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Was it constitutional for Proposition 124 to replace PSPRS' permanent benefit increases with a capped 2% COLA?

In this blog I and multiple commenters have broached the subject of the suspect constitutionality of PSPRS' replacement of the old perma...

Thursday, September 6, 2012

If PSPRS is broke, don't fix it

The largest public employee pension system in Arizona is the Arizona State Retirement System (ASRS).  It covers the majority of public workers in the state of Arizona.  ASRS is a defined benefit pension like PSPRS, but it uses a different system to calculate benefits.  On April 29, 2011 ASRS had many of its provisions changed by SB 1609, the same bill that modified PSPRS.

However, SB 1614, an earlier bill signed into law on April 6, 2011, included a very significant change to ASRS.  This bill changed the allocation of contributions, which had been split equally between employees and employers.  SB 1614 mandated that, starting on July 1, 2011, employees would be responsible for 53% of the total annual allocation of contributions to ASRS.  Employers would pay the other 47%.  This is not the actual percentage amount taken from an employee's paycheck but the amount of financial responsibility the employee would take versus the employer (i.e. for every total dollar ASRS would collect, employees would pay $0.53 vs. $0.47 paid by the employer)

A lawsuit was filed, and this change to ASRS was overturned (Arizona pension law ruled unconstitutional).  In light of this decision, HB 2264, signed into law on May 7, 2012, required any excess member contributions collected after July 1, 2011 be refunded to ASRS members and the old 50/50 split restored.  The justification for this legal ruling was the same as in the case of the retired judges' COLA's: the change violated a contract that was bound by Arizona's Constitution.

So what does this mean for PSPRS members whose contribution rate will rise annually until it tops out at 11.65% in fiscal year 2015-16?  As anyone hired before 7/1/2011 began their employment when the contribution rate was fixed at 7.65%, a constitutional case can be made that the increase in PSPRS members' contribution rate was a violation of a binding contract at the time of their hiring.   This very case is being made by two Arizona appellate court judges (Arizona judges will rule on own entitlement) against the Elected Officials' Retirement Plan (EORP).

Their lawsuit (case  #CV2011-021234) is still active in Maricopa County Superior Court.  If the EORP's increased member contribution rates are deemed unconstitutional, PSPRS can expect its higher member contribution rates to be overturned as well.  This could mean setting rates back to 7.65% and refunding any contributions over 7.65% taken from members' paychecks dating back to 7/1/2011.  Of course, new hires would still be subject to the higher contribution rates, and taxpayers will have to pay even more to bring PSPRS back to full funding.

As mentioned in previous posts, SB 1609's reforms to COLA's and the DROP are being rolled back in the courts and the legislature.  If successful, this challenge to higher member contribution rates would knock out the last leg of reforms enacted by SB 1609 and set PSPRS back nearly to square one.

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