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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...

Monday, December 16, 2013

PSPRS webinar synopsis

The following is a brief synopsis of the PSPRS webinar, hosted by PSPRS Administrator Jim Hacking, that took place on December 11, 2013:

  • Financial status: The bulk of the webinar covered the financial status of PSPRS, CORP, EORP and the investment returns of the combined funds.  While the combined fund earned a return in excess of the expected rate of return, each pension has seen its funding ratio decrease since the end of last fiscal year.  The full consolidated annual financial report (CAFR) for the fiscal year that ended on June 30, 2013 is now available online, so a future post will deal more specifically with PSPRS' status.  For those who want to check out a shorter summary for each pension, the annual report summary for each system can be accessed at the corresponding link: PSPRS, CORP, and EORP.
  • Investment allocation:  There was an explanation of the current investment allocation and a comparison to allocations in the past. The point was that current diversification has made the investment pool less volatile, unlike in the past where investments were too heavily concentrated in equities.
  • COLA's:  There was an explanation about the new COLA system that went into effect with the passage of SB 1609, and the thresholds in both funding ratio and previous year's returns that need to be met in order to pay a COLA.  Though it was not discussed in the webinar, it should be noted that only eligible CORP retirees will receive a post-retirement benefit adjustment (i.e. COLA).  The CORP CAFR states that it will be less than 1% and use almost $6.5 million in excess returns from the past fiscal year.
  • Cost to change to defined contribution pension system:  In response to EORP closing its defined benefit pension system to new members, an actuarial report was commissioned to determine the cost of doing the same thing to PSPRS or CORP.  The report requires more explanation, but the conclusion from PSPRS staff is that the costs of this type of change would be too great and not feasible.  It was also made clear that PSPRS staff is not advocating such a change.
  • Lawsuits: PSPRS states that they have no idea when the Arizona Supreme Court will rule on lawsuits against EORP and PSPRS.  The Fields v. EORP case had oral arguments heard before the Court on June 4, 2013.  This case is by retired judges who contend that changing the COLA formula after they retired was unconstitutional.  There is also a case against EORP by active judges who are also disputing the change in the COLA formula, as well as the increases in their contribution rates.  These active judges contend that they were vested under the rules of the system into which they were hired, which included the old COLA system and lower employee contribution rates.  Retired and active PSPRS members are also suing PSPRS for the same reasons; the ultimate disposition of these cases will follow whatever precedent is set in the judges' cases.  As just a minor point of interest, Mr. Hacking stated that PSPRS will only get 24 hours notice prior to the Supreme Court decision being announced.  Also, the Fields case is the only case argued during Supreme Court's last session that has not had a ruling.

Monday, December 9, 2013

PSPRS, CORP, and EORP members: December 11, 2013 webinar and condensed financial report available online

On December 11, 2013, PSPRS will be broadcasting a two-hour "Fiscal Year 2013 Financial Update" webinar from 10:00 AM to 12:00 PM.  Registration is required and can be done here for those interested in viewing.  It will be hosted by PSPRS Administrator Jim Hacking.  This will be a good opportunity to hear directly about your pension without information being filtered through media, politicians, or union representatives.

For those not interested in sitting through this presentation, please take a look at this report from PSPRS.  This is a condensed, 34-slide version of the Fiscal Year 2013 Consolidated Annual Financial Report (CAFR) that contains the most pertinent information about PSPRS, CORP, and EORP.  This report and your own employer's actuarial report should be required reading for anyone concerned about his or her retirement.

Tuesday, December 3, 2013

PSPRS members: Yes, Virginia, your pension can be cut

If you feel confident that your state constitution will protect your pension from being reduced, see this story by Nathan Bomey of the Detroit Free Press.  U.S. Bankruptcy Court Judge Steven Rhodes today ruled that Detroit's pensions have no special status in a municipal bankruptcy, in spite of a clause in the Michigan Constitution which forbids their diminishment or impairment.  Arizona has a similar clause in its Constitution.

Of course, there will be more legal wrangling, but this a very important precedent that will likely carry over state lines.

Thursday, November 21, 2013

Pennywise and pound-foolish: PSPRS staff raises versus the DROP

This article by Craig Harris of the Arizona Republic details the somewhat controversial decision by the Board of Trustees to give raises to several members of PSPRS' staff.  The motion passed by a vote of 4-3 and awards a combined total of $81,696 in raises to five PSPRS employees.  Neither PSPRS Administrator Jim Hacking nor Chief Investment Officer Ryan Parham received raises.  These raises come on the heels of a more recent controversy over bonuses due to PSPRS staff and the subsequent cancellation of those bonuses.

I have already written about how the bonus controversy is an unnecessary distraction from PSPRS' real problems, and these raises are even more irrelevant to PSPRS' finances.  Mr. Hacking states that while these employees are getting raises, there will not be a net increase in PSPRS' payroll because three other employees recently resigned.  These employees, who the article states "quit in protest following disputes with Hacking over whether trust management inflated the values of real-estate holdings," gave PSPRS $363,300 in salary savings.  Mr. Hacking justified the raises as fair compensation for the remaining employees' increased workload.

Even though PSPRS' payroll will still be $281,604 lower, this did not stop criticism.  The article's reader comments are unanimously negative.  The article itself has only one quote expressing displeasure about the raises.  The article states:
Rich Edwards, a retired Arizona Department of Public Safety officer who now is a Glendale police officer, called the board’s actions “ridiculous and crazy.” He said it was surprising the board would grant the raises when retirees had their pensions frozen.
On the face of it this seems like a fair comment, but what do the numbers say?  Since Mr. Edwards has a connection to both the Arizona Department of Public Safety (DPS) and the Glendale Police Department (GPD), let's take a quick look at the Deferred Retirement Option Plan (DROP) numbers for those departments.

