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PSPRS members: How to calculate what you paid in excess contributions to PSPRS

If you were wondering how much your refund from PSPRS was going to be, reader Rick Radinksy has discovered a relatively simple method of cal...

Wednesday, August 28, 2013

Why PSPRS is paying out bonuses

PSPRS released this memo by Administrator Jim Hacking on August 16, 2013 in response to this August 11, 2013 Arizona Republic story, Arizona pension system gave out bonuses, by Craig Harris.  While Mr. Hacking is certainly more qualified than me to defend the bonus structure of PSPRS, I believe that some more explanation is needed.

Mr. Hacking brings up two important points in his memo.  The first is that PSPRS is competing for talent with other non-profits and the private sector.  This 2011 chart from Pensions & Investments lists the 50 top paid chief investment officers (CIO) of US tax-exempt organizations.  The list includes colleges and universities, charitable foundations, and pension systems.  The list was topped by the CIO of Harvard University's endowment.  In 2011, she managed an endowment of $27.6 billion and was paid $4.75 million.  Number 50 managed the Rockefeller Foundation's $3.8 billion and was paid about $590,000.  The Republic article lists PSPRS CIO Ryan Parham's current base salary as $254,000, which will increase automatically to $268,000 on September 20, 2013,  He will also be eligible for a $75,000 retention bonus a year after that if he remains as PSPRS CIO.  The combined assets of PSPRS, CORP, and EORP, which are administered together as one investment pool, equaled approximately $6.7 billion on June 30, 2012.

The list of the 50 top paid CIO's contained only two who managed pension systems, one who earned about $1 million managing Texas' $100 billion teachers retirement system and another who earned $608,000 managing Georgia's $46 billion teachers retirement system.  I do not know the average salary for the CIO of a public pension CIO nor do I know how to assess the quality of one CIO versus another.  However, just looking at his overall compensation, it seems that Mr. Parham's salary is not out of line.  The Republic article focused on bonuses, which makes readers understandably angry when they consider the underfunded status of PSPRS.  However, this brings us to the second important point in Mr. Hacking's memo.

Mr. Hacking just briefly touches on this point by highlighting the gains made with the implementation of a new investment strategy.  This is actually a much more crucial point, which he may not be giving the proper emphasis due to his apolitical position as PSPRS Administrator.  Since I do not have that problem, I can provide a little more history.

Below is a breakdown of PSPRS' investments as of June 30, 2008, just prior to the start of the Great Recession:

US Government Securities                    13.50%
Corporate Bonds                                  12.20%
Total Fixed Income                               25.70%

Common Stock                                     67.79%
Alternative Investments                            6.51%

Contrast this with the investment breakdown as of June 30,2012:

US Equity                                              19.71%
Non-US Equity                                       14.45%
Total Equity (Common Stock)                 34.16%

Fixed Income                                           13.86%

Global Tactical Asset Allocation (GTAA)     9.68%
Credit Opportunities                                    8.83%
Real Assets                                                6.39%
Private Equity                                           10.45%
Absolute Return                                         3.56%
Real Estate                                                13.07%
Total Alternative Investments                      51.98%

As can be seen, there has been a dramatic change in the investment strategy of PSPRS.  This coincides with Mr. Parham's promotion into the CIO position.  He was listed as interim CIO in fiscal year 2007 and 2008 reports, and he is listed as permanent CIO in the fiscal year 2009 report.

The initial asset allocation appears not much different than that of an individual investor with a split between stocks and bonds.  This is a legacy of the past investment strategy.  If we go back to June 30, 2000 before the dot.com crash, PSPRS' allocation was 77.61% common stock and 19.15% bonds, a nearly complete commitment to stocks and bonds.  This had been a successful for many years until the two market crashes last decade showed the folly of this strategy.

Looking even deeper into the investments PSPRS held on June 30, 2008, we can see the top five equity investments were in financial companies: Citigroup, Bank of America, National City Corporation, Washington Mutual, and Wachovia, representing over $425 million in investments.  National City, Washington Mutual, and Wachovia were all taken over by other financial companies with huge losses to shareholders.  According to PSPRS' 2009 report, the losses on these three companies alone were approximately $110 million.

