Sunday, July 13, 2014

A final word about the soon-to-be-former PSPRS Administrator Jim Hacking

In case you missed it, the Arizona Republic had this July 11, 2014 article by Michelle Ye Hee Lee: Pension fund chief placed on leave in wake of illegal raises. The violation of state law has forced the Board of Trustees to terminate Jim Hacking's contract.  I expect Hacking's forced retirement to be the first of several departures, either voluntarily or involuntarily, from PSPRS' upper-level staff.

I have written minimally on the turmoil in the PSPRS office because I do not think it is important.  Worse yet, it is a huge distraction from the bigger, existential issues that plague PSPRS.  I do not know Mr. Hacking or what it is like to work for or around him, and I do not agree with everything he says or does.  However, before he leaves I would like to reiterate a point I have made in the past.

PSPRS' financial problems have been long in the making and preceded Mr. Hacking's tenure.  Responsibility in varying degrees can be laid on past and/or current PSPRS staff, Boards of Trustees, politicians, and unions.  If his personnel management style has annoyed and angered some people, Mr. Hacking has still done, I believe, an admirable job of righting the PSPRS ship and placing it on a sustainable future course.  Ideally, it would be nice to see PSPRS run without any controversy, but paychecks and retirement checks are the only real concern of PSPRS members.  Mr. Hacking deserves, at the very least, some begrudging gratitude, though it is unlikely he will ever receive credit for the good things he has done for PSPRS.

If Mr. Hacking never receives any thanks, we should not allow the most unfair thing to occur, which is to allow the creation of a public perception that there is some linkage between his management and PSPRS' dire financial situation.  One has nothing to do with the other, and whoever takes over for Mr. Hacking will have to deal with the same financial short-sightedness, political machinations, and naked self-interest engendered in the policies and actions of state and local government and public safety employee unions. The outrage shown toward Mr. Hacking and other PSPRS staff members would be better directed at the politicians and union officials (past and current) who are truly responsible for PSPRS' financial problems.  Implying some type of causal relationship between Mr. Hacking's management and PSPRS' finances is not only an injustice to Mr. Hacking but allows other responsible parties to escape blame and continue the same destructive behavior.  For an example of this kind of implication see "Think VA is arrogant?  Check out Ariz. pension system" by the Editorial Board of the Arizona Republic.

I wish Mr. Hacking a happy retirement.  And best of luck to whoever takes over his job.

Friday, July 11, 2014

Beggar thy younger brothers and sisters: The Professional Fire Fighters of Arizona (PFFA)'s underwhelming and offensive PSPRS reform proposal

In the last post, we posed the question of why the changes proposed by the Professional Fire Fighters of Arizona (PFFA) are necessary when simply allowing SB 1069 to stand as originally passed by the Arizona Legislature would have the same results?  In this post we will focus mostly on how the cost of living allowance (COLA) will change under the PFFA proposal.  Following is the chart we referenced in the last post:

Before SB 1609 became law COLA's were paid out of a Reserve for Future Benefit Increases ("the Reserve").  The Reserve was funded by half of any earnings over 9%, the expected rate of return (ERR) at that time, earned in any fiscal year.  This portion of excess earning went into the Reserve without any consideration of PSPRS' funded ratio or its past earnings.  For example, PSPRS could lose 20% one fiscal year, then earn 12% the next fiscal year, yet money would still flow into the Reserve that second year.  For a more complete explanation see the post Have a COLA and a smile.  This formula is not sustainable as the chart shows, but it was reinstated for those retired at the time SB 1609 went into effect.  The Fields decision by the Arizona Supreme Court deemed the changes to the COLA formulation in SB 1609 unconstitutional.