The latest PSPRS actuarial report gives us the following data about Arizona DPS and GPD.  DPS and GPD pensions are both underfunded; DPS is badly underfunded at 46.10%, while GPD is only 54.60% funded.  DPS has 141 DROP participants, while GPD has 25.  Looking at the highest officer salaries in each department we find that a topped-out, step 9 DPS officer makes $62,660 in base pay.  A topped-out, step 8 GPD officer makes $72,861 in base pay.  The current fiscal year employee contribution rate for all employers is 10.35%.

Participants in the DROP either make no employee contribution (if they had 20 years of service before January 1, 2012) during their time in the DROP, or they receive their accumulated employee contributions back plus interest after they finally leave the job (if they were hired before January 1, 2012 but did not have 20 years of service as of that date).  So in either situation, PSPRS will not be benefiting from employee contributions during their time in the DROP.  Using the DPS data, we can see that the 141 members in the DROP X topped-out officer base salary of $62,660 X 10.35% employee contribution rate = $914,429 a year in funds not going into DPS' underfunded pension.  For GPD, the same calculation would show $191,115 a year not reaching GPD's underfunded pension.

Remember these calculations use only a topped-out officer's base salary.  We did not include in our calculations either higher-paid employee salaries or payments in addition to base salary like overtime, shift differential, and sick leave sellback.  If we were to include these, the amounts not being contributed to the DPS and GPD pensions by DROPped member are likely to be much higher.

Between just the two departments Mr. Edwards is associated with, PSPRS is deprived of over $1.1 million a year by members who are in the DROP.   This $1.1 million is not only lost, but it will never have a chance to compound over time.  At PSPRS' current expected rate of return of 7.85%, $1.1 million would earn $86,350 in a year.  Between all entities comprising PSPRS, there were 1,482 members in the DROP.  If we use a modest $50,000 per year average salary, those 1,482 members alone are depriving PSPRS of $7,669,350 per year in funding.

For Mr. Edwards and others who see something wrong with a few PSPRS employees getttng raises, how can they not be equally offended by the DROP?  No matter how one tries to justify it, the DROP does two of the same things that have outraged the Arizona Republic and other critics of PSPRS' management.  The DROP gives both a raise through the elimination of the employee's contribution, and it pays a bonus by allowing the employee to earn up to five years of his retirement while still drawing his regular pay.  Worst of all, the DROP does all this while harming PSPRS' long-term financial sustainability.  While it is easy to use PSPRS' management as the scapegoat for everything wrong with PSPRS, we should be honest about where the real damage to PSPRS is being done.

Thursday, November 14, 2013

PSPRS members: How is your pension doing?

For those interested in finding out the financial status of their pension, follow this link to PSPRS'Actuarial Reports By Employer.  This link is also available on the right sidebar.

The reports are in PDF form.  To find your employer's historic annual required contribution (ARC), go to PDF page number 33.  The ARC is what the employer must pay each year to PSPRS.  The ARC for employers varies from year to year.  Employee contributions for every active PSPRS member are currently fixed at 10.35% of pay, which will increase to the 11.05% in the fiscal year that begins July 1, 2014 and finally, mercifully, top out at 11.65% in the fiscal year that begins July 1, 2015.

To find your employer's historic funding ratio, go to PDF page number 32.  This will tell whether the pension is over or underfunded, and its funding status during the last ten years.

To see a breakdown of active, retired, DROP, and inactive vested members, go to PDF page number 12.  This also give the average pay or retirement benefit of each group.  Inactive vested members are those who have left a PSPRS employer but have chosen to leave their contributions in PSPRS.

While PSPRS invests for all the various state public safety entities, as well as for corrections officers and elected officials, each entity is responsible for its own pension.  If you look through various reports, you will note quite a disparity in funding ratios and ARC's between employers.  The lower the funding ratio is, the higher the ARC.  This means that the more underfunded an employer's pension is, the more money they will have to pay into PSPRS.  A higher ARC means that there will be less money for things like raises, equipment, capital improvements, and new hires.

How your pension is doing now will determine a lot about your future.

Tuesday, November 12, 2013

Howdy, partner: Detroit's bankruptcy and the 16% solution

I have not commented on the Detroit bankruptcy as of yet for several reasons, mainly because it has been widely covered in the news, but also because any bankruptcy in its preliminary stages has to go through several legal steps before anything concrete comes into view.  However, this October 30, 2013 Fox News story by Perry Chiaramonte gives some idea what the future might look like for Detroit's public employees.

Detroit has been in dire financial straits for many years, and its bankruptcy, by far the largest municipal bankruptcy in history, was really more a matter of when than if.  The city has essentially been taken over by the state of Michigan.  Kevyn Orr was placed in charge of the city as emergency manager, whose authority supersedes that of Detroit's mayor and council, and he attempted to negotiate with Detroit's many creditors, including its pension funds, to accept reduced payment of the city's debts.  In the case of the pension funds, this would mean a reduction in benefits to current retirees and promised future benefits of current workers.  When these negotiations were unsuccessful, Detroit filed for Chapter 9 bankruptcy on July 18, 2013.

