2015 Actuarial Valuation Reports by Employer are now available

The 2015 actuarial valuation report for your employer are now available.  PSPRS has upgraded its website, which now allows access to individual employer reports going back to 2009, and uses a drop down menu to choose the employer and report year.  You will need Adobe Acrobat to access the reports.

Worse than it seems: PSPRS' 2015 Actuarial Valuation

The PSPRS Actuarial Valuation as of June 30, 2015 (Fiscal Year 2015) is now available on the PSPRS website.  The actuarial reports for individual employers have not been released, but if you would like to know what your employer's funded ratio is it can be found in Appendix III starting on PDF document page 75.  Your employers contribution rate for the next fiscal year starting July 1, 2016 can be found in Appendix IV starting on PDF document page 81.

Some of the highlights (or lowlights as the case may be) of the report are:

• The aggregate funded ratio dropped from 49.2% to 49.0%.
• The aggregate non-phased-in contribution rate increased from 41.08% to 42.36%.  Employers who chose to pay a lower phased-in rate to help pay the increased costs caused by the Fields case have a lower rate that will be made up in future years.
• PSPRS' total assets increased about $199 million from $6.018 billion to $6.217 billion.
• PSPRS' total liability increased about $453 million $12.233 billion to $12.686 billion.
• PSPRS' total unfunded liability increased about $254 million from $6.229 billion to $6.483 billion.
• The actuary projects the aggregate contribution rate to stay between 42 and 43 percent through 2027, though this is likely to be too low since the actuary used the old 7.85% expected rate of return (ERR) and not the current 7.5% ERR.
• There were 18,409 active, contributing members of PSPRS at the end of FY 2015 versus 18,526 at the end of FY 2014, a decrease of 117.
• There were 11,034 retirees and beneficiaries and 1,675 Deferred Retirement Option Plan (DROP) members for a total of 12,709 non-contributing members of PSPRS at the end of FY 2015.  This is an increase of 626 from the 12,083 (10,524 + 1,559) non-contributing members at the end of FY 2014.  (Depending on when a member entered the DROP, the member may make no contributions to PSPRS while in the program, or the member may continue to contribute to PSPRS while in the program then receive a full refund of the accrued contributions and 2% interest when the member finally leaves work.  Regardless, PSPRS ends  with no employer or employee contributions for the up-to-five years a member is in the DROP.)
• The FY 2015 ratio of active, contributing members to non-contributing members dropped to 1.45.  Last fiscal year the ratio was 1.53.
• The average annual pay for an active, contributing member increased from $75,048 to $76,114.
• The average annual retirement benefit for retirees and beneficiaries increased from $51,616 to $51,833.
• The average annual pay for a member in the DROP increased from $64,173 to $64,659.
• Employers contributed about $448 million to PSPRS in FY 2015 versus about $414 million in FY 2014.
• Employees contributed about $165 million to PSPRS in FY 2015 versus about $152 million in FY 2014.

The decreased funded ratio and increased employer contribution rate speak for themselves, but it is actually worse than it seems.  Even though the funded ratio dropped only 0.2% and the employer contribution rate increased by only 1.28%, we have to remember how PSPRS recognizes its investment gains and losses.  PSPRS uses a seven-year smoothing period to lessen the impact that extraordinarily good or bad years may have on PSPRS' funding ratio and the subsequent calculation of employer contribution rates.  If you are interested in a more detailed explanation of the smoothing period, please see this post.

The Great Recession gave PSPRS two large investment losses in FY 2008 and FY 2009, but these two losses are far enough in the past that they are now beginning to fall out of the seven-year smoothing period.  The FY 2008 smoothed loss of about $119 million was eliminated from the calculation of the FY 2015 funded ratio and replaced by a smaller loss incurred in FY 2015.  This dropped PSPRS' recognized loss over the seven-year period by about $82 million from $282 million to $200 million, and yet, PSPRS' funded ratio continued to drop and the employer contribution rate continued to rise.  This means that liabilities are continuing to grow faster than assets, even as the negative impact of the Great Recession begins to lose some of its effect on PSPRS.