Obviously, a huge portfolio like PSPRS' is bound to have some losers amongst it, but the real problem here was the over-concentration of PSPRS' portfolio in equities. This was the same problem after the dot.com crash.  Some have tried to lay the blame for those losses on former PSPRS Administrator Jack Cross, while conveniently forgetting the huge returns he produced for years using the same equity-heavy strategy.  Now the current bonus controversy is being used against Mr. Parham, and to a lesser extent, against Mr. Hacking.

The only criticism that could be leveled against Mr. Parham was that he did not change the balance of PSPRS' portfolio before the last market crash.  I do not know how aware he or Mr. Hacking were of PSPRS' perilous state in 2007 or 2008 or what their plan for PSPRS was at that time, but to expect some special prescience about the imminent market crash is absurd.  I do not know if it was even possible to rebalance the portfolio in time.  I suspect a process like this takes months, if not years, to accomplish as it entails consultation with advisors and buying and selling investments in an orderly fashion.

In the end, Mr. Parham's job has been to clean up a mess that was there when he took over as CIO.  It appears from the outside that no one responsible for PSPRS realized what the real problem was.  The dot.com debacle was followed by the same pattern of equity investment, I guess, with the idea that the previous losses would be more than made up in the next boom.  We all know how wrong that was.  Only now is an investment philosophy being put in place that recognizes that PSPRS can not just play the boom and bust cycle of the market.  PSPRS must try to maximize gains but not at the expense of losing capital.  That is what Mr. Parham is trying to do with the new asset allocation (For more information see this Institutional Investor article).

Those who are upset about bonuses need to understand that we will not see the real value of Mr. Parham's wisdom until another market crash.  Based on PSPRS' own amortization schedule, it will take years for PSPRS to reach full funding again, so to expect a bonus structure based on PSPRS' funding level is not realistic.  However, if Mr. Parham's strategy keeps PSPRS from being devastated again during the next crisis, he will have been worth every penny it took to retain him.  Of course, only time will tell how it works, but we do know the old strategy was a disaster.  It would be a shame if Mr. Parham was driven out by a penny-wise, pound-foolish lynch mob.

Saturday, August 24, 2013

PSPRS and pension spiking, part III

So did someone say something about spiking?  This video about the highest-paid employees in Tucson city government comes from KVOA, the NBC affiliate in Tucson:



The video is accompanied by this story, which includes a list that shows the compensation of Tucson's top-paid employees.  The list breaks down compensation between base pay and other pay and benefits. For public safety personnel, who make up more than half of the top 100, overtime and sick leave sell back make up significant portions of their compensation.  A searchable and more user-friendly list  from 2011 is available here from the Arizona Daily Star.

KVOA's report does not mention retirement or pension spiking.  However, it does include the current mayor and a former mayor discussing the practice of sick leave sellback.  Current Mayor Jonathan Rothschild says sick leave sellback is something the Mayor and Council are "going to look at this year," and former Mayor Tom Volgy even refers to it as "a lousy practice."  It makes one wonder how they feel about using sick leave sellback in pension calculations.

When SB 1609 was enacted in 2011, one of the provisions of the law was the creation of a study committee on Arizona's retirement systems.  The Defined Contribution & Retirement Study Committee Final Report is the end product of that committee.  It includes information and recommendations on five issues that the committee was tasked to study.  One of those issues was pension spiking.

The committee used  the following criteria to define pension spiking in PSPRS:  a "more than 25% increase in compensation during the final 36 months of employment in PSPRS."  This threshold is "more than twice the average compensation increase that the plan uses in determining wage inflation in the final years of employment."  The years they used for comparison, 2008-2011, followed immediately after the housing market crash, so it is unlikely that there was any actual wage inflation anywhere in Arizona.  This makes any compensation increases in those years all the more dramatic.

The study found that in 2008 25.16% of retirees had an increase in compensation of more than 25% in their final three years.  In 2009, it was 29.77%, 2010-27.27%, and 2011-22.60%.  This means that in those four years 20-30% of all retirees were able to increase their final compensation by more than 25%.  In the previous post, we used only a 10% increase for our hypothetical retiree.  If she had increased her final compensation by 25%, she would have increased her annual pension by $10,937, instead of $4,375.  From 2008 to 2011 this type of spiking was being done by 2-3 out of every 10 PSPRS retirees.  This is not insignificant and was far greater than I would have imagined.