SB 1609 eliminated the Reserve and changed the COLA formulation as follows:
  • If the ratio of the actuarial value of assets to liabilities is 60-64% and the total return is more than 10.5% for the prior fiscal year, 2% maximum increase to all eligible retirees and survivors.
  • If the ratio of the actuarial value of assets to liabilities is 65-69% and the total return is more than 10.5% for the prior fiscal year, 2.5% maximum increase to all eligible retirees and survivors.
  • If the ratio of the actuarial value of assets to liabilities is 70-74% and the total return is more than 10.5% for the prior fiscal year, 3% maximum increase to all eligible retirees and survivors.
  • If the ratio of the actuarial value of assets to liabilities is 75-79% and the total return is more than 10.5% for the prior fiscal year, 3.5% maximum increase to all eligible retirees and survivors.
  •  If the ratio of the actuarial value of assets to liabilities is 80% or more and the total return is more than 10.5% for the prior fiscal year, 4% maximum increase to all eligible retirees and survivors.
As can be seen, this new formulation takes into account PSPRS' funded ration and raises the ERR threshold to pay COLA's from 9% to 10.5%.  However, it also allows for a sliding scale of COLA's from 2-4% based on PSPRS' funded ratio.  This formulation was designed to allow PSPRS to slowly recover yet still pay some COLA's to retirees.  The chart shows that this change and others made by SB 1609 would steadily bring PSPRS back to full funding and drop employer contributions to a reasonable level.

The significant changes proposed by the PFFA that were used to produce the chart are:
  • COLA delayed until 7 years after commencement of benefits or age 60. 
  • Tier 2 members can retire at 25 years of service (no minimum age required).
  • Employee Self funded Inflation Protection Program (IPP) provided for all active generations.  Members can participate in a Non-contributory, Contributory or Reverse IPP (dependent on the date of hire).  
  • Pensionable income limited to $180,000 indexed with CPI. 
  • Eliminate the current excess earnings model for the COLA.  
  • Reduce employee contribution rate to 7.65% (eliminating the 4% maintenance of effort contribution). 
  • Create a new account funded by 4.0% employee contributions (plus actual investment income) which would fund an annual COLA payable after 3 full years of contributions. 
  • A COLA would be paid each year based on funds available.
As can be seen these COLA changes are quite radical when compared to the more modest changes made by SB 1609.  There are multiple issues here, but the most outrageous one is the penultimate bullet point regarding the funding of a new COLA fund.  Another reform that was part of SB 1609 raised the employee contribution rate from 7.65% to an annually increasing rate that tops out at 11.65% in the 2015-16 fiscal year.  The rate just increased from 10.35% to 11.05% on July 1, 2014.  The PFFA wants to take that additional 4% employees will ultimately be paying into the general PSPRS fund and place it into a COLA fund to pay retirees.  PFFA wants to go from the excess earnings model to one that pays COLA's from the paychecks of current employees.

Remember there are still two outstanding lawsuits by a PSPRS member and an EORP member who were active employees when SB 1609 went into effect.   These members are suing over both the COLA formula change and the increase in member contributions.  They are virtually certain to win their case over the changes to the COLA formulation based on the results of the Fields case, but the increase in employee contributions is a new issue for the courts.  The PFFA seems to believe that the SB 1609 increase in employee contribution rates will also be deemed unconstitutional and wants to lock down this money for another purpose before it is returned to current employees.

A quick word about the "excess earnings model for the COLA," which is made to look like the villain here.  There is nothing wrong with using excess earnings to pay COLA's.  PSPRS is not designed as a pay-as-you-go system, and in fact, COLA's should only be paid out of excess earnings.  What is wrong with the current excess earnings model is banking the excess earnings in good years but leaving PSPRS (and taxpayers and current employees) to suffer the losses during the bad years.  Earnings, particularly in fixed income investments, should track with inflation and produce excess earnings in the future if the cost of living should increase.

As I stated before, I find the COLA proposals by PFFA outrageous.  The idea that anyone, much less a union that is supposed to look out for all its members, would propose to fund COLA's on the backs of its working members is offensive.  I know the standard response will be that this may seem unfair now but others will pay it for you when you are retired.  First, I don't think anyone believes anymore in the permanence of PSPRS, much less any of its current policies.  Second, if I were that concerned about COLA's in the future, I would take the 4% and put it away in my own deferred compensation account.  Third, this isn't some sort of shared sacrifice since those who are already retired or close to retirement paid only some or none of the increased contribution rates that current, non-DROPped employees are paying now and will pay for the rest of their careers.  Fourth, we have to remember that this proposal is meant as an amendment to the Arizona Constitution, meaning that it will be the law of the land unless it is repealed through a cumbersome initiative/referendum process.  Employees could pay this extra 4% long after it is necessary.  Fifth, the bad math of this proposal takes 4% of current workers' wages for a promise to pay a maximum 2% COLA sometime in their future.  Finally, as a current employee I understand that more money needs to be paid by current employees, and that is just the way it is, but it needs to be used to bring PSPRS back to full financial health.  We all need to work to get this done, and I am willing to play my part.  I expect others to do the same.