A Michigan state judge attempted to overturn the bankruptcy filing as a violation of the Michigan Constitution clause that prohibits the diminishment or impairment of pension benefits.  This clause is similar to Article 29 of the Arizona Constitution, which is at the heart of several legal challenges to SB 1609's changes to PSPRS.  However, the federal bankruptcy court overruled the state judge and mandated that all legal actions regarding Detroit's bankruptcy be decided exclusively in federal court.  Currently, parties to the bankruptcy are awaiting the decision of a federal court judge to determine if Detroit is eligible to enter bankruptcy.  The nine-day trial allowed those opposed to the bankruptcy to make their cases.  Numerous issues, including the allowability of pension cuts, will have to be negotiated and settled in the federal bankruptcy court if Detroit is deemed eligible for bankruptcy.

The Fox News story states that Detroit believes that it can only meet its pension obligations to the tune of sixteen cents on the dollar.  That means a pension of $3,000 per month would decrease to $480 per month.  That gives an idea of how bad Detroit's finances are, and the likelihood that it will be declared eligible for bankruptcy.  Mr. Orr's plan is for Detroit to be out of bankruptcy sometime in 2014, and hopefully with a clean slate for the city and its residents.  Of course, for retirees, employees, and others who will have to accept a "haircut" on the money owed them by the city the future will not look so rosy.

Fortunately for Arizona, there are no cities in anywhere near the financial distress that Detroit is in.  It took decades of almost deliberate neglect and abuse of a once-great city to get into its current sorry state.  As a cautionary tale, though, it has value to PSPRS members.

Texas conman Billie Sol Estes was reputed to have said, "When you owe someone a thousand dollars you're in debt; when you owe someone a million dollars, you've got a partner."  Public sector employees, particularly public safety personnel, have committed their long-term financial security to the belief that government will always have the ability to pay what it owes.  They have long believed that they can steer the political process in their favor financially by allying with friendly politicians, who are more concerned about getting elected than they are with fiscal sustainability.  After all, why shouldn't we spike our pensions or give ourselves end-of-career bonuses via the DROP if politicians acquiesce to our demands?  Governments don't go out of business, and anyway, that is something people in the future will need to figure out.

I wonder if that is what Detroit's (non-public safety) retirees and city employees thought when they were drawing 13th checks for years.  So what happens when the future happens now and the money finally runs out?  Detroit's retirees and city employees are about to find out when they go from being creditors to partners in Detroit's financial disaster.

Wednesday, October 16, 2013

Still waiting: no decision yet in PSPRS lawsuits as of 10/16/2013

We are still waiting on a decision by the Arizona Supreme Court in the Fields case against the Elected Officials Retirement Plan (EORP).  The principal issue in this case, the constitutionality of SB 1609's changes to how cost of living allowances (COLA) are calculated for retirees, is the same as the issue in the Rappleyea case against PSPRS.  While the Fields involves retired judges and the Rappleyea case involves retired public safety personnel, the Fields case reached the Supreme Court first and will set the precedent in the Rappleyea case.

Follow this link if you want to see the oral arguments made before the Court on June 4, 2013 and read a summary of the case.

Friday, October 4, 2013

Rearranging deck chairs on the Titanic: PSPRS and the bonus controversy

By a unanimous vote of PSPRS' Board of Trustees on September 24, 2013, the payment of bonuses to PSPRS' management and investment staff has been halted until the "next compensation review."    This
article by Craig Harris of the Arizona Republic gives more details about the vote and the controversy leading up to it.

PSPRS Adminstrator Jim Hacking had earlier released this forceful response to recent criticism of PSPRS' management, including the payment of bonuses.  While Mr. Hacking is certainly the most capable person to defend his staff, there is more to this story that Mr. Hacking, given his apolitical position, is not discussing.

It is important to remember that PSPRS' staff manages the pension according to the laws created by the Arizona legislature and signed by the governor.  The PSPRS staff is governed by a seven-member Board of Trustees, serving staggered terms, that is appointed by the governor.  The Board of Governors has the ultimate say on how PSPRS' funds are invested.  Finally, the PSPRS staff has no input into how employers calculate the benefits of their employees.  If one employer allows employees to increase their pensions in an irresponsible way, the PSPRS staff simply figures the employer's unfunded actuarial accrued liability (UAAL) and tells the employer how much it must contribute each year to fund its pension responsibilities.  It has no control over that employer's actions.

While it seems fashionable to pile on the PSPRS staff, there is plenty of blame to go around for PSPRS' current woes.  Shortsighted and  ill-conceived laws and policies created by politicians, lax oversight by past Trustees (or Fund Managers as they used to be called), and pension spiking allowed by employers, of course at the urging of public safety unions, have all contributed to PSPRS underfunding.  Mr. Hacking is dealing with multiple issues that preceded his tenure as PSPRS Administrator.  PSPRS' funding ratio has been eroding for well over a decade and began long before Mr. Hacking or Ryan Parham, the chief investment officer (CIO) began their current tenures.  Yet there is this fixation on bonuses, particularly as they relate to PSPRS' funding ratio and PSPRS' annual return on investment.

The current PSPRS staff is trying to clean up a mess that was created by others.  PSPRS' terrible funding ratio shows how big this mess is.  The current strategy they are using now is based on diversifying into multiple investment vehicles that try to maximize upside during good times but limit losses during bad times.  My understanding is that there are benchmarks for each investment vehicle to determine whether or not the strategy is working, and bonuses are paid based on whether or not these benchmarks are met.  This does not mean that PSPRS makes money every year but that it achieves a proper balance between risk and reward that will eventually bring PSPRS back to full funding.  This is what the PSPRS staff is being awarded bonuses for, not for a short-term focus on annual gains.  The previous post discussed some of the changes Mr. Hacking and Mr. Parham have implemented.