I suspect that it was also far greater than the committee imagined. Their recommendations read:
  • Legislation should be considered going forward that limits retirement benefits to base salary compensation and does not include off-duty work and the use of lump sum payouts at termination of vacation and sick time.  This would mitigate some of the methods in which a salary can be "spiked" to boost retirement benefits. (italics mine)
  • Further legislative study of spiking and other methods of increasing compensation that affect final retirement benefits should be conducted.
This goes far beyond what the Goldwater Institute is trying to stop in Phoenix.  This means not counting anything other than base pay in the final pension calculation, which means employees could only increase their pension by promoting or moving to a better paying employer.  Barring these two options, employees would be at the mercy of their employers for any increases in compensation (e.g. COLA's or step raises).

However, implementing this type of change to current workers may be problematic.  Workers with 10, 15, or 20 years of service, who have been paying pension contributions over the year on thousands of dollars of non-base pay compensation, would be due refunds with interest on all those accumulated pension contributions.  This says nothing of what refunds their employers might also be due.  PSPRS can not expect contributions to be paid on income that is not included in final pension calculations.

I fear that any "reform" to pension spiking will only affect new hires and will be another case of  the current generation passing costs on to the next generation of police and firefighters. Hopefully, the legislature will devise a solution that involves shared sacrifice this time around.

Of course, the Tucson City Council may have one pontential solution to salary and pension spiking in mind that was hinted at in the video.  They can simply eliminate sick leave sellback completely if they believe its elimination would more than offset the overtime costs incurred with any increased sick leave use.  While it is easy to demonize the Goldwater Institute for their lawsuit, it is clear that they are not the only ones who see a problem with pension spiking.

Thursday, August 22, 2013

PSPRS and pension spiking, part II

The type of pension spiking that is occurring in Phoenix, which appears to be in clear violation of state law since it uses lump sum payouts in final pension calculations, is not the only type of pension spiking that impacts PSPRS.  The more common type of pension spiking occurs when a worker uses other methods to increase the final average salary used to calculate his pension benefit.

For all workers hired before January 1, 2012, the final pension benefit is calculated based on the average of their high three-year salary period.  (For those hired on January 1, 2012 or later, the calculation is based on the high five-year period.)  This means that a worker interested in maximizing his pension can utilize pay enhancements like overtime and incremental sick leave sellback programs to increase his average salary.  These types of enhancements appear to fit within state law as they do not involve lump sum payments.  Workers are free to work overtime as needed by their employer, and incremental sick leave sellback programs allow workers to sell back portions of their accrued sick leave while they are still working.  This means  regular payments are made during a participant's career, not as a lump sum payments at the end of his career.

So what effect does this type of pension spiking have on PSPRS' finances?  Using the same type of example as in the previous post, we can use a Tucson Fire Department (TFD) member who retires or DROP's after 25 years and will have a final pension benefit calculated at 62.5% (a 2.5% pension multiplier for each year of service) of the average of her high 3-year salary period.  If through a combination of selling back sick leave and working overtime she is able to increase her average annual salary of $70,000 by 10%, she will earn an extra $7,000 per year.  This would translate to an increase in her annual pension benefit of $4,375.  If she lives another 20 years she will reap an extra $87,500 in benefits.

If we use the current combined contribution rate for TFD of 57.12% (10.35% employee and 46.77% employer), each year PSPRS would receive approximately $3,998 in additional contributions.  If this amount was paid into PSPRS on a biweekly basis this would equal approximately $154 every two weeks.  This steady $154 paid every two weeks, compounded daily at 8% annual interest, would grow to $13,597 after three years.  This $13,597 compounding at the same interest rate would increase to $67,335 after another 20 years.  This means that 20 years into this member's retirement PSPRS would actually see a deficit of $20,165. 

Using different interest rates we can see where the breakeven point for PSPRS is when it comes to spiking:

Interest Rate          Balance at 20 Years       Gain or (Loss)
     6.00%                    $43,742                      ($43,758)
     7.00%                    $54,267                      ($33,233) 
     7.85%                    $65,191                      ($22,309)
     8.00%                    $67,335                      ($20,165)
     9.00%                    $83,551                       ($3,949)
     9.25%                    $94,794                         $684
    10.00%                   $113,869                      $16,177

PSPRS does not break even in this case of pension spiking until the interest rate reaches around 9.25%.  7.85% rate is PSPRS' expected rate of return (ERR) for the current fiscal year.  So while this case of pension spiking may not appear as bad that occurs when lump sum payments are used, it still takes a toll on PSPRS' finances to the tune of $22,000 at the current ERR.  It is also very important to remember that of the additional $3,998 paid each year into PSPRS, the employee paid only about $725, the taxpayers picked up the other $3,273.  All in all, the employee paid an extra $2,175 to receive an additional $87,500 in benefits over 20 years.

