan (DROP) numbers for those departments.
The latest PSPRS actuarial report gives us the following data about Arizona DPS and GPD. DPS and GPD pensions are both underfunded; DPS is badly underfunded at 46.10%, while GPD is only 54.60% funded. DPS has 141 DROP participants, while GPD has 25. Looking at the highest officer salaries in each department we find that a topped-out, step 9 DPS officer makes $62,660 in base pay. A topped-out, step 8 GPD officer makes $72,861 in base pay. The current fiscal year employee contribution rate for all employers is 10.35%.
Participants in the DROP either make no employee contribution (if they had 20 years of service before January 1, 2012) during their time in the DROP, or they receive their accumulated employee contributions back plus interest after they finally leave the job (if they were hired before January 1, 2012 but did not have 20 years of service as of that date). So in either situation, PSPRS will not be benefiting from employee contributions during their time in the DROP. Using the DPS data, we can see that the 141 members in the DROP X topped-out officer base salary of $62,660 X 10.35% employee contribution rate = $914,429 a year in funds not going into DPS' underfunded pension. For GPD, the same calculation would show $191,115 a year not reaching GPD's underfunded pension.
Remember these calculations use only a topped-out officer's base salary. We did not include in our calculations either higher-paid employee salaries or payments in addition to base salary like overtime, shift differential, and sick leave sellback. If we were to include these, the amounts not being contributed to the DPS and GPD pensions by DROPped member are likely to be much higher.
Between just the two departments Mr. Edwards is associated with, PSPRS is deprived of over $1.1 million a year by members who are in the DROP. This $1.1 million is not only lost, but it will never have a chance to compound over time. At PSPRS' current expected rate of return of 7.85%, $1.1 million would earn $86,350 in a year. Between all entities comprising PSPRS, there were 1,482 members in the DROP. If we use a modest $50,000 per year average salary, those 1,482 members alone are depriving PSPRS of $7,669,350 per year in funding.
For Mr. Edwards and others who see something wrong with a few PSPRS employees getttng raises, how can they not be equally offended by the DROP? No matter how one tries to justify it, the DROP does two of the same things that have outraged the Arizona Republic and other critics of PSPRS' management. The DROP gives both a raise through the elimination of the employee's contribution, and it pays a bonus by allowing the employee to earn up to five years of his retirement while still drawing his regular pay. Worst of all, the DROP does all this while harming PSPRS' long-term financial sustainability. While it is easy to use PSPRS' management as the scapegoat for everything wrong with PSPRS, we should be honest about where the real damage to PSPRS is being done.
Thursday, November 14, 2013
PSPRS members: How is your pension doing?
For those interested in finding out the financial status of their pension, follow this link to PSPRS'Actuarial Reports By Employer. This link is also available on the right sidebar.
The reports are in PDF form. To find your employer's historic annual required contribution (ARC), go to PDF page number 33. The ARC is what the employer must pay each year to PSPRS. The ARC for employers varies from year to year. Employee contributions for every active PSPRS member are currently fixed at 10.35% of pay, which will increase to the 11.05% in the fiscal year that begins July 1, 2014 and finally, mercifully, top out at 11.65% in the fiscal year that begins July 1, 2015.
To find your employer's historic funding ratio, go to PDF page number 32. This will tell whether the pension is over or underfunded, and its funding status during the last ten years.
To see a breakdown of active, retired, DROP, and inactive vested members, go to PDF page number 12. This also give the average pay or retirement benefit of each group. Inactive vested members are those who have left a PSPRS employer but have chosen to leave their contributions in PSPRS.
While PSPRS invests for all the various state public safety entities, as well as for corrections officers and elected officials, each entity is responsible for its own pension. If you look through various reports, you will note quite a disparity in funding ratios and ARC's between employers. The lower the funding ratio is, the higher the ARC. This means that the more underfunded an employer's pension is, the more money they will have to pay into PSPRS. A higher ARC means that there will be less money for things like raises, equipment, capital improvements, and new hires.
