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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...

Monday, June 15, 2015

A bad plan executed badly: The Professional Fire Fighters of Arizona's (PFFA) PSPRS pension reform plan

As the Professional Fire Fighters of Arizona's (PFFA) PSPRS pension reform "fix" continues along, we now have something a little more concrete to analyze in the form of the PSPRS pension reform draft bill, available at the PFFA website.   As of late, PFFA President Bryan Jeffries has been going around the state presenting a slideshow about the PFFA plan to employers and PSPRS members.  The version of the slideshow available at the PFFA website is here.  This slideshow has been altered from the initial slideshow the PFFA was presenting.  The older version, available at the League of Arizona Cities and Towns Pension Task Force ("the Task Force") website, is here under the 10-24-14 agenda, but you will need Powerpoint to read it.

As I have pointed out in multiple posts, the PFFA plan is shortsighted, unfair, and does not solve any of the root problems of PSPRS.  However, in this post I just want to go into the specifics of the PSPRS pension reform draft bill ("the draft bill").  The bill was drafted by Michele J. Hanigsberg, which the state government directory indicates is a member of the Arizona Legislative Council (ALC)-Legislative Services Wing.  The Arizona Legislative Council gives it function as the following :
The Council staff provide a variety of nonpartisan bill drafting, research, computer and other administrative services to all of the members of both houses of the Legislature.
 The ALC appears to be the body that does the actual grunt work of turning a proposal into a bill, and since this bill incorporates all the ideas of the PFFA plan and is linked from the PFFA website, it appears that this is the bill that the PFFA wants.  The devil, of course, is in the details, so let's see what the draft bill actually says and what it means for employers and PSPRS members.

This analysis of the draft bill had an inauspicious start when I first compared the two Powerpoint slideshows on the PFFA and the Task Force websites.  The older slideshow from October 2014 states the following about the new system for funding permanent benefit increases (PBI):
Employees only pay 4% into the PBI fund.
The underscoring of "employees only" is in the PFFA's slide.  Compare this to what is says in the slideshow on the PFFA website:
Employees pay 4% into the PBI fund.
No underscoring and the elimination of the "only" are slight changes, but they mean a great deal for employers and active PSPRS members, because this is what the draft bill states:
In addition to an employer's contributions to the fund pursuant to this subsection, each employer shall contribute an amount equal to one percent to its employees' compensation to the cost-of-living adjustment account maintained within the fund for future benefit adjustments for retirees and survivors pursuant to Section 38-856.02.
It is even worse than this because the draft bill also states that employers will have to continue to pay 1% into the PBI even after an employee enters the Inflation Protection Program, the rebranded Deferred Retirement Option Plan (DROP), of which we will talk more about later.  When looking at the wording of the draft bill, we can see how disingenuous the change in the wording between the two slides is.  A more forthright wording would be:
Employees pay 4% into the PBI fund, and employers pay 1% into the PBI fund.
This 1% extra cost to employers is in addition to an increase in the minimum employer contribution level from 8% to 10%, meaning that employers will now pay at least 11% of their employees' pensionable wages, instead of 8%.  This many not seem like a big deal for those employers who are already paying sky-high contribution rates, but it will be a huge cost for those employers who do not have big unfunded liabilities and are at or under the current 8% minimum.  Furthermore, the increase of the minimum employer contribution is permanent, regardless of the future funding status of PSPRS.

For retirees, there is a crucial provision in the draft bill that is not addressed in the Powerpoint slideshow.  In addition to the three-year freeze on all PBI's, seven-year or 60 year-old waiting period for PBI's, a 2% maximum PBI, and a 25% dispersal limit from the PBI fund, there is this:
The annual maximum percentage adjustment to the base benefit is the lesser of two percent or the percentage change published by the United States Bureau of Labor Statistics of the consumer price index for all urban consumers, using the United States city average, unadjusted, for all items, during the twelve months ending July of the year in which the benefit is to be paid.
While I am a strong advocate of an adequately funded PSPRS paying true cost of living adjustments (COLA) based on some measure of inflation, this is another case of an egregiously bad formula for PBI's.  This provision means that, regardless of the funding level of the PBI fund and/or the rate of inflation, retirees can only get a 2% maximum PBI per year, but in any year that the CPI is less than 2%, regardless of the funding level of the PBI fund, they could get less than 2% all the way down to nothing at all.  The same inexcusable lack of foresight that burdened us all with the current, unsustainable excess earnings PBI formula exists in this PBI provision.  Retirees can see one year of 5% inflation and receive a 2% PBI, but the next year see 0% inflation and get no PBI, despite the fact that they are still 3% behind in their purchasing power.  It this post you can see recent COLA's paid by Social Security.  The four-year period from 2009 to 2012 show two years of 0% inflation in 2010 and 2011 bookended by 5.8% and 3.6% inflation in 2009 and 2012, respectively.  Under this PBI provision, a retiree would have received 4% in PBI's against 9.4% inflation, leaving him a 5.4% difference.  (These percentage amounts are non-compounded for simplicity but would be worse if they were.)  If the PBI fund was adequately funded, a 2% PBI each year would have left him only a 1.4% difference.