So what of the idea of bonuses in general?  It is certainly understandable that taxpayers are uncomfortable with public employees (i.e. public servants) receiving bonuses, but what about union officials, politicians, and public safety personnel?  Those that lobbied for, created, and have participated in or plan to participate in the Deferred Retirement Option Plan (DROP) have no right to complain about bonuses since, after all, the DROP is nothing but a giant bonus program to public safety personnel.  This Arizona Republic database shows how big some of these bonuses are, with the average DROP payment reaching into five and six figures, depending on the employer.  Do these DROP payments perform any real purpose other than to enrich retiring public safety personnel?  No, and for those who disagree, see the series of posts entitled "The Folly of the DROP" here, here, and here.

So those that wanted to end the bonuses got their way, and an agreement for a promised payment was broken.  In the end, everyone would be well advised to reread Mr. Hacking's response, particularly the part about pending lawsuits against PSPRS.  If you think bonuses are a problem, wait until you see what the Arizona Supreme Court does to PSPRS' funding ratio after it rules on these lawsuits.

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.

Wednesday, June 26, 2013

The short life and quick death of an Arizona pension: EORP (July 1, 1981 - December 31, 2013)

For members of PSPRS, the big news out of Phoenix is not the expansion of its Medicaid program or the passing of the state budget.   Rather it is Governor Jan Brewer's signature on HB 2608, which will change the Elected Officials Retirement Plan (EORP) from a defined benefit pension to a defined contribution pension.  Starting January 1, 2014 any new members of EORP will be forced into a 401(k)-style retirement system; those already in EORP prior to this will remain in a defined benefit pension.  This Arizona Republic article by Craig Harris, Statute will alter state pensions, goes into more detail about HB 2608.

To be sure, EORP was the low-hanging fruit among the state's pensions, and it can be argued that there was no other choice but to change it to a 401(k)-style pension.  It is underfunded with more retirees drawing from it than active members paying into it and, to some people, is overly generous in its benefit calculation.  Depending on when one was hired, a retiree can receive up to 80% of the average of his high three-years pay (4% per year of service)  after 20 years or up to 75% of the average of his high five-years pay (3% per year of service) after 25 years.  This calculation is more generous than any other state pension, though to be fair it must be noted that as of June 30, 2012 only about 25% of EORP retirees have at least 20 years of service.  The other 75% retired with less than an 80% benefit.  Also, the pay for many positions covered by EORP is quite underwhelming.  Arizona state legislators make only $24,000 a year for their service.  Governor Jan Brewer's annual salary is a mere $95,000.  The Chief Justice of the Arizona Supreme Court, the top judge in the state, makes $160,000 a year.  For some perspective, three PSPRS employees are in the top ten of state salaries, each making over $200,000 a year, according to the Arizona Republic database.

The significance of HB 2608 and EORP reform has been detailed in posts here and  here.  It remains to be seen how this will ultimately affect PSPRS.  The combination of term limits, retirements, and reelection defeats will greatly diminish the ranks of those with a defined benefit pension over the next ten years, and any institutional memory of the defined benefit pension in the Arizona legislature will be lost.  The ranks of judges  with defined benefit pensions will likely take longer to decrease since judges are not subject to the same attrition factors as the legislature.  However, the defined contribution pension will eventually be viewed as the norm for those in elected office and judgeships, and defined benefit pensions like PSPRS may not be viewed as sympathetically.  Going forward, legislators and judges will be viewing the costs of saving defined benefit pensions more and more from the standpoint of taxpayers and  not as participants.  That could make a big difference for the future of PSPRS.

Wednesday, June 5, 2013

The public pension COLA wars reach the Arizona Supreme Court

The first case challenging SB 1609's public pension reforms has reached the Arizona Supreme Court.  This Arizona Republic article, State’s high court weighing judge-pension case, by Beth Duckett covers the arguments by the plaintiffs, retired judges seeking to overturn the change in how retirees' cost of living allowances (COLA) are determined, and the Elected Officials Retirement Plan (EORP).  The state of Arizona became involved in the case, and an Assistant Attorney General is arguing the case on behalf of EORP.

The issues of this case have been covered in several prior posts, including this one, which updated all the case currently pending against PSPRS and EORP.  For retirees, at least, my (strictly amateur) reading of the vesting laws and the Arizona Constitution seems to make it clear that their benefits, including COLA's, can not be changed after they retire, and this is how the lower courts have already ruled.  The only winning argument I can see for the state would be that the reforms are absolutely necessary to avoid EORP's default.

The outcome of this case will immediately resolve the Rappleyea case since they involve the exact same COLA issue.  The only difference is the parties: Rappleyea involves retired law enforcement officers versus PSPRS.  The Hall vs. EORP and Parker vs. PSPRS cases involve active employees and still await their day in the high court.  The article states a decision is expected by the end of summer.  If the state loses this case, the article says that some legislators may propose to amend the state Constitution in order to lessen some public pension guarantees.  Any amendment would have to be approved by the state's voters.  I do not know the odds of approval, but the election would undoubtedly cost a lot of money and bring national attention to another Arizona legal fight.

Stay tuned.

Friday, May 24, 2013

First they came for the Elected Officials Retirement Plan (EORP) . . .

This previous post discussed House Bill (HB) 2608, which would close the Elected Officials Retirement Plan (EORP) to new hires, and this article by Associated Press reporter Bob Christie, Arizona bill on politicians' pensions passes Senate on 2nd try, gives the latest information of HB 2608's progrss.