How your pension is doing now will determine a lot about your future.
.
The reports are in PDF form. To find your employer's historic annual required contribution (ARC), go to PDF page number 33. The ARC is what the employer must pay each year to PSPRS. The ARC for employers varies from year to year. Employee contributions for every active PSPRS member are currently fixed at 10.35% of pay, which will increase to the 11.05% in the fiscal year that begins July 1, 2014 and finally, mercifully, top out at 11.65% in the fiscal year that begins July 1, 2015.
To find your employer's historic funding ratio, go to PDF page number 32. This will tell whether the pension is over or underfunded, and its funding status during the last ten years.
To see a breakdown of active, retired, DROP, and inactive vested members, go to PDF page number 12. This also give the average pay or retirement benefit of each group. Inactive vested members are those who have left a PSPRS employer but have chosen to leave their contributions in PSPRS.
While PSPRS invests for all the various state public safety entities, as well as for corrections officers and elected officials, each entity is responsible for its own pension. If you look through various reports, you will note quite a disparity in funding ratios and ARC's between employers. The lower the funding ratio is, the higher the ARC. This means that the more underfunded an employer's pension is, the more money they will have to pay into PSPRS. A higher ARC means that there will be less money for things like raises, equipment, capital improvements, and new hires.
How your pension is doing now will determine a lot about your future.
.
Tuesday, November 12, 2013
Howdy, partner: Detroit's bankruptcy and the 16% solution
I have not commented on the Detroit bankruptcy as of yet for several reasons, mainly because it has been widely covered in the news, but also because any bankruptcy in its preliminary stages has to go through several legal steps before anything concrete comes into view. However, this October 30, 2013 Fox News story by Perry Chiaramonte gives some idea what the future might look like for Detroit's public employees.
Detroit has been in dire financial straits for many years, and its bankruptcy, by far the largest municipal bankruptcy in history, was really more a matter of when than if. The city has essentially been taken over by the state of Michigan. Kevyn Orr was placed in charge of the city as emergency manager, whose authority supersedes that of Detroit's mayor and council, and he attempted to negotiate with Detroit's many creditors, including its pension funds, to accept reduced payment of the city's debts. In the case of the pension funds, this would mean a reduction in benefits to current retirees and promised future benefits of current workers. When these negotiations were unsuccessful, Detroit filed for Chapter 9 bankruptcy on July 18, 2013.
A Michigan state judge attempted to overturn the bankruptcy filing as a violation of the Michigan Constitution clause that prohibits the diminishment or impairment of pension benefits. This clause is similar to Article 29 of the Arizona Constitution, which is at the heart of several legal challenges to SB 1609's changes to PSPRS. However, the federal bankruptcy court overruled the state judge and mandated that all legal actions regarding Detroit's bankruptcy be decided exclusively in federal court. Currently, parties to the bankruptcy are awaiting the decision of a federal court judge to determine if Detroit is eligible to enter bankruptcy. The nine-day trial allowed those opposed to the bankruptcy to make their cases. Numerous issues, including the allowability of pension cuts, will have to be negotiated and settled in the federal bankruptcy court if Detroit is deemed eligible for bankruptcy.
The Fox News story states that Detroit believes that it can only meet its pension obligations to the tune of sixteen cents on the dollar. That means a pension of $3,000 per month would decrease to $480 per month. That gives an idea of how bad Detroit's finances are, and the likelihood that it will be declared eligible for bankruptcy. Mr. Orr's plan is for Detroit to be out of bankruptcy sometime in 2014, and hopefully with a clean slate for the city and its residents. Of course, for retirees, employees, and others who will have to accept a "haircut" on the money owed them by the city the future will not look so rosy.
Fortunately for Arizona, there are no cities in anywhere near the financial distress that Detroit is in. It took decades of almost deliberate neglect and abuse of a once-great city to get into its current sorry state. As a cautionary tale, though, it has value to PSPRS members.