In one of the few years when we could expect to see some improvement in PSPRS finances we instead have another disappointing year.  What do we have to look forward to in the near future?  PSPRS' lowering of its ERR from 7.85% to 7.50% will raise the aggregate employer contribution rate 3%, and a plaintiff victory in the Hall case could raise it another 6% on top of that.  So we could see the aggregate employer rate increase by as much 9% over the next year.  Of course, who knows what is really going to happen next year.  The only certainty is that no matter what happens PSPRS and its Board of Trustees will be there to tell us all how great a job they are doing.

What will PSPRS look like the next time we celebrate Thanksgiving?

As most of us are aware, 2016 will be a watershed year for PSPRS.  The panel of judges selected by the Arizona Supreme Court to adjudicate the Hall case (CV-15-0180-T/AP) will hear oral arguments on February 18, 2016 and will probably deliver a final decision sometime before the end of the current fiscal year.  If you would like to read updates on the case, though there should be no more coming until after oral arguments are heard, you can follow the Pension Litigation Tracker link or go to the Arizona Supreme Court case page directly then click on the active civil cases link and search that page for the word "Hall."

We also have that other branch of government involved too.  This AP story, Lawmakers work on public safety pension system overhaul plan, by Bob Christie appeared in the November 26, 2015 Arizona Daily Star.  It gives tantalizing clues to some of the changes to PSPRS that the Arizona Legislature will be considering in the next legislative session.  Among these are:

• Changes to how permanent benefit increases (i.e. COLA's) are calculated
• Income level caps for pension calculations to combat pension spiking
• Having equal contribution rates for employees and employers

There is not a lot of detail in the article, but it appears that the Legislature is incorporating some ideas from both the League of Arizona Cities and Towns' Pension Task Force Report and the Professional Fire Fighters of Arizona's (PFFA) awful plan.  Mr. Christie attempted to get a comment from PFFA President Bryan Jeffries for his article, but he declined to comment.  Whatever comes out of the Legislature will have to be referred to the voters for final approval, and it seems likely that they would want to do this in November 2016 during a presidential election year when voter turnout will be the highest.

I hope everyone has a safe and enjoyable Thanksgiving this year.  Next Thanksgiving may find all of us in a very different pension system. 

PSPRS investment returns through September 2015

The following table shows PSPRS' investment returns, gross of fees*, versus the Russell 3000 for September 2015, the third month of the current fiscal year (FY), with the fiscal year end 2014 and 2015 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%
7/31/2015	0.13%	0.13%	1.67%	1.67%
8/30/2015	-1.43%	-1.31%	-6.04%	-4.47%
9/30/2015	-1.02%	-2.31%	-2.91%	-7.25%

There is usually about a two-month lag in PSPRS reporting its investment returns.  PSPRS again outperformed the Russell 3000 in a negative month, suffering about 35% of the loss of the Russell 3000.  As in August, both US and non-US equity were the big September losers with US equity down 3.04% and non-US equity down 4.63%.  The Russell 3000 returned an incredible 7.90% in October 2015, and through November 24, 2015, the Russell 3000 has a more modest 0.80% return.  It will be interesting to see what PSPRS' returns are in October 2015 and how much it recoups of the current year's losses, particularly in comparison to the Russell 3000.

Looking at PSPRS' annualized 5-year rate of return, we can see that during the first quarter of the current fiscal year it has dropped from the 9.2%, gross of fees, that it had as of June 30, 2015 to a current rate, gross of fees, of only 7.04%, well below PSPRS' expected rate of return (ERR) of 7.50%.  Since November 2014, this is the first time the annualized 5-year rate has dropped below the ERR.  It does not bode well for the future if PSPRS cannot achieve its ERR during a 6 1/2 year long bull market in which the Russell 3000 earned 13.28% over the same annualized 5-year period.

* 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.  The past two years fees have reduced the final annual reported return by about a half percent.  Returns, net of fees, were 13.28% and 3.68% for fiscal years 2014 and 2015, respectively.

