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Monday, October 13, 2014

What are two most important legal issues facing PSPRS, Part I? (Hint: Neither has anything to do with James Hacking or real estate investments)

In the last post I mentioned the Pension Task Force that has been set up by the League of Arizona Cities and Towns ("the League").  I have not had a chance to read every document posted on the Task Force's homepage, but the one that caught my eye and seemed like required reading is titled "Kutak Rock Presentation."  I recognized the Kutak Rock name as that of PSPRS' law firm, so I was hoping there would be some updated information about the still pending Parker v. PSPRS and Hall v. Elected Officials' Retirement Plan (EORP) cases.  The Parker and Hall cases were filed by individuals who were active law enforcement personnel and active judges, respectively, at the time SB 1609 went into effect.  These cases are challenging both the change in COLA calculations for active personnel hired before SB 1609 went into effect, which was the issue resolved when the already retired judge Fields won his case against EORP, and the increase in contribution rates.  In the case of PSPRS, contribution rates have had stepped increases annually starting from 7.65% and will top out at 11.65% next fiscal year.

Unfortunately, there was no updated information about the cases.  This is frustrating since the outcome of these case will financially affect so many of us both now, when it comes to contribution rates, and in the future, when it comes to how our COLA's are calculated.  However, the presentation by Marc R. Lieberman, a partner at Kutak Rock, is still very interesting.  The critical issues it covers are the options available to change the Arizona Constitution with respect to public retirement systems and the principal legal issues involved in the Hall and Parker cases.  In this post we will discuss the options available to change the Arizona Constitution with respect to PSPRS.

Article XXIX of the Arizona Constitution states the following:
Membership in a public retirement system is a contractual relationship that is subject to article II, section 25, and public retirement system benefits shall not be diminished or impaired.
This one sentence is at the heart of all the legal challenges to SB 1609.  Mr. Lieberman breaks the sentence down into two clauses with the first clause being the "Contract Clause" and the second being the "Pension Clause," which I have seen other references to as the "pension protection clause."  The distinction between the two clauses is important because the Contract Clause seems to offer less protection than the Pension Clause.  The Contract Clause was not considered in the Fields case, which relied strictly on the Pension Clause as justification to overturn the COLA formulation changes to the pensions of retired EORP members.  This is important because he writes Article II, section 25 if the Arizona Constitution:
. . . prohibits a government's impairment of contracts ("No . . .  law impairing the obligation of contract, shall ever be enacted").  Despite the fact that the provision appears absolute, the courts have construed Art. II, section 25 as allowing governments to enact legislation impairing contracts if certain elements are satisfied.
He writes that among these certain elements are "significant and legitimate public purpose" and "reasonable and appropriate measure to achieve the public purpose," and in the Fields case:
 the Court emphasized that the Contract Clause pertains to "the general contract provisions of a public retirement plan, while the Pension Clause applies only to public retirement benefits."
 As a result of this dichotomy, the Court held that the Pension Clause "confers additional, independent protection for public retirement benefits separate and distinct from the protection afforded by the Contract Clause."
So there we can see the importance of the Pension Clause.  Mr. Lieberman writes,
Fields confirmed earlier decisions (Yeazell, Thurston) holding that members and retirees have a vested right to rely on benefits promised them at the time of their hire.
The question remaining here is if it was possible that Fields might have lost his case against EORP if the Pension Clause was not in the Constitution.  We will never know since the Contract Clause was not considered in the Fields case, and this would, no doubt, bring in other legal issues and precedents that Mr. Lieberman did not cover in his Powerpoint slides.

Mr. Lieberman mentions two possible changes to the Arizona Constitution which he refers to as consensual and non-consensual changes.  As an example of consensual change he mentions "fire fighter legislation," which I take to mean the ridiculous Professional Fire Fighters of Arizona (PFFA) PSPRS reform proposal.  I wrote about the PFFA proposal in several posts, including here, so I will not go into it further now.  The  most likely option of the non-consensual changes involves simply repealing all or part of Article XXIX of the Arizona Constitution.

Article XXIX is a relatively new addition to the state Constitution, only being ratified by Arizona voters on November 3, 1998.  I suspect that Proposition 100, as it was then labeled on the ballot, would not pass if it were put before the voters now.  Mr. Lieberman brings up the potential for simply repealing the Pension Clause while retaining the Contract Clause of Article XXIX.  This would allow the potential for some type of impairment of pension benefits (like changes to unsustainable COLA's), in what I would assume to be in extreme cases of underfunding and exorbitant contribution rates, but retaining the same protections of any other binding contract in normal circumstances.  This would obviously mean more lawsuits when the Legislature tried to implement changes but would not allow any pension reform to be dismissed out of hand, regardless of PSPRS' financial circumstances, as was done in Fields.  Would Arizona voters approve changes to Article XXIX?  Perhaps the results of Phoenix's pension referendum will give us an idea.

Mr. Lieberman ends his presentation with a great question:
What's more important, preserving the plans' fiscal health for future generations or protecting the pension rights of existing members?
I would add to this my own question about the crucial issue of fairness.  How much (more) financial sacrifice should be made by future (and current younger) generations so that the financial sacrifice of existing or (soon-to-be) retirees is minimized?

The next post will cover the other major issue facing PSPRS.

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