These numbers are projected out from simple estimates, but it again shows how pension spiking blunts the power of compounding.  TFD's high contribution rate tells us that they are already badly underfunded, so a pension spike like this only makes their situation worse.  For anyone interested in running numbers, Bankrate has this compound interest calculator that I used for computations.

While this case may not be as egregious as those in Phoenix, it is still harmful.  This case would be much worse if Tucson taxpayers were not already paying such a high contribution rate.  While an individual case may not seem so bad, when combined with thousands of others, you start to see the problem.  If you think this problem has not been noticed by those able to change the law, you would be wrong.  More on that in the next post.







Monday, August 19, 2013

PSPRS and pension spiking, part I

The Goldwater Institute, the bĂȘte noire of Arizona's public employee unions, has filed a lawsuit to end the practice of pension "spiking" by Phoenix police and firefighters.  This August 15, 2013 article by Craig Harris in the Arizona Republic details the principal issue of the case, the use of lump sum payouts for unused vacation, sick time, and other deferred compensation to increase (spike) the final retirement benefits of police and firefighters.

The article makes a pretty unimpeachable case that this violates state law.  The relevant Arizona statute reads:
"Compensation" means, for the purpose of computing retirement benefits, base salary, overtime pay, shift differential pay, military differential wage pay, compensatory time used by an employee in lieu of overtime not otherwise paid by an employer and holiday pay paid to an employee by the employer on a regular monthly, semimonthly or biweekly payroll basis and longevity pay paid to an employee at least every six months for which contributions are made to the system pursuant to section 38-843, subsection D. Compensation does not include, for the purpose of computing retirement benefits, payment for unused sick leave, payment in lieu of vacation, payment for unused compensatory time or payment for any fringe benefits. (Italics mine)
While it is fair that employees be compensated for unused time after they leave employment, the Phoenix public safety unions and city officials give no justification as to why this time should be included in pension calculations, especially when it is expressly forbidden.  Nor do they explain how pension spiking benefits Phoenix's taxpayers, who pay city taxes on both rent and food.  The usual arguments about pay and benefits revolve around how they are necessary for retention of good employees.  However, this benefit is being paid to individuals who are leaving city employment forever.  The city and union officials have only made a weak statement about this being a legal, negotiated item that can not be changed until the next round of contract negotiations.   This is a ridiculous defense since a contract can not supersede state law.  After the last few years of conflict with the federal government over several state laws, all Arizonans are probably well-versed on the legal concept of supremacy.

The heart of the issue here is, as always, financial.  Pension spiking bleeds PSPRS and soaks taxpayers because it robs the pension of its most important tool to stay solvent--compounding over time.  A pension contribution at the end of a career raises the final benefit though the contribution did not grow over time.  For example, someone retiring from the Phoenix Fire Department (PFD) today who sold back $30,000 in unpaid time would pay an employee contribution (currently 10.35%) of  $3,105 and the city of Phoenix would make an employer contribution (currently 34.95%) of  $10,850.  If this individual retired at 25 years, he would raise his average three-year high salary by $10,000 per year and boost his pension by $6,250 per year for the rest of his life.  If the combined contributions of $13,955 were to compound daily at 8% annual interest, it would increase to $69,108 after 20 years.  The individual would be paid an extra $125,000 pension benefit over those 20 years.  This would leave a deficit to the pension of $55,892.  This shortfall would need to be made up by taxpayers over the years.

Contrast this financial example with one where the $13,955 had been contributed over the 25 years of his career.  This would translate to approximately $21 biweekly over 25 years.  At 8% annual interest, compounded daily, this steady biweekly contribution of $21 would equal $43,667 after 25 years.  If this $43,667 continued to earn the same 8% interest rate, 20 years later it would be worth $216,246.  This would be more than sufficient to cover the spike in the retiree's pension that he received from selling back his unused time.

These calculations, of course, do not take into consideration the changes in either contribution rates or rates of  return on the PSPRS' investments.  It is only meant to show how damaging end-of-career pension spiking is.  Even a retiree who believes he earned his spiked pension benefits because of all the family and leisure time he gave up while employed must acknowledge that this is not sustainable over the long-term.  Nor is it fair to Phoenix taxpayers who must foot the ultimate bill for the extra costs of spiking. They already pay for a very good retirement for their public safety workers.