Texas conman Billie Sol Estes was reputed to have said, "When you owe someone a thousand dollars you're in debt; when you owe someone a million dollars, you've got a partner." Public sector employees, particularly public safety personnel, have committed their long-term financial security to the belief that government will always have the ability to pay what it owes. They have long believed that they can steer the political process in their favor financially by allying with friendly politicians, who are more concerned about getting elected than they are with fiscal sustainability. After all, why shouldn't we spike our pensions or give ourselves end-of-career bonuses via the DROP if politicians acquiesce to our demands? Governments don't go out of business, and anyway, that is something people in the future will need to figure out.
I wonder if that is what Detroit's (non-public safety) retirees and city employees thought when they were drawing 13th checks for years. So what happens when the future happens now and the money finally runs out? Detroit's retirees and city employees are about to find out when they go from being creditors to partners in Detroit's financial disaster.
Detroit has been in dire financial straits for many years, and its bankruptcy, by far the largest municipal bankruptcy in history, was really more a matter of when than if. The city has essentially been taken over by the state of Michigan. Kevyn Orr was placed in charge of the city as emergency manager, whose authority supersedes that of Detroit's mayor and council, and he attempted to negotiate with Detroit's many creditors, including its pension funds, to accept reduced payment of the city's debts. In the case of the pension funds, this would mean a reduction in benefits to current retirees and promised future benefits of current workers. When these negotiations were unsuccessful, Detroit filed for Chapter 9 bankruptcy on July 18, 2013.
A Michigan state judge attempted to overturn the bankruptcy filing as a violation of the Michigan Constitution clause that prohibits the diminishment or impairment of pension benefits. This clause is similar to Article 29 of the Arizona Constitution, which is at the heart of several legal challenges to SB 1609's changes to PSPRS. However, the federal bankruptcy court overruled the state judge and mandated that all legal actions regarding Detroit's bankruptcy be decided exclusively in federal court. Currently, parties to the bankruptcy are awaiting the decision of a federal court judge to determine if Detroit is eligible to enter bankruptcy. The nine-day trial allowed those opposed to the bankruptcy to make their cases. Numerous issues, including the allowability of pension cuts, will have to be negotiated and settled in the federal bankruptcy court if Detroit is deemed eligible for bankruptcy.
The Fox News story states that Detroit believes that it can only meet its pension obligations to the tune of sixteen cents on the dollar. That means a pension of $3,000 per month would decrease to $480 per month. That gives an idea of how bad Detroit's finances are, and the likelihood that it will be declared eligible for bankruptcy. Mr. Orr's plan is for Detroit to be out of bankruptcy sometime in 2014, and hopefully with a clean slate for the city and its residents. Of course, for retirees, employees, and others who will have to accept a "haircut" on the money owed them by the city the future will not look so rosy.
Fortunately for Arizona, there are no cities in anywhere near the financial distress that Detroit is in. It took decades of almost deliberate neglect and abuse of a once-great city to get into its current sorry state. As a cautionary tale, though, it has value to PSPRS members.
Texas conman Billie Sol Estes was reputed to have said, "When you owe someone a thousand dollars you're in debt; when you owe someone a million dollars, you've got a partner." Public sector employees, particularly public safety personnel, have committed their long-term financial security to the belief that government will always have the ability to pay what it owes. They have long believed that they can steer the political process in their favor financially by allying with friendly politicians, who are more concerned about getting elected than they are with fiscal sustainability. After all, why shouldn't we spike our pensions or give ourselves end-of-career bonuses via the DROP if politicians acquiesce to our demands? Governments don't go out of business, and anyway, that is something people in the future will need to figure out.
I wonder if that is what Detroit's (non-public safety) retirees and city employees thought when they were drawing 13th checks for years. So what happens when the future happens now and the money finally runs out? Detroit's retirees and city employees are about to find out when they go from being creditors to partners in Detroit's financial disaster.
