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Wednesday, February 3, 2016

Selling the PSPRS sellout: How union leader are shafting the next generation of firefighters and law enforcement

If you would like to know what is actually in Senate Bill 1428 (SB 1428), you can find an 11-page fact sheet about it here.  For a video explanation from Bryan Jeffries, president of the Professional Fire Fighters of Arizona (PFFA), and Will Buvidas, treasurer/chief negotiator of the Phoenix Law Enforcement Association (PLEA), you can go to this nearly one-hour video presentation.  The presentation is also available at the PFFA website, but it appears to work better at the PLEA link.  Readers can read the fact sheet for themselves, but I wanted to focus on the presentation.

The presentation is more interesting because it includes participants in the reform negotiations.  It is done in the manner of a late-night infomercial, including what appear to be planted questions from the audience.  Anyone who reads this blog knows that I have been quite critical of the PFFA's reform efforts.  Nothing in this video has done anything to change my opinion that they have quite shamelessly dumped the costs of senior members' excesses on a future generation.  Law enforcement personnel can make their own judgment about Mr. Buvidas, although I do not know how universally he speaks for all of Arizona's law enforcement personnel.

Here are several points from the video presentation:

1. There are actually four tiers:
  • Tier 1 is anyone with 20 years of credited service as of December 31, 2011.
  • Tier 2a is anyone in PSPRS but with less than 20 years of credited service as of December 31, 2011.
  • Tier 2b is anyone hired between January 1, 2012 and June 30, 2017.
  • Tier 3 is anyone hired after June 30, 2017.
I had considered all Tier 1 members to be those hired before January 1, 2012.  The only difference between Tier1 and Tier 2a members is whether members' contributions to PSPRS while in the DROP are not paid at all (Tier 1) or paid and later refunded (Tier 2a).  Going forward, it is important to remember how the tiers are broken down.

2. During the presentation, they mention that one of the causes of PSPRS' problems is an "unrealistic expected rate of return" (ERR).  They state that it should actually be closer to 5%, instead of the current 7.5%.  They estimate that PSPRS has less than a 50% likelihood of reaching 7.5% over the next 30 years.  PSPRS, just a few years ago, had an ERR of 9.0%, and PSPRS just dropped its ERR from 7.85% to 7.50% this fiscal year.  Once again, going forward, this point will be important to remember when we consider this reform proposal.

3. The presenters actually praised Reason Foundation, a libertarian organization, for its participation in the process.  This is perhaps the greatest irony in all this.  Both Mr. Jeffries and Mr. Buvidas expressed their apprehension about working with Reason Foundation but found them easy to work with.  The sad truth is that Reason Foundation was fairer to union members than the union leaders themselves.  Mr. Jeffries spent last year going round the state blithely trying to sell his plan of intergenerational theft to union members.  Yet an outside organization, dedicated to small government, comes in with a better plan that takes better care of union members than the members' own representatives.  This is an especially shameful spectacle on the part of the PFFA, an organization that was denying any reform was necessary in 2011, promoting a generational wealth transfer last year, and is now on board with a completely different plan.  A model of leadership the PFFA isn't.

4. Future COLA's will be based on an individual's actual benefit amount, not the average normal pension benefit.  In fiscal year (FY) 2015, the average normal pension was $54,974/year or about $4,581/month.  With a $4,581/month pension, a 2% increase would mean a $92/month compounding increase; $3,500/month would be $70/month; $5,500/month would be an additional $120/month.  Over 20 years, the compound effect of 2% annual COLA's will raise our $3,500/month benefit about $1,599/month, our $4,581.month benefit about $2,093/month, and our$5,500/month about $2,512/month.  Under the current system, all members get the same COLA, based on the average normal pension benefit, regardless of their individual benefit amount.  This was especially helpful for those receiving disability and survivor pension, which tend to be smaller than most normal pensions.  Readers can decide for themselves how they feel about this.

However, this is another incentive to spike one's pension since it will pay this extra dividend in retirement as well.  The pensionable income cap for Tier 3 members will make this more difficult for them to take advantage of this, but it is left wide open for Tiers 1, 2a, and 2b.

5. The replacement of the deferred retirement option plan (DROP) with a defined contribution (DC) pension is blatantly unfair to Tier 2b and Tier 3 members.  The DC pension was a sop thrown at those members to protect the DROP for Tier 1 and Tier 2a members.  That the DROP is bad policy is without question; that is why it was ended in 2012.  Yet rather than accept the same conditions they are imposing on future workers the union leaders protected senior members by preserving the DROP.

