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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...

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.

Wednesday, March 13, 2013

Public safety union PAC's and paycheck protection

This article by Howard Fischer of Capitol Media Services, Measure to limit union politicking may go to voters, appeared in the March 12, 2013 Arizona Daily Star.  The piece covers another paycheck protection measure that could appear on the 2014 ballot as voter-decided initiative.

The proposed initiative would require annual approval from union members to allow money taken from their paychecks to be used for any political purposes, including lobbying activities.  As this pertains to normal union dues, this appears to be an impossibly difficult condition for unions to meet.  Unions are a special interest group, and union members pay dues in large part so that their unions represent them before government to defend and enhance their pay, benefits, safety, and working conditions.  While the term "special interest group" may be freighted with negative connotations, the simple fact is that union representatives must actively participate in the political process.  They are in competition with other groups that are equally passionate about representing their constituencies as well.

It seems unclear how a union would distinguish political activities and non-political activities on a day-to-day basis.  If a union official speaks with a government official about a safety issue, is it lobbying or just a work-related conversation?  If a union website mentions requesting attendance at an upcoming city council meeting being political or just informational?  This type of hair-splitting serves no purpose and does not benefit union members who expect their union to interact with government.

The more appropriate area that should be dealt with regarding paycheck protection involves union political action committees (PAC).  These PAC's have the greatest potential to support positions that are contrary to members' beliefs and wishes.  Speaking to my own experience, I was approached by my soon-to-be local union representatives about joining their PAC when I was still in training.  Needless to say, a recruit in training, still facing a probationary period after graduation, and not knowing how he would be perceived by his future peers and supervisors if he refused to join the PAC was vulnerable and easily convinced (i.e. coerced) to sign up, as I did.  This dubious practice of passive intimidation continues to this day in my department.

Strong-arming recruits to join the PAC occurs for the same reasons detailed in the previous post, What is paycheck protection really about?  By getting them to sign up early for a regular payroll deduction, they will be less likely to think about the money being taken out of their checks every week. The small amount of money is never really noticed and stopping the payroll deduction never occurs to them, or if it does, it is quickly forgotten.  Some may even confuse the PAC contribution as part of their regular union dues.  Requiring an annual written consent to continue paying into the PAC would cause many union members to consider whether the PAC's activities conformed with their personal moral and political beliefs.  This may cause many members to forgo signing on for another year of funding.  This would be a much better avenue to pursue for those advocating for paycheck protection for union members.

If you contribute to a public safety union PAC and are interested in finding out where all the PAC money is being spent, go to the Arizona Secretary of State's Campaign Finance search site.  Users can enter search terms into the "Filer Name" box and click on the "Name" header to put the names in alphabetical order.  Typing in terms like "fire," "police," or "law enforcement" will bring up lists of PAC's related to public safety unions.  Click on the PAC you would like to research in order to pull up periodic and annual reports.  The annual reports dated "January 31st" will show PAC contributions and expenses for the prior year.

Tuesday, March 12, 2013

PSPRS Members: Please watch this video!

The following video was produced by Ontario (Canada) Teachers' Pension Plan (OTPP):

Pension Plan Evolution

Stunningly well done, it has the production values of a PBS documentary and a narrative that holds the viewer's attention for its entire 23 minutes.  Surpassing even these outstanding filmmaking qualities is the information provided.

The documentary deals soberly, fairly, and openly with many of the unavoidable issues affecting defined benefit pensions.  It features important players involved in different public pensions, as well as Alicia H. Munnell, the director of Boston College's Center for Retirement Research, an expert who probably knows more about defined benefit pensions than anyone in the United States.

Canada's economy survived the 2008-2009 financial crisis in much better condition than either the United States or Europe, so if they are implementing reforms to their public pension, it would be wise if we paid attention and learned some lessons about preventing crises, rather than waiting until after the damage is already done.

All readers should do themselves a favor, and watch this video.