Wednesday, October 16, 2013
Still waiting: no decision yet in PSPRS lawsuits as of 10/16/2013
We are still waiting on a decision by the Arizona Supreme Court in the Fields case against the Elected Officials Retirement Plan (EORP). The principal issue in this case, the constitutionality of SB 1609's changes to how cost of living allowances (COLA) are calculated for retirees, is the same as the issue in the Rappleyea case against PSPRS. While the Fields involves retired judges and the Rappleyea case involves retired public safety personnel, the Fields case reached the Supreme Court first and will set the precedent in the Rappleyea case.
Follow this link if you want to see the oral arguments made before the Court on June 4, 2013 and read a summary of the case.
Follow this link if you want to see the oral arguments made before the Court on June 4, 2013 and read a summary of the case.
Friday, October 4, 2013
Rearranging deck chairs on the Titanic: PSPRS and the bonus controversy
By a unanimous vote of PSPRS' Board of Trustees on September 24, 2013, the payment of bonuses to PSPRS' management and investment staff has been halted until the "next compensation review." This
article by Craig Harris of the Arizona Republic gives more details about the vote and the controversy leading up to it.
PSPRS Adminstrator Jim Hacking had earlier released this forceful response to recent criticism of PSPRS' management, including the payment of bonuses. While Mr. Hacking is certainly the most capable person to defend his staff, there is more to this story that Mr. Hacking, given his apolitical position, is not discussing.
It is important to remember that PSPRS' staff manages the pension according to the laws created by the Arizona legislature and signed by the governor. The PSPRS staff is governed by a seven-member Board of Trustees, serving staggered terms, that is appointed by the governor. The Board of Governors has the ultimate say on how PSPRS' funds are invested. Finally, the PSPRS staff has no input into how employers calculate the benefits of their employees. If one employer allows employees to increase their pensions in an irresponsible way, the PSPRS staff simply figures the employer's unfunded actuarial accrued liability (UAAL) and tells the employer how much it must contribute each year to fund its pension responsibilities. It has no control over that employer's actions.
While it seems fashionable to pile on the PSPRS staff, there is plenty of blame to go around for PSPRS' current woes. Shortsighted and ill-conceived laws and policies created by politicians, lax oversight by past Trustees (or Fund Managers as they used to be called), and pension spiking allowed by employers, of course at the urging of public safety unions, have all contributed to PSPRS underfunding. Mr. Hacking is dealing with multiple issues that preceded his tenure as PSPRS Administrator. PSPRS' funding ratio has been eroding for well over a decade and began long before Mr. Hacking or Ryan Parham, the chief investment officer (CIO) began their current tenures. Yet there is this fixation on bonuses, particularly as they relate to PSPRS' funding ratio and PSPRS' annual return on investment.
The current PSPRS staff is trying to clean up a mess that was created by others. PSPRS' terrible funding ratio shows how big this mess is. The current strategy they are using now is based on diversifying into multiple investment vehicles that try to maximize upside during good times but limit losses during bad times. My understanding is that there are benchmarks for each investment vehicle to determine whether or not the strategy is working, and bonuses are paid based on whether or not these benchmarks are met. This does not mean that PSPRS makes money every year but that it achieves a proper balance between risk and reward that will eventually bring PSPRS back to full funding. This is what the PSPRS staff is being awarded bonuses for, not for a short-term focus on annual gains. The previous post discussed some of the changes Mr. Hacking and Mr. Parham have implemented.
So what of the idea of bonuses in general? It is certainly understandable that taxpayers are uncomfortable with public employees (i.e. public servants) receiving bonuses, but what about union officials, politicians, and public safety personnel? Those that lobbied for, created, and have participated in or plan to participate in the Deferred Retirement Option Plan (DROP) have no right to complain about bonuses since, after all, the DROP is nothing but a giant bonus program to public safety personnel. This Arizona Republic database shows how big some of these bonuses are, with the average DROP payment reaching into five and six figures, depending on the employer. Do these DROP payments perform any real purpose other than to enrich retiring public safety personnel? No, and for those who disagree, see the series of posts entitled "The Folly of the DROP" here, here, and here.
