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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, 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.

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