Monday, March 11, 2013

PSPRS' unfunded actuarial accrued liability (UAAL)

The previous post referenced PSPRS' increased annual required contribution (ARC) as a factor in the city of Tucson's budget deficit.  The following table shows a breakdown of PSPRS' aggregate ARC from all its participating employers. The table, which is incomplete due to the limited data available in PSPRS' online reports, breaks down the ARC into two parts.  The normal cost represents the employer cost to fund the retirement of current workers while the unfunded actuarial accrued liability (UAAL) represents the employer cost to cover PSPRS' unfunded liability.  This UAAL percentage represents a portion of PSPRS's unfunded liability that has been amortized over 24 years.  The sum of the normal cost and UAAL represents what employers must pay to PSPRS each year.  Using 1968 for example, this meant that for every $100 in salary paid to employees, $14.49 was paid to PSPRS; in 2012 it will be $30.44 for each $100.  The following totals represent the aggregate for all participating employers, so each individual employer's ARC will vary depending on their own pension liabilities.  For example, Tucson Fire Department's ARC for the 2012 valuation year was 46.77% (31.17% of which is UAAL), which is over 16% higher than PSPRS' aggregate ARC.


























The pattern of ARC's follows an expected path up until 2004.  Before that we can see an early period where the ARC was high as PSPRS was established and needed additional start-up funding.  Beginning in the late 1970's, we can see the ARC begin a steady decline to where PSPRS was actually overfunded, which is represented by the negative UAAL percentages.

2004 began the steady increase of the UAAL percentage from 2.51% in 2004 to 17.07% in 2012.  This included huge year-to-year jumps between 2010 and 2012.  The last decade, of course, was when we had two major market crashes.  The average ARC over all years is 12.78%, which shows that over the long run, despite PSPRS' current underfunding, employers have always paid their fair share into PSPRS.

As can be seen in Tucson, the problems with the UAAL is that it is now being paid down at a time when governments are still struggling with their budgets.  Planned amortization of the UAAL is supposed to eventually lead to lower ARC's.  The big unknown is what happens if things do not go as planned.  Lower than expected rates of returns or, even worse another major market crash, will upset the plan and worsen the current underfunding.  How much more can a city like Tucson pay to cover the UAAL?  Cross your fingers and hope we never have to find out.

Wednesday, March 6, 2013

Taken for a ride

The placement of the following two articles by Darren DaRonco in the March 4, 2013 Arizona Daily Star makes for a powerful juxtaposition by the paper's editors.  The first article, City told streetcar operating cost will be 4 times earlier estimate, appears above the fold on the front page and continues on page A4.  The second article, Tucson must bridge $15M gap in budget, also appears on page A4 just to the left of the first article.  The editors of the paper leave it to the reader to reach his own conclusion about Tucson's city government.

Residents of Tucson have watched as the boondoggle known as the modern streetcar has mercilessly played out over the last several years.  Disruption of downtown business, delays in the delivery of streetcars, and fights between different government entities over costs were just the opening acts to the real budget buster: the misestimated costs of actually operating the system.  This new quadrupled cost estimate is being made even before the streetcar has run its first mile.  These are the costs that will haunt the city of Tucson and its taxpayers for the indefinite future.

The modern streetcar was the perfect addition to a city already struggling to pay for core services.  Last November, city residents barely approved Proposition 409, a $100 million bond program to fix the city's deteriorating roads.  This bond program will increase long-term costs to the city via debt service.  Mr. DaRonco writes, "The biggest causes for the ($15 million) deficit are salaries, benefits, and debt service."  This brings us to members of the Tucson Police (TPD) and Fire Departments (TFD).

The previous post about the Arizona Public Safety Personnel Retirement System FY 2012 actuarial report details the increased annual required contributions that the city of Tucson will have to pay PSPRS in the next fiscal year.  These costs amount to approximately $3 million for TFD and $5 million for TPD.  These two amounts alone make up more than half the $15 million deficit.

I would not want to be sitting across from representative of Tucson's city government trying to negotiate a new contract for wages and benefits.  A city council facing a $15 million budget shortfall and publicly embarrassed by an overbudget streetcar project is unlikely to be a sympathetic negotiating partner.  The additional $8 million in public safety pension costs will have to be made up out of somebody's budgets.  I will leave it to the readers of this post to reach their own conclusions from whose budget those costs will be recouped.