So back to the question we started this post with: why would the PFFA propose these reforms when they produce no net gain over the SB 1609 reforms?  The simplest answer is that the PFFA is afraid that the Arizona Legislature or concerned citizens will attempt to repeal or modify Article 29 (the "pension protection clause") of the Arizona Constitution, which states that "public retirement system benefits shall not be diminished or impaired."  Some legislators have already proposed this, so the PFFA is attempting to offer an alternative, crafted by a labor organization, that ostensibly has the blessing of rank and file workers.

However, the PFFA proposal is overly complicated and will need to be amended to the Arizona Constitution, which is supposed to deal in general state and local governance and individual rights, not financial minutiae of specific legislation that more properly belongs in the Arizona Revised Statutes.  Legislating via constitutional amendment is foolish.  I see little chance that this would ever make it to the ballot, much less be approved by voters.  I suspect that the PFFA recognizes that the best solution to PSPRS' woes is to simply repeal or modify the pension protection clause and give the legislature constitutional cover to make the reforms they know are necessary, namely SB 1609, but being a labor organization, they can never admit to this.  They had to make a proposal once they became involved in the process, even though they appear to have nothing to offer that is better than SB 1609.  Opposition is their stock in trade, so even their own bad proposal must be presented and defended just to show they can confront the powers that be.  The leadership adage that even a bad action is better than inaction may be the working principle at play here.

There are more cynical explanations, but I will leave it up to the reader to consider those explanations.   Sadly missing here is any perspective from law enforcement groups. I do not know if they agree or disagree with the PFFA or have their own proposal to offer.  Any perspective that law enforcement personnel can offer would be appreciated.  In the next post, we will do a little more analysis of the different COLA formulations.

Wednesday, July 9, 2014

Proposed reforms to PSPRS: new but are they an improvement?

Since the last post I have had a chance to go through the PSPRS Special Board of Trustees Meeting dated June 4, 2014.  I should preface this by saying that there will no reform measures appearing on the November 2014 ballot since there has not been a special session called by the Governor, and at this late date, it would be nearly impossible to work out a ballot measure in time.  The meeting materials begin with the multiple COLA scenario studies PSPRS had requested from its independent actuary, Gabriel Roeder Smith & Company (GRS), to show the effects different COLA scenarios will have on PSPRS' (and EORP's and CORP's)  funding ratio and employer contribution rates.  It ends with a "summary of proposed changes for PSPRS" and funding policy review that includes a comparison of the effects to PSPRS' funding ratio and employer contribution rates when compared to three scenarios where SB 1609 changes are maintained or reversed or a new set of reforms is implemented.  Sandwiched between these studies are  Powerpoint slides by  the Professional Fire Fighters of Arizona (PFFA) that shows their proposed change for "fixing the PSPRS pension fund."

The most important information can be found in the graph and figuress on page 55 of the PDF document below.  (You can type "55" in the page number box to go directly to that page.)  The graph and figures show the effects on the median funded ratio and median contribution rate of PSPRS based on three different scenarios.  The green line and bar represent the effects of the following proposed changes:
  • COLA delayed until 7 years after commencement of benefits or age 60. 
  • Tier 2 members can retire at 25 years of service (no minimum age required).
  • Employee Self funded Inflation Protection Program (IPP) provided for all active generations.  Members can participate in a Non-contributory, Contributory or Reverse IPP (dependent on the date of hire).  
  • Pensionable income limited to $180,000 indexed with CPI. 
  • Eliminate the current excess earnings model for the COLA.  
  • Reduce employee contribution rate to 7.65% (eliminating the 4% maintenance of effort contribution). 
  • Create a new account funded by 4.0% employee contributions (plus actual investment income) which would fund an annual COLA payable after 3 full years of contributions. 
  • A COLA would be paid each year based on funds available.
The blue line and bar represent the effects of the SB 1609 reforms already in place.  Some of these reforms have already been reversed, and others may also be reversed in the near future, but it shows the effects as if the reforms were to remain fully in place.  The red line and bar represent a full reversal of all SB 1609 changes.