HB 2608 would lead to the eventual elimination of defined benefit pensions for elected officials and judges in Arizona.  The pension will continue for those retirees already in EORP as well as for those active members of EORP who have not yet retired, but future hires will be put into a new defined contribution plan.  As current Arizona legislators retire, lose reelection, or are term-limited out, the number of state-level decision-makers with a defined benefit pension like PSPRS will dwindle down over the years.  Judges with defined benefit pensions will also become rarer and rarer as current judges are replaced over the years.

HB 2608 will still need to return to the Arizona House to approve amendments made in the Senate and need Governor Jan Brewer's signature to be passed into law.  It has already passed in the Arizona House once and should easily pass again.  While I can find nothing that indicates the Governor's intentions, it seems unlikely that Republican legislators would have brought forth this bill without a good expectation that she would sign it.  While the passage of HB 2608 ostensibly should have no tangible impact on PSPRS since they are two separate systems, the symbolic impact of this bill is highly significant.

The legislature appears to be voluntarily giving up their own defined benefit pension.  Of course, none of those who are currently voting for it are giving up their own personal defined benefit pensions, but they are committing future legislators and judges to a less generous retirement.  This will create a two-tier system, not unlike the two-tier system in PSPRS for those hired before 2012 and those hired in 2012 and after, though the disparities between the two tiers for elected officials will be much greater than those in PSPRS.  Of course, today's legislators will save future legislators from any charges of hypocrisy if those future legislators want or need to enact more reforms to PSPRS, the Arizona State Retirement System, or the Corrections Officer Retirement Plan.  Going forward, this will be the real impact of HB 2608.

Friday, May 17, 2013

Vesting of benefits for PSPRS members (an update)

With sincere apologies for the long time between posts, here is a further update about the vesting of benefits for PSPRS members.  This Pension Committee Report comes courtesy of the Fraternal Order of Police Arizona Valley Lodge 44's Facebook page and is dated July 7, 2012.  It is a summary of a PSPRS monthly meeting held on June 6, 2012.  It contains specific information from PSPRS Administrator Jim Hacking about the Arizona Revised Statutes (A.R.S.) that deal with the vesting of benefits for PSPRS, EORP, and CORP members.  These statutes are pertinent to the lawsuits against PSPRS relating to reforms made by SB 1609.  As web links can often disappear without notice, the following is taken verbatim from the Facebook post:

PSPRS: A.R.S 38-844.01
Effective 07/27/1983. This states those hired after 07/27/1983 are not vested until the member applies for and is approved for retirement benefits.

CORP: A.R.S. 38-900.01
Effective 07/18/2000, but is retroactive to, from and after 06/30/1986. This states those hired after 06/30/1986 are not vested until the member applies for and is approved for retirement benefits.

EORP: A.R.S. 38.810.02

Effective 07/18/2000, but is retroactive to, from and after 08/06/1985. This states those hired after 08/06/1985 are not vested until the member applies for and is approved for retirement benefits.

This post is extremely helpful because it gives firm dates when the relevant vesting statutes went into effect.  According to this, only those who joined PSPRS before July 28, 1983 would be affected by a victory in the Parker vs. PSPRS lawsuit.  This would seem to mean that a PSPRS member would have to have nearly 30 years in the PSPRS system in order to be affected by a victory.  I do not know the length of PSPRS service of the plaintiffs in the Parker lawsuit, but PSPRS' 2012 Consolidated Annual Financial Report shows only 58 active PSPRS members with at least 30 years of service as of June 30, 2012.  A layman's read of this would mean that a victory in the Parker lawsuit would have no effect on the vast majority of active PSPRS members as it relates to the new contribution rates and new cost of living allowance (COLA) formulas that were imposed by SB 1609.

However, this is in the courts and will eventually get to the Arizona Supreme Court.  A recent victory (PSPRS lawsuit update: Arizona Judges 2, EORP 0) by active judges against EORP shows that the judge in that case did not allow the use of retroactive vesting back to1985 referenced above and instead used the year 2000.  This shows that the situation will be highly dependent on the judgment of a small number of judges and Supreme Court justices, whose opinions are the only ones that matter.  Stay tuned.

Wednesday, April 3, 2013

Vesting of benefits for PSPRS members

In the previous post about the Hall lawsuit versus the Elected Officials' Retirement Plan (EORP), an intriguing point was raised regarding when pension benefits vest.  The active judges suing EORP are attempting to overturn the reforms of SB 1609 that change how the cost of living allowances are calculated and the increase in employee contributions.  They were not completely successful in the lawsuit since there was a law passed in 2000 that changed the timing of vesting from the start of employment to the date of retirement.  This means that those hired after 2000 are subject to the reforms of SB 1609, while those hired in 2000 or prior are not.  This will obviously have a major effect on those active law enforcement personnel who are suing PSPRS over the same changes to COLA's and employee contributions in Parker v. PSPRS.

The Arizona Revised Statute (ARS) 38-844.01 relating to PSPRS states:

A member of the system does not have vested rights to benefits under the system, except as provided in section 38-854, until he files an application for benefits and is found eligible for those benefits as provided in this article. An eligible claimant's rights to benefits vest on the date of his application for those benefits or his last day of employment under the system, whichever occurs first.(italics mine)
This is quite clear that for PSPRS members benefits do not vest until they retire.  However, I can not find a date for this particular statute, so I do not know to whom it may apply.  It could apply to every law enforcement officer and firefighter currently serving or only some, depending on when it was passed by  the legislature.  Making this even more confusing is that the ARS Article dealing with EORP does not have any similar language clearly stating when members' benefits vest, although such language must exist as it was referenced in the most recent decision in the Hall lawsuit.  Furthermore, the annual reports for PSPRS and EORP state, "Generally, all benefits vest after five years of credited service."  Unfortunately, all of this makes it difficult for the layman with a stake in the outcome to know how the Hall and Parker lawsuits will affect him. I guess this is why attorneys make hundreds of dollars an hour.

