Have a COLA and a smile

Though Arizona SB1609 was signed into law on April 29, 2011, there has already been a successful court challenge to a key provision of the law. The successful challenge (Maricopa judge: Halting pension raises unconstitutional) by retired Arizona judges affects the Elected Officials' Retirement Plan (EORP).  EORP is a pension plan pension similar to PSPRS, but its membership is significantly smaller.  The judges argued that any change to their cost of living allowances (COLA) violated the Arizona Constitution, which states that "public retirement benefits shall not be diminished or impaired."

Before SB1609, COLA's in both PSPRS and EORP were paid out of a reserve funded by excess returns earned each year.  Any year that PSRPS or EORP earned more than 9%, a portion of that excess amount was placed in a Reserve for Future Benefit Increases.  As long as funds were available in the Reserve for Future Benefit Increases, a permanent COLA of up to 4% of the average benefit being paid at the end of the prior fiscal year was awarded to retirees.

The problem with this system of awarding COLA's is that it only took into consideration the past year's performance and not the overall health of the pension. A period of negative or substandard returns could cause the funded ratio of  PSPRS and EORP to plummet, but when the rate of return again exceeded 9% money would flow into the Reserve for Future Benefit Increases.  Instead of all excess returns being used to return the pension to a healthy funded ratio, a portion of the excess was being set aside for COLA's.  Retirees were rewarded during good years but shared none of the pain of the bad years.  The burden of bringing the pension back to full health was left on the backs of taxpayers and current employees.

SB1609 changed this arrangement by tying COLA's to both annual returns and the funded ratio of the plans 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.

This new arrangement is still generous but obviously fairer.  It not only raises the rate of return threshold from 9% to 10.5% but links the maximum allowable COLA to the funded ratio.  The retired judges did not agree that this new arrangement was fair, and their position that this was a violation of a contractual agreement and unconstitutional was upheld.  This successful challenge will certainly encourage those who already have active court cases about PSPRS COLA's as well as those considering filing them.  It will also embolden those who are thinking of challenging other provisions of SB1609.

Forgotten in all this is the pension itself.  The task of returning it to fiscal health is only going to get that much harder as these lawsuits chip away at the minimal reforms that SB1609 has already enacted.