The most blatant misrepresentation by the PFFA relates to the new Inflation Protection Program (IPP).  As stated earlier, the IPP is the new name for the DROP, the ill-conceived program born of PSPRS' brief period of overfunding during the late 1990's and early 2000's, that has garnered bad press because of the huge payouts received by some PSPRS retirees.  The Powerpoint slideshow on the PFFA website says the following about the IPP:
The DROP will become the Employee Self-Funded Inflation Protection Program.
  • Tier 1 (members with 20 or more years on the job as of 1/2015)
    • No contributions
    • Interest rate = assumed rate of return for PSPRS
  • Tier 2 (everyone else)
    • Contributions during the program period
    • Interest rate = minimum 2% or 7-year average of PSPRS investment returns (whichever is greater)
    • Return of member contributions
The statements about member contributions are expressly contradicted by the draft bill which states:
A member who elects to participate in the Inflation Protection Program shall make member contributions to the the fund and the separate cost-of-living adjustment account in an amount equal to the member contributions required pursuant to Section 38-843, Subsections E, F, and G.  Member contributions made pursuant to Section 38-843 during the Inflation Protection Program participation period are not eligible to be refunded to the member.
As the DROP stands now, PSPRS members with at least 20 years of service as of December 31, 2011 (aka Tier 1) pay no member contributions and receive a variable interest rate based on PSPRS' returns with a minimum of 2% per year.  Those who were PSPRS members as of December 31, 2011 but did not have 20 years of service (aka Tier 2) receive the same interest rate as Tier 1 members, but they continue to pay member contributions.  (The DROP is not available to those hired in 2012 or later.)  These member contributions are refunded when the member leaves the DROP along with 2% interest.  The PFFA slide about the IPP appears to copy these provisions, even though the draft bill is very clear that IPP participants will pay contributions, and these contributions will not be refunded to them.  The draft bill also does not categorize Tier 1 and Tier 2 employees.  Conditions are the same regardless of  when a member joined PSPRS, and all will be paid the variable interest rate with the 2% minimum.

An employee averaging $70,000 per year for the five years in the IPP would make over $40,000 (11.65% employee contribution rate) in member contributions to PSPRS, so we are talking a significant amount of money.  The PFFA is selling the IPP to active employees as if it were no different than the current DROP, even though it will cost them thousand of dollars.  The draft bill gives an end date on the DROP program of December 31, 2016, so active members may want to consider their financial options beforehand.  If this does get approved by the voters in 2016, you will have less than two months to decide if you want to participate in the DROP before it disappears forever.

Unlike Obamacare, we don't have to pass this draft bill in order to see what's in it.  I appreciate that the PFFA has posted the draft bill on their website, but I do not understand why their are selling their "fix" in a way with incomplete and, in at least one major way, blatantly incorrect information.  While I do not believe that they are deliberately trying to deceive anyone, the fact that they started this reform process without a fully formed plan as to what they wanted to do does not inspire confidence.  The PFFA presented its slideshow to the Task Force on October 24, 2014 and this bill was drafted on January 9, 2015, yet in less than three months, they produce a bill that has significant changes and undisclosed provisions that were not presented to the Task Force.  You have to know where you want to go first before you try to lead.  It is no wonder the Task Force has created their own competing proposal for PSPRS reform, which we will cover in the next post.


  1. Why put such a burden on retired members?

  2. This problem will not go away until reform of the financial/corporate system in this country takes place as well. How can you expect a person who is willing to work and save for their retirement only to invest and "risk" their life savings in a fraud riddled, zero sum, greater fool casino? IMHO the pension problems in this country are a symptom of a greater problem. We have ENRON on a nation scale in this country.

  3. Succinctly, I would argue that Labor has forgotten their roots.

    By this I mean that the three concerns of Labor ought always to be efforts by cities to privatize, deregulate for private business, and decreased social spending, i.e., pensions.

    What is missing from the pension conversation is the fact that cities have been giving generous tax breaks to private, for-profit corporations and therefore losing tax base. Also, cities have privatized what could otherwise be revenue generating services.

    How can it be the case that the stock market is up, joblessness is down, and corprorate CEOs are bringing in millions in profit after paying shareholders, but the problem with the pension system, as always, is that it needs reformed.

    Or why is it that city revenues are down because people people are not spending money, or because large corporations are not paying their share?

    I'm not arguing that some modifications in the System are necessary. They are.

    My point, really, is that I agree with your post that this is incredibly short-sighted.

    We live in a red, right-to work state and this erosion of the pension system ought to be a battle cry. Instead, we are facilitating it and bringing in conservative think tanks to help us do it.

    Yes, common sense modifications to the system are necessary because it has been gamed. Straight up. But leaving language in the proposition that makes it easy for future austerity measures is a whole lot of short-sightedness.


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