Once again, we will have to wait for Arizona Supreme Court to rule before we have any definitive answers.  Stay tuned.

Wednesday, March 27, 2013

PSPRS lawsuit update: Arizona Judges 2, EORP 0

The results of the latest skirmish in the battle to reverse the pension reforms enacted by SB 1609 are available in this article, Arizona judges mostly victorious in pension plan dispute, by Howard Fischer of Capitol Media Services and appeared in the Arizona Daily Star.

This lawsuit, Hall v. EORP, involves the constitutionality of changing both the cost of living allowance (COLA) formula and raising the contribution rates of sitting judges who are members of the Elected Officials' Retirement Plan (EORP).  A quick explanation is necessary about EORP, the Corrections Officer Retirement Plan (CORP), and the Public Safety Personnel Retirement Plan (PSPRS).  While EORP, CORP, and PSPRS are three separate Arizona public employee retirement plans and have features that are unique to each, they are all managed under PSPRS.  PSPRS is far and away the largest plan, and the funds of the other two plans are lumped in with it to save investment and management costs.  However, each plan's financial condition is reported separately with no sharing of funds or liabilities between plans.  SB 1609's reforms affected PSPRS, EORP, and CORP, so any legal decisions affecting one has great implications for the other two.  Arizona has three other large public pension plans: Arizona State Retirement System (ASRS) and the pension systems operated by the cities of Phoenix and Tucson.  None of these plans were affected by SB 1609.

The success of this latest lawsuit is the second victory for Arizona judges.  Last year, retired judges were successful in their lawsuit, Fields v. EORP, that challenged SB 1609's change to the system used to calculate COLA's for retirees.  The same constitutional argument was used successfully in Fields as the most recent decision.  The change in COLA's violated both the contracts clause and the amendment that prohibited the impairment of retirement benefits.  The Hall lawsuit deals with the increase in employee contributions of active judges, as well as the COLA's that they would receive after they retire.  The article states that only judges hired in 2000 or before can see their contribution level drop since a law in 2000 changed the vesting of benefits from hire date to retirement date.  I do not know if this vesting law affected PSPRS employees as well but will try to research it.

For PSPRS members, these lawsuits will have enormous impact on their pensions.  There are two lawsuits against PSPRS making the same constitutional arguments to overturn the SB 1609 reforms to PSPRS regarding contribution rates and COLA's.  PSPRS' latest status regarding these lawsuits can be found here: Latest update to lawsuits against PSPRS, and the implications of these lawsuits on PSPRS' financial condition can be found here: PSPRS lawsuits: Sacrifice is for the other guy.

These cases will all end up before the Arizona Supreme Court, but the decisions now could indicate what the final outcomes will be.  Stay tuned

Tuesday, March 19, 2013

PSPRS members: Thoughts about retirement on a (maybe not so) lighter note.

For a fun, and probably highly inaccurate, view of what you will look like as you age, visit the Face Retirement website by Merrill Edge.  You will need a webcam and Flash Player to get it to work, and the younger you are the better it works.  While I think the application gives an overly flattering portrait of people in their 80's, 90's, and even their 100's (it is an advertising tool, after all), it still serves to remind us that we will all get old and have to think about retirement now.

This bring us to this piece, Who Can I Turn To?, by Ben Stein, the economist, lawyer and actor of "Bueller? Bueller?" fame.  His short piece gives one of the best takes about the responsibilities of retirement: that the younger you is here to take care of the older you.  In the end, the only person you can really count on in the future will be the you of the past as friends, relatives, and the government may be unable or unwilling to help you out when you need it.

Mr. Stein's point is a good thing to keep in mind as you look at the you of the future.

Monday, March 18, 2013

Latest update to lawsuits against PSPRS and EORP (March 2013)

Following is the most recent update to the four legals cases challenging SB 1609 reforms to the Public Safety Personnel Retirement System (PSPRS) and the Elected Officials' Retirement Plan (EORP).  The memorandum, which shows a modification date of March 7, 2013, is from the PSPRS Adminstrator. It is also available here in PDF format.  The previous post, PSPRS lawsuits: Sacrifice is for the other guy goes into more detail about these lawsuits.


From: Jim Hacking

Re: The following summarizes the status of the four pending lawsuits challenging reforms to the Public Safety Personnel Retirement System (PSPRS) plans effected by Senate Bill 1609 in 2011.

All four lawsuits were filed in the Superior Court of Arizona in Maricopa County.  Two (Fields and Hall) were brought by, respectively, retired and active judges challenging changes to the Elected Officials’ Retirement Plan (EORP); the other two (Rappleyea and Parker) were brought by, respectively, retired and active law-enforcement officers challenging changes to the PSPRS plan.