While this lawsuit may appear to affect only those PSPRS members who work for the city of Phoenix, there is more to the story of pension spiking, and it affects all PSPRS members.  The next post will cover this issue further.

Thursday, August 15, 2013

PSPRS members: What happens if progessives think your job can be outsourced?

For those who think that PSPRS and its members are being picked on by The Arizona Republic, check out this August 8, 2013 article, Mission Creep at the L.A. Fire Department, by Hillel Aron of LA Weekly.  For those not familiar with LA Weekly, it is the Los Angeles weekly that follows the same editorial (progressive) and business model (food/entertainment advertising) as Phoenix New Times and Tucson Weekly; LA Weekly and Phoenix New Times are both owned by Voice Media Group, whose flagship paper is New York City's The Village Voice.  These papers all pride themselves on their investigative reporting, coverage of stories ignored by other local media outlets, and bare-knuckle commentary on local politics, as well as being the arbiters of all that is cool and hip in their respective communities.

Mr. Aron's article is interesting because it starts out as the standard article chronicling the burdensome medical call load of the Los Angeles Fire Department (LAFD).  However, the reader who sticks with the article will find that the article is about much more than that.  It details Los Angeles' diminished fire call load, its recent scandal of reporting fictitious response-time data, and the misalignment between LAFD's current resources, both human and equipment, and the community's needs.

However, the most surprising aspect of the article is its unfavorable comparison between LAFD and the Los Angeles County Fire Department (LACoFD).  LACoFD is held up as a model of efficiency compared to LAFD.  And one of the principal reasons for this is the County's use of private ambulance services, instead of using more costly LACoFD personnel to transport patients.  So we have the premier local progressive media source in Los Angeles actually praising the outsourcing of a government service.  Now that's interesting.

The true impact of this for anyone in fire and EMS is that if you eliminate even a small portion of the medical call load, you eliminate the need for a corresponding number of fire and EMS personnel.  When a progressive can employ the words "outsource" or "privatize" without sarcasm or vitriol, it may be time for some of us to worry.

Tuesday, August 13, 2013

Why is the Professional Fire Fighters of Arizona (PFFA) working with Paycheck Direct?

Several days ago I received another catalog from Paycheck Direct.  This is a company that has recently entered into a relationship with the Professional Fire Fighters of Arizona (PFFA), the state organization representing Arizona's unionized firefighters.  Paycheck Direct is a catalog retailer that offers brand-name items with the option to pay, interest-free, via payroll deduction over a one-year period.  While the welcome letter by PFFA President Tim Hill included in the catalog states, "These great products are intended as a service to you," the true purpose of this partnership is to generate revenue for PFFA, which is paid a commission for any purchases made by PFFA members.

This sounds like a mutually beneficial relationship.  A company gets catalog business while the union gets additional revenue to fund its cause.  I think it is wrong for PFFA to give away personal information to a third party without prior permission, but they have apparently given Paycheck Direct access to members' addresses.  Hopefully, this is all they gave them.  That said, I think it is important to look closer at the cost of using a service like Paycheck Direct.

Here is a sample comparison of some of Paycheck Direct's prices versus Amazon's for the same items:

                                                       Paycheck                               Price           
 Product                                          Direct          Amazon          Difference     Premium

KitchenAid 5-Qt Mixer                  $358.99        $342.02            $16.97           4.96%
Calphalon 10-pc Cookware Set     $218.99        $165.57            $53.42           32.26%
Maytag 24.8 cu ft Refrigerator      $1,799.99    $1,699.50         $100.50         5.91%
Dyson DC40 Vacuum                     $548.99       $390.99            $158.00         40.41%
DeWalt 18v Tool Combo Kit          $548.99       $282.99            $266.00         93.99%
Poulan Pro 20" Chainsaw               $318.99       $188.24           $130.75         69.45%
Char-Broil 42K BTU BBQ              $829.99       $549.00           $280.99         51.18%
Klaussner Queen Bed                     $1,174.99    $1,128.79         $46.20           4.09%
Sleep Number p5 Queen Set          $2,449.99     $1,879.97        $570.02         30.32%
Aspen 3-pc Entertainment Center  $1,424.99     $1,133.57        $291.42        25.70%
Citizen Men's Eco-Drive Watch      $324.00        $285.00            $39.00          13.68%
Toshiba 58" LED TV                        $1,574.99     $1,097.99        $477.00        43.44%
Apple iMac Desktop Computer      $1,518.99     $1,199.98        $319.01        26.58%
Nintendo DS Cosmo Black              $218.99       $178.65            $40.34           22.58%
 
