February 21, 2019
SERVICE PURCHASE REFUND
AND DISCOUNT PERIOD FAQs
Q: Why would the Board of Trustees decide to refund service purchases payments (and DROP contributions) and lower service purchase costs?
A: Based on the outcome of the Hall-Parker lawsuit, the PSPRS board determined that changes made to the DROP program and service purchase calculations in 2011 could possibly be ruled unconstitutional. PSPRS incurred almost $1.4 million of legal fees in the Hall-Parker lawsuit. PSPRS did not wish to incur additional litigation costs at the potential expense of its members and employers.
The board’s decision to revert or “roll back” service purchase and deferred retirement laws to pre-2011 statutes was done to avoid lawsuits based on case law established by the Arizona Supreme Court in Hall-Parker. The litigation would have required PSPRS to pay attorneys to fight a potentially losing court battle, as well as the costs associated with service purchase and DROP recalculations, refunds and other remedies for members.
Q: I purchased qualified time from PSPRS based on a quote requested and obtained after July 1, 2017. What do I need to do to get my partial refund?
A: Nothing. PSPRS will contact roughly 100 members who are eligible by mail and provide refund options. The choices could include using the refund amount to purchase additional time, if available.
Q: I’d like my service purchase refund to be put directly into my 401, 457, IRA or savings account. Can this be done?
A: Our tax counsel has advised PSPRS that refunds must be sent to the entity from which we received the funds that originally paid for the service purchase. For instance, if you used a personal check to purchase your service, we must send the refund back to you. If you used funds from an existing 457 account to purchase your service, we must send the refund back to the 457 account.
Q: How much will my refund be?
A: The amount will vary from person to person, depending on several variables. PSPRS will contact you just as soon as we’ve recalculated your service purchase and will let you know how much your refund will be or how much additional service you may purchase.
Q: So, it sounds like I will receive a refund within the next couple of months. Can I depend on this money to finance purchases I want to make right now?
A: PSPRS does not encourage its members to make major financial decisions based on the prospect of receiving future lump sum refunds. PSPRS hopes to complete all service purchase refunds by July 1, 2019.
Q: A lot can happen between now and this coming July. How do I know I will receive a notice and refund?
A: Only about 100 members are due partial service purchase refunds. These members can always double-check their listed address in PSPRS files by visiting their Members Only account. If necessary, members can complete and send PSPRS an address change form located on our Forms page.
SERVICE PURCHASE FAQs
Q: Who is eligible to make service purchases under the Board of Trustees’ decision to use their demographics (age, salary, years of service) as of July 1, 2017, to purchase time at a lower (and temporary) cost?
A: Almost all Tier 1 and Tier 2 members with qualified time can buy credited service at a temporary reduced cost as ordered by the PSPRS Board of Trustees.
There are no time restrictions on Tier 1 members’ ability to buy credited service. Tier 2 members require at least five years of credited service with a PSPRS employer in order to buy qualified time. Tier 2 members can buy a maximum of 5 years of qualified time.
Tier 1 members were hired prior to January 1, 2012, and Tier 2 members were hired on or after January 1, 2012.
Q: I bought time prior to July 1, 2017. How come my service purchase doesn’t warrant a refund?
A: The service purchase decision by the Board of Trustees puts pre and post-July 1, 2017, service purchases on equal footing by requiring the use of the same discount rate. Simply put, pre-July 1, 2017, service purchase costs were calculated with a discount rate that provided a lower cost than purchases made from quotes obtained after July 1, 2017. Thus, no refund is due.
Q: What constitutes “qualified time” under state law?
A: Qualified time includes prior military service, out-of-state public safety service, credited in-state time after forfeits or contribution refunds, contracted public safety service for PSPRS employers (Ex. Rural Metro), public safety service with an employer prior to the employer joining PSPRS.
Q: How exactly is the service purchasing cost discounted?
A: Service purchase costs are determined by many factors, including age, salary, years of existing credited service and the “discount rate” used to determine the present value of the future benefit of buying time (retirement at an earlier date, higher pension benefits).
The Board of Trustees decision allows members to use their demographic information based on their status on July 1, 2017, for their current service purchasing cost calculation. The board also permanently reverted the discount rate for Tier 1 and 2 members back to that of the PSPRS Assumed Earnings Rate. These actions will result in a lower overall service purchasing cost.
Q: How long do I have to make a service purchase at the temporarily discounted rate?
A: Eligible Tier 1 and 2 members can seek service purchase quotes until July 1, 2019. These quotes will be honored for 60 days – even if the 60-day timeframe extends past July 1, 2019. This means members only have to email, mail or fax PSPRS a quote request form by midnight July 1, 2019.
All quotes sought July 2, 2019, and thereafter will be based on current demographic data, which may result in a higher cost to members.
Q: How do I get a service purchase cost quote?
A: The best first step is to use the Service Purchase Estimator on the PSPRS Service Purchase and Transfer webpage. It’s fast, it’s easy and it is relatively accurate when correct data is entered by users. Members who have used the Service Purchase Estimator and wish to seriously consider whether to purchase qualified time must fill out the appropriate Service Purchase/Transfer form located on the PSPRS forms page.
Completed forms can be emailed, faxed or mailed according to instructions on the form.
Q: How will I know PSPRS is processing my request for a quote?
A: PSPRS will notify members to acknowledge receipt all of quote requests and send periodic emails during processing prior to sending members official quotes by mail.
Q: What financial impact will the Board of Trustees’ decision have on the PSPRS trust?
A: The impact will be slight, especially compared to the hundreds of millions of dollars the trust refunded to retirees and members as a result of the Fields and Hall litigation. Still, trustees decided it was best to avoid litigation and apply all available remedies, including partial refunds. This was done to minimize the impact on employer contribution rates and funding levels.