Fields v. Elected Officials’ Retirement Plan, No. CV 2011-017443
The Fields case was filed on September 12, 2011, by Kenneth Fields, a retired MaricopaCounty Superior Court judge, and Jefferson Lankford, a retired Arizona Court of Appeals judge, on behalf of a putative class of EORP members who were retired as of July 20, 2011, the effectiveness date of SB 1609. The lawsuit challenges only changes made with regard to the amount and funding of annual permanent increases in base benefits, including the elimination of any new flow of excess earnings above the hurdle rate into the reserve for future benefit increases, changes in the hurdle rate, and the tying of maximum annual increases to the plan’s funding ratio. Plaintiffs challenged the amendments under the “contract clauses” of the Arizona and United States Constitutions,1 and well as under the public-retirement clauses of the Arizona Constitution, adopted in 1998, which provide that “[m]embership in a public retirement system is a contractual relationship that is subject to article II, § 25, and public retirement system benefits shall not be diminished or impaired.” Ariz. Const. art. XXIX, § 1(C). The State of Arizona, through the Attorney General’s Office, intervened as a defendant in order to defend the constitutionality of SB 1609.

The superior court (the Honorable John Buttrick presiding) ordered the trial on the merits consolidated with a hearing on Plaintiffs’ motion for a preliminary injunction. The court held a one-day trial, including live testimony, on April 10, 2012. At the hearing, it also certified a class of EORP members who had retired or applied for benefits under the EORP on or before July 20, 2011, their spouses and surviving spouses, and their children who were under the age of 23 or who became disabled before that age and remained a dependent of the member, a surviving spouse, or a guardian. On May 21, 2012, the court issued a minute entry holding that the changes to the benefit-increase mechanism violated Article XXIX, § 1(C) of the Arizona Constitution by reducing or impairing the retired members’ benefits. The court granted only declaratory relief; it did not grant an injunction. In addition, the court expressly did not reach either the Arizona or federal contract clauses.

Plaintiffs then filed a proposed form of judgment that included injunctive relief. They also moved for an award of roughly $80,000 in attorneys’ fees against the EORP Defendants and the State of Arizona, with that amount to be trebled under the “common fund” doctrine and the additional $160,000 in fees to be awarded against the class itself by being paid from the reserve for future benefit increases. The EORP Defendants and the State objected to the form of judgment and the fee request, including the shifting of fees to the defendants and the spreading of fees to the class.

Judge Buttrick was appointed a federal magistrate judge, and his last date on the superior court bench was August 31, 2012. As a result, on August 16, 2012, Plaintiffs moved for entry of an immediately appealable partial final judgment on the merits under Arizona Rule of Civil Procedure 54(b). Judge Buttrick held a hearing on the form of judgment on August 29, 2012, and on the following day entered a form of judgment that included both declaratory relief and an injunction requiring EORP to transfer funds into the reserve for future benefit increases and pay the retirement benefits due as if SB 1609 had never been enacted. This injunction became immediately appealable, with the notice of appeal due within thirty days of the date of that order. However, Judge Buttrick did not enter Rule 54(b) language that would make the declaratory relief immediately appealable.

On September 12, 2012, Judge Robert Oberbillig, to whom the case was reassigned, heard argument on Plaintiffs’ application for an attorneys’-fee award against the EORP and the State of what was then $96,609.55, with an additional $193,439.96 to be awarded against the class under the “common fund” doctrine. After a nearly two-hour hearing, Judge Oberbillig ruled that he would award the fees against the EORP and the State, although it was a difficult issue under the fee statute as written; this sets up a separate appeal on that ground. He also held that the transfer to the reserve for future benefit increases would create a “common fund” from which additional fees could be paid from individual members’ checks without running afoul of the constitutional and statutory restrictions on use of EORP funds. He has deferred the issue of the amount of fees and whether to award any additional fees to Plaintiffs’ counsel until after notice to the class and an opportunity for class members to object.

On December 17, 2012, the court held a hearing on the form of class notice and resolved the pending issues as to the notice. The notice was mailed to the class members on January 11, 2013.  The court will hold a hearing on the fee application on March 4, 2013, at 1:30 p.m. Several submissions by class members were filed, some of whom support and others of whom object to the multiplier sought by Plaintiffs’ counsel.

In light of Judge Buttrick’s entry of an immediately appealable injunction, the parties stipulated at the hearing to entry of a revised judgment with Rule 54(b) language that would allow a single appeal of all of the merits issue, leaving the fee issues to be resolved by the superior court. Judge Oberbillig entered an appealable final judgment on September 13, 2012. The EORP Defendants filed their notice of appeal on September 28, 2012, and the State filed its notice of appeal on October 12, 2012.

Plaintiffs would not agree to a complete stay of the judgment pending the appeal, and insisted at the September 12, 2012, hearing that the EORP should be required to transfer funds into the reserve for future benefit increases as it would have done on June 30, 2011, if SB 1609 had not been enacted. The EORP Defendants moved for a stay of all injunctive relief, and Judge Oberbillig granted the stay on October 30, 2012. The EORP Defendants and the State petitioned to have the appeal transferred from the Arizona Court of Appeals to the Arizona Supreme Court. The transfer petition was supported by briefs from the Governor, the President of the Arizona State Senate and Speaker of the Arizona House of Representatives, and the League of Arizona Cities and Towns as amici curiae.

Plaintiffs opposed the transfer petition. On January 8, 2013, the Arizona Supreme Court granted the petition and accepted the case. The EORP Defendants and the State filed their respective opening briefs on February 13, 2013. Plaintiffs’ answering brief was due April 1, 2013, but Plaintiffs’ counsel stated that Plaintiffs would be seeking an extension of time for that brief. Any amicus briefs are currently due twenty days after the filing of the answering brief, which would be April 22, 2013, if the answering brief is filed on the existing deadline.