The graph and figures show that a complete reversal of SB 1609, the red line, would be a disaster for PSPRS.  Median contribution rates would continue to increase until 2033, and the median funded ratio would not reach 60% until 2023.  We have to remember that these are median rates and ratios and specific rates and ratios for individual employers could be much worse.  When we look at the blue and green lines and bars, they are nearly identical.  The blue and green bars are of nearly equal height, and the blue and green lines converge to a point where they appear like one line.  These lines also maintain a level median contribution rate until 2033.  The blue and green bars also maintain higher funding ratios over time and reach 60% funding approximately five years prior to the red bar.

This now brings us to the big question.  Why do we need a new set of reforms to PSPRS when the reforms of SB 1609 already appear to be working, and the proposed reforms show no improvement over SB 1609?  It goes beyond certain parts of SB 1609 being declared unconstitutional since the SB 1609 reforms could just as easily be proposed as a constitutional amendment as the proposed reforms.  We'll go into this further in the next post.

Saturday, June 14, 2014

Whose ox is going to get gored: PSPRS reform efforts that everyone needs to see

It is a lot to read, but this is of interest to everyone that has a stake in PSPRS because it will determine your future cost of living alllowances (COLA), if your retired, or your future paychecks, if you are still working.  The PSPRS Special Board of Trustees Meeting from June 5, 2014 has several actuarial studies that show the impact of various changes to the COLA formulation that could occur, but more interesting is the proposal put forth by the Professional Fire Fighters of Arizona (PFFA).

Starting on page 31 of the PDF documents is a Powerpoint presentation produced by PFFA entitled, "Fixing the PSPRS Pension Fund."  My preliminary reading of this document makes me, particularly as a current employee with quite a few years until I retire, very uneasy about what is about to be proposed and possibly sent to Arizona's voters for approval.  If I was a retiree, I would also be very concerned.  This looks like a proposal that will benefit those closest to retirement at the expense of those with many more years to work. This Arizona Republic from June 5, 2014 article, Arizona pension board seeks special session, shows that the PSPRS has not endorsed the PFFA plan but does want the Arizona legislature to begin considering some kind of changes.

This document is too large to cover in one post, and parts of it, particularly the actuarial studies, will need a much closer analysis.  However, I am interested in any comments, especially from active or retired law enforcement personnel about how they feel, so please comment if you have anything to add.  The Scribd document follows.

Thursday, June 12, 2014

How to stop the PSPRS pension monster from eating your paycheck: this is a good first step

It appears that the practice of using sick and vacation leave sellback to spike pensions has been all but ended.  These two stories from Phoenix and Tucson, Phoenix ends pension spiking for police officers, firefighters by Dustin Gardiner and Judge won't force city to resume sick-time selling policy by Darren DaRonco, from the Arizona Republic and the Arizona Daily Star, respectively, show that the governments of the state's two largest cities and the Goldwater Institute are on the same page: you can not legally count sick or vacation leave as pensionable compensation.

It remains to be seen how the courts will rule.  However, the judge in Tucson ruled against the police union who wanted a delay in implementing the city's new policy until the actual court hearing, and the Goldwater Institute is considering dropping its lawsuit in Phoenix.  The amount of money that can be saved by employers is just too great for them not to do everything they can to eliminate sick and vacation from pensionable income, especially when it is clearly illegal.  This makes it seem like this issue is now settled, except for the issue of employee and employer contributions on past sick leave sellback, which I previously addressed here.

The Arizona Republic article says that eliminating sick and vacation leave sellback from pensionable income will save Phoenix taxpayers "an estimated $233 million over next 25 years, according to a city report," and $2.3 million in the next fiscal year alone.  Those opposing this change in Phoenix (and, of course, considering a lawsuit) can only point to how some employees have saved their sick and vacation leave for years to enhance their retirement.  This is another iteration of the "broken promise" defense.  However, the outrage over the elimination of sick and vacation leave from pensionable income is lost on me.