The prices include shipping.  Many of Amazon's products include free shipping, but with the exception of appliances, Paycheck Direct charges a minimum shipping charge of $19.00.  I did not include sales tax, which would further increase Paycheck Direct's prices as the tax would be applied to a higher initial price in each case.  The premium is the percentage one would pay over Amazon's price.  For the sample of items the premium ranges from 4.09% to 93.99%.

Here is where we have to start thinking financially about Paycheck Direct.  While Paycheck Direct does not charge interest on purchases, the premiums over Amazon's prices are the equivalent of an annual interest rate one would pay to use Paycheck Direct rather than paying cash at Amazon.  These premiums (interest rates) range from low (4.09%) to offensively high (93.99%).  The highest annual percentage rate (APR) on an Amazon Visa rewards card is 22.24%  Of the 14 items sampled, the premium on only three items is below 22.24%.  This means that the final cost of most items, including purchase price, shipping and interest, would be less if bought with an Amazon Visa credit card and paid off in one year than if purchased through Paycheck Direct.  22.24% is a rather high interest rate, so it would be cheaper still with a lower interest rate credit card.

Readers can judge for themselves if Paycheck Direct is a service of value to them. There may very well be some individuals who find that it meets their particular needs.  In the end, it is a business that must make money from the service it provides, though it could be argued that the only real service Paycheck Direct provides, payroll deduction, is more a service to them than it is to the purchaser. 

The real issue here is whether PFFA, which is supposed to look out for its members' financial well-being, should promote a service of dubious value to its members.  According to the PFFA's IRS Form 990 for the fiscal year ending June 30, 2012, they had total assets of $2,384,940 and total revenue of $762,455, of which $562,601 was member dues.  This hardly seems to be an organization short of funds, so why would it encourage members to shop through Paycheck Direct?  Is the kickback that PFFA gets in the way of commission worth having its members pay as much as 90% more for products?

I certainly can not answer for those that signed PFFA up for this program, but I do know that the union is supposed to work for the members, not the other way around. 

Monday, August 12, 2013

A little perspective through a tale of two pensions

The Arizona Republic has continued its excellent reporting on the Public Safety Personnel Retirement System (PSPRS) with a four-day series by Craig Harris and Beth Duckett that ran in May 2013.  It is a must-read for anyone concerned about the future of PSPRS.

The series covers several issues, including pension spiking, the Deferred Retirement Option Plan (DROP), the ballooning pension cost of employers, and the trade-offs between pension funding and providing services to citizens.  While these issues can often descend into dry financial data and analysis, the first article of the series tries to put a human face on some of the issues by comparing the pensions of two retirees on opposite ends of the pension spectrum.

The article uses as examples the pensions of an assistant fire chief who retired from the Phoenix Fire Department and a retiree (his rank is not given but I will refer to him as a firefighter throughout) from the Lake Havasu Fire Department.  Through the use of unpaid sick leave, vacation, and other deferred payments, the chief, who retired in December 2011 after 37 years of service, was able to amass a DROP payout of almost $800,000, as well as an annual retirement of $130,000.  This chief then became Peoria's Fire Chief where he makes an annual salary of $145,000 and is eligible to participate in another retirement plan.  By comparison, the retired 61-year-old Lake Havasu firefighter, who retired in 2000 after 20 years of service, has an annual pension of "just under $40,000."  He states that his medical expenses have become so high that he has had to forgo his family's dental insurance.

The initial visceral reaction to this pension comparison is to be concerned or outraged by the nearly million-dollar payout to the retired chief.  Estimating from numbers given in the article, the chief was able to increase his average annual salary during his last three years by $56,186 (one-third of his total unused vacation time, sick time, and deferred compensation benefits) through the sell-back of this unused time.  Entering the DROP after 32 years of service meant that he would receive 80% of that in retirement, or an additional $44,948 per year, for the rest of his life.  If the chief lives another 20 years, he will make almost $900,000 more in retirement through this spiking of his pension.  This is in addition to the nearly $800,000 DROP payment he has already been paid. 

