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

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

Thursday, 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.