We are now in a situation where the pension tail is wagging the compensation dog.  Even if we care not a whit about taxpayers or the funding of other city services, we have to recognize that pension costs are now driving down the available money that can be paid to current public safety employees.  Remember, we now have a pension that has two tiers of employees based on when they were hired, although I might substitute the term "caste" for "tier" when we consider the difference in how each group is treated.  These Tier Two employees, hired after 2011, are required to pay more, work longer, and have lost many other pension benefits, including enhanced refunds and the DROP.

Keeping sick and vacation leave pensionable benefits only one group of workers: those close to retiring or entering the DROP; yet it increases costs to everyone else since it negatively affects PSPRS' financial condition.  These costs will continue long after the beneficiaries retire and will affect the income of those still working for years to come.  These costs may be visible, through the increased pension contributions already in place, or invisible, through pay raises never implemented in the future, but either way they are going to drop the career earnings of those still working.  A policy that beggars junior workers still left behind after those more senior retire is hardly worth fighting to keep.  Shouldn't we care more about the pay of everyone than the retirement income of a few?

Wednesday, June 11, 2014

Better late than never: PSPRS pays retroactive COLA's

For those of you who haven't had a chance to visit the PSPRS website, here is the latest on the permanent benefit increases (aka COLA's) that retirees are due in the aftermath of the Fields case:
In compliance with the Supreme Court decision regarding post benefit increase (PBI) payments, the Public Safety Personnel Retirement System is issuing a retroactive post benefit increase payment for its eligible members (those members who retired effectively on or before July 1, 2011). Please read the following notice for details regarding this payment.
Retroactive PBI payments:
  • Notifications of the retroactive post benefit increase (PBI) payment were sent on Tuesday, June 10, 2014 via U.S Mail and e-mail. Your notification contains the exact dollar amount you will receive for the retroactive post benefit increase.
  • Eligible members will receive their retroactive PBI payment in the same manner they receive their monthly pension payment.
  • Checks will be mailed on Tuesday, June 10, 2014. Please allow 5-10 business days for U.S. Mail delivery.
  • Direct deposit payments are being sent Tuesday, June 10 and Wednesday, June 11, 2014.
  • Retroactive PBI payment information will also be available in the Members Only site (click here). Check your Member Account Record under the section "PBI History."
Public Safety Retroactive PBI payments (per member)
July 2012 $6.07 per member ($159.13 total per member)
July 2013 $121.19 total per member
CORP Retroactive PBI payments (per member)
July 2011 0.57% additional paid
July 2012 1.95% additional paid
July 2013 0.55% additional paid
EORP Retroactive PBI payments (per member)
July 2011 1.53% additional paid
July 2012 4.00% additional paid
July 2013 4.00% additional paid
July 2014 PBI payments:
  • In July 2014, the PBI will return and be awarded as usual.
  • The July 2014 PBI payment will be included in the regular pension payment on July 31, 2014.
  • The amount of the July 2014 PBI payment is currently being figured by the PSPRS actuaries. This information is expected to be available at the end of June 2014.
Requesting Changes:
  • Member information changes (for mailing address, email address, etc.) are not accepted over the phone; they must be submitted in writing.
  • Retirees can submit change of address, telephone number, direct deposit information, and tax withholding elections through the Members Only site (click here and go to "Personal Data Changes")
  • All other changes must be requested by completing the applicable form and submitting it to the PSPRS Administrative Office. Click here for a list of forms available for download to request changes to your account.
For the most up-to-date information, please check this area of the PSPRS website, or listen to the PSPRS voicemail greeting (602-255-5575), as it is frequently updated with time sensitive notices.
This is general information, and retired individuals should check their mailboxes or bank accounts to see what they will be paid.  The amount will depend on when one retired. There is a lot going on behind the scenes with potentially big changes proposed before the next general election.  I should have more posts about COLA's soon as a clearer picture emerges about what exactly will be on the ballot.  I usually end these posts with the request to "Stay tuned," but the next five months are a time when everyone really should take that to heart.  We may wake up the morning after November 4, 2014 with permanent, unchallengable modifications to PSPRS.  So, once again, STAY TUNED.