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

Saturday, February 9, 2013

PSPRS lawsuits: Sacrifice is for the other guy

There are currently two lawsuits filed in Maricopa County Superior Court that challenge the changes made to the Arizona Public Safety Personnel Retirement System (PSPRS) by SB 1609 in 2011:

            Rappleyea vs. PSPRS (Case #CV2012-000404)

            Parker vs. PSPRS (Case #CV2012-000456)

The Rappleyea lawsuit was filed by a retiree.  The Parker case was filed by an active member of PSPRS.  Both lawsuits dispute the change in how cost of living allowances (COLA's) are calculated, but the Parker lawsuit also challenges the change in contribution rates imposed by SB 1609.  This November 21, 2012 Legal Challenge Memorandum* from the attorneys representing PSPRS gives more details about the lawsuits.

Previous posts like Have a COLA and a smile have addressed the dangers to PSPRS by reverting back to the old COLA formulation.  However, the Parker lawsuit's attempt to reverse the increase in contribution rates shows that the same impulses of those retirees challenging the COLA reform are alive and well in some active members of PSPRS.

All the lawsuits challenging PSPRS over the SB 1609 reforms hinge on the same two legal arguments.  The first involves the Arizona Constitution's Article 29, which states "public retirement system benefits shall not be diminished or impaired."  This straightforward premise states that any attempt to change benefits is unconstitutional, and it has already been successfully used by retired judges in their lawsuit over COLA changes to the Elected Officials' Retirement Plan (EORP).  The second premise regards the contracts clauses of both the Arizona and US Constitutions.  It argues that the operation and structure of the retirement plan upon an employee's hire date should be construed as a contract between employer and employee and can not be unilaterally changed.  The Parker case's premise is that if an employee was hired before January 1, 2012, the employee contribution rate of 7.65% was a binding contract between the employer and the employee.  If upheld, this would make the annual increases, which top out at 11.65% in fiscal year 2015-16, unconstitutional for those hired before January 1, 2012.

The end result of these cases will have major effects on PSPRS.  The retirees seem to have the stronger and more sympathetic case as the changes were made after they had already retired with certain expectations of future increases in their benefits.  The victory in the EORP case also sets precedent for the Rappleyea case.  I am not a lawyer, but based on a layman's reading of the language of the Arizona Constitution, it seems that changing the COLA formula after someone retired would be unconstitutional.  I think the only argument that could convince a judge otherwise would be that resuming the old COLA formula would imperil PSPRS' very existence. 

As for the active employees, their case is less clear as the changes to both the COLA formula and contribution rates occurred while they were still working and active members of PSPRS.  Both the Rappleyea and Parker cases, as well as two similar cases filed against EORP, will most likely be resolved by the Arizona Supreme Court, possibly as soon as this year. 

So what happens to PSPRS if the Parker case is successful?  A reversion to the old COLA formula would not have an immediate effect since the Parker case involves those still working.  However, if PSPRS was forced to lower contribution rates back to 7.65% for those hired before January 1, 2012, there would be an immediate financial impact.  PSPRS would be forced to refund all employee contributions in excess of 7.65% and could not collect more than that for any employee hired before January 1, 2012.  There would be both an immediate financial hit to PSPRS through the refunds it would be forced to pay and a long-term hit through decreased employee contributions. 

If both the lawsuits are successful, retirees and active employees hired before January 1, 2012 will be exempt from paying any of the increased costs of bringing PSPRS back to full funding.  The burden of those increased costs can only fall on two groups, those hired January 1, 2012 or later and taxpayers.  New hires are already subject to the annually escalating contribution rates (topping out at 11.65%), but their only option will be to advocate for passing even higher rates on to those hired after them.  Employers (i.e. taxpayers), already burdened with paying a 30% contribution rate, will have no choice but to use more of their limited tax revenue to fund PSPRS.

This is the sad state we have reached.  Three distinct groups (retirees, older hires, and newer hires) are all battling for a share of a shrinking pie with the two most powerful groups trying to stake out their chunk of defensible territory.  Taxpayers are innocent bystanders hoping not to get destroyed in the crossfire.  PSPRS will be the scorched earth left at the end.

*March 18,2013 update: Previous link is dead. Undated but what appears to be an updated Legal Challenge Memorandum is available.

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