PSPRS investment returns through August 2015

The following table shows PSPRS' investment returns, gross of fees*, versus the Russell 3000 for August 2015, the second month of the current fiscal year (FY), with the fiscal year end 2014 and 2015 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%
7/31/2015	0.13%	0.13%	1.67%	1.67%
8/30/2015	-1.43%	-1.31%	-6.04%	-4.47%

There is usually about a two-month lag in PSPRS reporting its investment returns.  As can be seen, PSPRS outperformed the Russell 3000 in a negative month, suffering less than a quarter of the loss of the Russell 3000.  Out of its ten asset classes, seven had losses and three had monthly gains with real estate being the biggest monthly gainer at 2.91% and non-US equity the biggest loser at -6.39%.  Through October 22, 2015, the Russell 3000 is up 6.56%, with another big gain today (October 23) that will further offset the combined losses of August (-6.04%) and September (-2.91%).  Hopefully PSPRS will do better than it did in July, when it captured only about 8% of the gains of the Russell 3000, if October ends the month with a significant gain.

* 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.  The past two years fees have reduced the final annual reported return by about one-half of a percent.  Returns net of fees were 13.28% and 3.68% for fiscal years 2014 and 2015, respectively.

PSPRS investment returns through July 2015 and a look at investment fees paid last year

The following table shows PSPRS' investment returns, gross of fees*, versus the Russell 3000 for July 2015, the first month of the current fiscal year (FY), with the fiscal year end 2014 and 2015 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%
7/31/2015	0.13%	0.13%	1.67%	1.67%

There is usually about a two-month lag in PSPRS reporting its investment returns.  As can be seen, PSPRS trailed the Russell 3000 in a positive month, capturing less than 8% of the gain in the Russell 3000.  PSPRS will need as many positive months as possible this fiscal year since the markets have already had two very bad months this fiscal year.  The Russell 3000 had a monstrous 6.04% loss in.August 2015 and another loss of about 3.00% in September 2015.  The good news is that, through October 12, 2015, the Russell 3000 is up 5.17%, which has offset some of the losses from August and September, but who knows how the month will end.

The following table shows a breakdown of what PSPRS paid in fees for each of its asset classes:

		Gross		Net
Asset Class		Returns		Returns		Fees
US Equity		6.70%		6.32%		0.38%
Non-US Equity		-4.58%		-4.79%		0.21%
Private Equity		14.05%		12.72%		1.33%
Fixed Income		2.31%		2.19%		0.12%
Credit Opportunites		5.36%		4.82%		0.54%
Absolute Return		5.80%		4.86%		0.94%
GTAA		6.34%		6.28%		0.06%
Real Assets		-3.55%		-4.24%		0.69%
Real Estate		5.33%		4.32%		1.01%
Risk Parity		0.94%		0.87%		0.07%
Short Term Investments		0.13%		0.02%		0.11%
PSPRS Total		4.21%		3.68%		0.53%

An explanation of the different asset classes can be found on PDF page six of this paper, which includes among its co-authors several members of PSPRS's staff.  Fees are relative, and paying 1.33% on an investment that nets you 12.72% is a good value, while paying nearly 85% of of your gross returns in fees to get a paltry .02% return seems like a bad one.  Fortunately, short-term investments make up only 3.85% of PSPRS' portfolio and is the most liquid of the asset classes. The high proportion of fees paid may have to do with the high turnover in an asset class that is likely used as a temporary parking place for money waiting to be invested in other asset classes.

The big sore thumb sticking out here is the real estate asset class, which makes up nearly 10% of PSPRS' portfolio.  Real estate was the only asset class, other than the much more profitable private equity, that had fees over 1.00%, but it really stands out because it lagged its benchmark by the most of any of the classes.  Only three asset classes did not meet their benchmarks: US equity by 0.97%, real assets by 6.42%, and real estate by 8.66%.  Even non-US equity bested its benchmark 0.47%, despite having a loss for the year.  At 12.98%, real estate had the highest benchmark return of any asset class, and PSPRS paid 1% in fees to achieve a return just one-third of the benchmark.  It would be interesting to know what, if any, effect the Desert Troon investments are still having on PSPRS' bottom line or if more recent real estate investments have been more profitable because PSPRS, unlike last fiscal year when it lost 1.26%, at least had a positive return on its real estate portfolio.  Unfortunately I have been unable to find any information about the fiscal year 2015 real estate investments in any of the recent Board of Trustees meeting materials. 

* 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.  The past two years fees have reduced the final annual reported return by about one-half of a percent.  Returns net of fees were 13.28% and 3.68% for fiscal years 2014 and 2015, respectively.