So those that wanted to end the bonuses got their way, and an agreement for a promised payment was broken. In the end, everyone would be well advised to reread Mr. Hacking's response, particularly the part about pending lawsuits against PSPRS. If you think bonuses are a problem, wait until you see what the Arizona Supreme Court does to PSPRS' funding ratio after it rules on these lawsuits.
article by Craig Harris of the Arizona Republic gives more details about the vote and the controversy leading up to it.
PSPRS Adminstrator Jim Hacking had earlier released this forceful response to recent criticism of PSPRS' management, including the payment of bonuses. While Mr. Hacking is certainly the most capable person to defend his staff, there is more to this story that Mr. Hacking, given his apolitical position, is not discussing.
It is important to remember that PSPRS' staff manages the pension according to the laws created by the Arizona legislature and signed by the governor. The PSPRS staff is governed by a seven-member Board of Trustees, serving staggered terms, that is appointed by the governor. The Board of Governors has the ultimate say on how PSPRS' funds are invested. Finally, the PSPRS staff has no input into how employers calculate the benefits of their employees. If one employer allows employees to increase their pensions in an irresponsible way, the PSPRS staff simply figures the employer's unfunded actuarial accrued liability (UAAL) and tells the employer how much it must contribute each year to fund its pension responsibilities. It has no control over that employer's actions.
While it seems fashionable to pile on the PSPRS staff, there is plenty of blame to go around for PSPRS' current woes. Shortsighted and ill-conceived laws and policies created by politicians, lax oversight by past Trustees (or Fund Managers as they used to be called), and pension spiking allowed by employers, of course at the urging of public safety unions, have all contributed to PSPRS underfunding. Mr. Hacking is dealing with multiple issues that preceded his tenure as PSPRS Administrator. PSPRS' funding ratio has been eroding for well over a decade and began long before Mr. Hacking or Ryan Parham, the chief investment officer (CIO) began their current tenures. Yet there is this fixation on bonuses, particularly as they relate to PSPRS' funding ratio and PSPRS' annual return on investment.
The current PSPRS staff is trying to clean up a mess that was created by others. PSPRS' terrible funding ratio shows how big this mess is. The current strategy they are using now is based on diversifying into multiple investment vehicles that try to maximize upside during good times but limit losses during bad times. My understanding is that there are benchmarks for each investment vehicle to determine whether or not the strategy is working, and bonuses are paid based on whether or not these benchmarks are met. This does not mean that PSPRS makes money every year but that it achieves a proper balance between risk and reward that will eventually bring PSPRS back to full funding. This is what the PSPRS staff is being awarded bonuses for, not for a short-term focus on annual gains. The previous post discussed some of the changes Mr. Hacking and Mr. Parham have implemented.
So what of the idea of bonuses in general? It is certainly understandable that taxpayers are uncomfortable with public employees (i.e. public servants) receiving bonuses, but what about union officials, politicians, and public safety personnel? Those that lobbied for, created, and have participated in or plan to participate in the Deferred Retirement Option Plan (DROP) have no right to complain about bonuses since, after all, the DROP is nothing but a giant bonus program to public safety personnel. This Arizona Republic database shows how big some of these bonuses are, with the average DROP payment reaching into five and six figures, depending on the employer. Do these DROP payments perform any real purpose other than to enrich retiring public safety personnel? No, and for those who disagree, see the series of posts entitled "The Folly of the DROP" here, here, and here.
So those that wanted to end the bonuses got their way, and an agreement for a promised payment was broken. In the end, everyone would be well advised to reread Mr. Hacking's response, particularly the part about pending lawsuits against PSPRS. If you think bonuses are a problem, wait until you see what the Arizona Supreme Court does to PSPRS' funding ratio after it rules on these lawsuits.
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