Depending on where you stand, this comparison has multiple ways to concern or outrage you.  The most obvious is a near-million-dollar first-year payout to the retired chief, which viscerally seems wrong for a public servant.  This big payout is even more troubling when one considers the financial burden being shifted to taxpayers, who are on the hook for most of the shortfall in PSPRS.  There is also the wide disparity between the pensions of the retired chief and firefighter, though it must be noted, the chief worked the maximum years and participated in the DROP while the firefighter worked the minimum years and retired without taking advantage of the DROP.

The retired firefighter expresses no animosity toward other retirees with large pensions.  He states, "I know these guys went above and beyond to serve the community.  I understand why some may not understand — or may just be jealous.”  The article states that this 61-year-old firefighter retired in 2000 after 20 years of service and has a current pension of "just under $40,000."   This again is an estimate based on figures from the article, but if we use an annual pension of $39,000, he would receive a monthly retirement check of $3,250.   Between 2001 and 2012 there have been a total of $1,524 in COLA increases to his monthly benefits.  Subtracting the COLA's from his current benefit would mean his initial monthly benefit was $1,726 after 20 years of service.  Doubling this and multiplying by twelve gives an average annual salary for his high three years of $41,424 in 2000.  If he had worked five more years and retired at 53, instead of 48, this would have earned him an extra $431 per month.

The article uses the pensions of the two men to show that not every retired PSPRS member is walking away with an unseemly financial windfall.  However, we need to look beyond just the amounts of money mentioned. The retired chief worked for the largest fire department in the state for 37 years and ascended to one of its highest-ranking positions.  If we assume he started at age 20, he would have been 57 years old at retirement.  The retired firefighter worked for a small department and retired as early as possible at only 48 years old.  While making no judgments about either man's career or personal choices, it is obvious that one man had to work harder and longer to achieve both his position and his benefits.  He retired nine years older and worked 17 years longer, and no doubt, had to spend countless hours of his own time to study for promotions and learn the skills necessary to qualify for those promotions.  This work was obviously worthwhile to him as he took a job as Fire Chief in another city after retirement.

The retired firefighter chose a different path.  He earned an intangible but equally, and some might say more valuable, benefit in retirement: time.  He retired at 48, an age when many are still in their peak earning years.  He was able to immediately begin drawing retirement benefits when many can not draw them until 59 1/2 years of age, or in the case of Social Security, 62, 65 or 67 years of age.  He was able to work for a mere 20 years yet will draw benefits until he dies (with spousal benefits continuing if he has a surviving spouse).  Even if we count his work life as beginning at age 18, he is still likely to draw a benefit check from PSPRS for more years than he worked.  Retiring at 48 is a dream for most people. He achieved it and has lived it for the past 13 years.

Once again, the idea here is not to criticize either the retired chief or the retired firefighter.  Both did their jobs and took advantage of the benefits available to them.  Neither has anything to apologize for.  However, we have to look at this through the eyes of the taxpayers and the Arizona legislature.  A legislature, I might add, that beginning next year will no longer have its own defined benefit pension for any newly elected members.  The retired chief looks bad because the sheer amount make it look like he gamed the system to enrich himself.  As more such cases like this are publicized, the pressure to end pension spiking will become greater.

What of the retired firefighter?  I do not know the authors' intent, but if he was meant as a sympathetic character, he does not fit the bill.  There is an undertone of entitlement in his comments, whether he meant it or not.  The "struggle" of living on $3,250 per month would not seem so bad if he was aware that the maximum Social Security benefit for a 70-year-old retiring this year is a whopping $3,350 per month.  (See here for a comparison of PSPRS versus Social Security.)  Working 22 more years to get an extra $100 a month does not seem like a good trade-off to me.  While the retired firefighter's pension is portrayed as less than adequate, he appears to be in an very enviable position when his retirement is placed in perspective with those of non-PSPRS members.

While it is easy to fixate on the huge payout made to the retired chief, I would argue that each man has done quite well for himself.  The difference between them is that one man's choice paid off better in time while the other man's paid off better in financial reward.  This is a choice that most workers can only imagine when it comes to their retirement.  The purpose of a pension is to provide you with income when you can no longer work.  PSPRS, in its current state, not only fulfills this purpose but goes well beyond it.  If you are concerned about the public image of PSPRS it is important to remember that while a $1 million payout to a retiring civil servant looks bad to most taxpayers, retirement at 48 years old looks pretty good to most working people.