Hall v. Elected Officials’ Retirement Plan, No. CV 2011-021234
The Hall case was filed on November 30, 2011, by Philip Hall and Jon Thompson, both active judges of the Arizona Court of Appeals, on behalf of a putative class of judges of the superior court, court of appeals, and Arizona Supreme Court who were active members of the EORP as of July 20, 2011. The lawsuit asserts the same challenges as the Fields case to the benefit-increase reforms. It also asserts challenges to the increase in the employee contribution rates under the contract clauses, the public-retirement clauses in Article XXIX, and the Arizona Constitution’s judicial-salary clause, which provides that the “salary of any justice or judge shall not be reduced during the term of office for which he was elected or appointed.” Ariz. Const. art. VI, § 33.

This lawsuit, which was reassigned by stipulation to Judge Buttrick, remained inactive during the trial proceedings in the Fields case. On August 9, 2012, the State of Arizona, by the Attorney General’s Office, gave notice of its intention to intervene, and the court ordered in a minute entry filed August 14, 2012, that intervention was granted upon the State’s filing of a notice of appearance. Following the decision in Fields, the parties (including the State) began negotiating a stipulation of facts and a schedule for resolution of the action through cross motions for summary judgment. The parties submitted a joint stipulation as to certain facts and the admissibility of documents on September 14, 2012. Plaintiffs filed their motion for summary judgment on September 21, 2012. The EORP Defendants and the State filed their respective responses and cross-motions for summary judgment on November 7, 2012. Plaintiffs’ combined reply and response was filed on December 31, 2012. The EORP Defendants filed their reply in support of their cross-motion on February 7, 2013, and the State filed a joinder in that reply. Judge Douglas Rayes, to whom the case has been reassigned, held a hearing on the summary judgment motions on February 11, 2013. The court indicated that it will try to rule quickly, and the parties have agreed that they will seek to pursue an immediate appeal and transfer to the Arizona Supreme Court, in the hope that the case can be decided at the same time as the Fields case.

Rappleyea v. Public Safety Personnel Retirement System, No. CV 2012-000404
The Rappleyea case was filed on January 11, 2012, by two retired law-enforcement officers, and it challenges SB 1609’s amendments to the benefit-increase mechanism for PSPRS. It asserts the same causes of action asserted in the Fields action. The case is assigned to the Honorable George H. Foster, Jr. By stipulation filed October 11, 2012, the State of Arizona, through the Attorney General’s Office, intervened as a defendant. The case remained dormant while the Fields case proceeded.

On August 7, 2012, Plaintiffs filed a brief motion for summary judgment based on the Arizona and federal contract clauses and the Arizona retirement-benefits clauses. The motion also argues that the distribution to government employers’ accounts of excess investment earnings would violate Article XXIX, § 1(B) and compromise PSPRS’s tax qualification under the Internal Revenue Code, but this appears to reflect Plaintiffs’ misunderstanding of the nature of the employer accounts, i.e., that money is being returned to the employers themselves, as opposed to the main plan.

On August 13, 2012, Plaintiffs filed a request for a Rule 16 scheduling conference. By an ordered dated August 14, 2012, the Court ordered the parties to file a joint proposed scheduling order by September 13, 2012, and the parties did so. On October 30, 2012, Judge George Foster, Jr. conducted the Rule 16 scheduling conference. He announced that he would recuse himself from the case because of his prior professional relationship with Assistant Attorney General Charles Grube, his own wife’s position in the Attorney General’s office, and Mr. Grube’s current representation of him and other members of the Commission on Judicial Conduct in a Ninth Circuit appeal challenging certain Commission rules. The case has been reassigned to Judge Randall H. Warner.

Plaintiffs moved for summary judgment on August 7, 2012. The PSPRS Defendants and the State filed their respective responses to Plaintiffs’ motion for summary judgment on October 25, 2012, and Plaintiffs filed a reply on December 20, 2012. On February 15, 2013, the parties filed a stipulation to stay further proceedings in Rappleyea pending the Arizona Supreme Court’s decision in Fields.

Parker v. Public Safety Personnel Retirement System, No. CV 2012-000456
The Parker case was filed on January 12, 2012, by the Rappleyea plaintiffs’ counsel on behalf of four active law-enforcement officers, who purport to represent a putative class of all active law-enforcement PSPRS members as of July 20, 2011. The lawsuit parallels the Hall suit and challenges SB 1609’s amendments to the benefit-increase mechanism and employee contribution rates on the ground that they violate the Arizona and federal contract clauses and Article XXIX, § 1(C). This case is assigned to the Honorable John Rae. The State of Arizona has indicated its intention to intervene in this action but has not yet done so.

The plaintiffs’ lawyers who filed this action are also counsel to the Arizona Fraternal Order of Police (FOP). On March 23, 2012, the Phoenix Law Enforcement Association (PLEA) moved to intervene as a plaintiff; FOP’s counsel strenuously opposed the motion, and the PSPRS Defendants remained neutral. By a minute entry dated June 11, 2012, the court granted the motion to intervene. PLEA’s counsel filed their complaint on September 17, 2012.

On August 14, 2012, the original Plaintiffs filed a request for a Rule 16(b) pretrial conference. The parties submitted a joint pretrial memorandum on September 17, 2012, and the court conducted a telephonic status conference on September 19, 2012. PLEA had moved for a three-month continuance of proceedings because of its counsel’s medical condition. In its September 19, 2012, minute entry, the court extended the date for Plaintiffs to file a motion for summary judgment until January 21, 2012. The court also set a hearing on any summary judgment motions for April 26, 2013.