It is difficult to make straight comparisons of the DROP versus the new DC plan.  However, I used Bankrate.com's calculators to figure out the final DC benefit for someone who earned $75,000/year for 25 years.  Obviously, this would not happen, as wages would grow over the years, but it is a simple way to have someone double his salary over a 25-year period.  It would also be more favorable to the employee than if we started at $50,000/year and incrementally increased annual salary to $100,000 in year 25.

A monthly contribution of $375, 6% (3% apiece from the employer and employee) of $6,250/month or $75,000/year, would produce a final benefit at 5% annual interest, compounded monthly, of $223,320.  The employee would have contributed $56,250 over the 25 years for a net gain, including the employer's $56,250 contribution, of $167,070.  Not bad, but let's compare it to the DROP.

A person in the DROP participates for only the last five years of work.  He either makes no member contributions like Tier 1 members or makes members contributions that are later refunded with interest when he leaves work for good.  Either way, he is not out any extra money, and in fact, is ahead since he ultimately keeps those member contributions.  Using the the same $75,000 salary, a Tier 2a member who enters the DROP after 20 years will receive a final benefit after five years of $203,053 at the current DROP interest rate of 3.1%.  A Tier 1 member would get $228,064 due to a higher interest rate of 7.5%.  Both will also save over $43000 in member contributions.  We can see that at least $80,000 more will accrue to the DROP member, who has to do absolutely nothing except join the DROP, versus the member in the DC plan, who has to pay into the plan his entire career.

This disparity between the DROP and DC plan is a factor of the DROP's bad financial math.  It cannot and will not work.  Yet the unions were not going to give it up in order to help other tiers or the long-term financial stability of PSPRS. The union leaders sold out younger members to protect an unsustainable benefit for senior members.

6. Tier 2b members can feel better about themselves since the union leaders are shafting Tier 3 members even worse than them.  Remember that Tier 2b members were hired after SB 1609 and are subject to its provisions, among which was a minimum of 25 years credited service and a minimum age of 52.5 years to draw benefits.  Tier 3 members have the same minimum 25 year's service but cannot draw benefits until they are 55.  Tier 3 members can still draw benefits at 52.5 years but must take a lower amount.

The unions like to point out how physically demanding firefighting and law enforcement are, but apparently this will not be the case in the future.  A young man or woman who joins a fire department or law enforcement agency at 25 should expect to work 30 years if he or she wants to get full benefits.  Pay no attention to that wear and tear on your body and mind, a Tier 1 or Tier 2a person needs you to keep working longer than they were required to.

7. I mentioned in point 2 about the ERR and how we needed to keep it in mind going forward.  Here is where it becomes relevant. The presentation states that Tier 3 members will only be responsible for 50% of the normal cost of their tier only.  The presenters estimate that the normal cost will be 18% for Tier 3, which means Tier 3 members should expect only a 9% member contribution.  Sounds good, but what ERR did they use?

Is this 9% member contribution rate based on the current 7.5% ERR or the 5% ERR the presenters said was more realistic and sustainable?  If it is based on 7.5%, Tier 3 members should not expect that 9% employee rate to last since the ERR will eventually have to be lowered to 5%.  The lower the ERR, the more contributions will need to be made, and half of any increase will have to come from Tier 3 members' own pockets.  No one can know for sure what the employee rate will be until we know what the ERR is going to be.

The presenters also say that Tier 3 members are not responsible for prior pension system debt, but this is not a corporate spin-off.  Employers are still responsible for their pension debt until it is paid off.  This will have financial consequences in other ways that may not be seen in the normal cost. Mr Jeffries and Mr. Buvidas are right that Tier 3 members are not responsible for prior pension system debt, but they will be paying for it in the form of lower wages and benefits, longer careers, greater call loads, and less safe working conditions.

8. Probably my favorite part of the presentation of was Mr. Jeffries talking about how he had difficulty with the 50/50 split of normal costs between employers and employees.  Yet he brings up a point that we have discussed before, which is that a 50/50 split keeps employees aware of the health of their pension.  The absurd part of Mr. Jeffries comments was how he recommends that the next generation be more "vigilant" in watching out for the health of PSPRS!

What?  Wasn't that the job of the PFFA, PLEA, FOP, AHPA, et al?  I do not know the role of Mr. Jeffries or Mr. Buvidas in our current situation, so I am not calling them out specifically, but they represent organizations that have been anything but vigilant about PSPRS.  In fact, they seem to have represented the worst aspects of human nature: greed, selfishness, short-sightedness, arrogance, and just plain stupidity.  It is the height of hypocrisy to advocate this selfish and greedy plan while admonishing the future victims of your greed to be more vigilant about the system you screwed up.

9. But wait, there's even more for Tier 3 members.  Their COLA's will be on sliding scale that lowers the percentage of their COLA based on the funded level of PSPRS.  Furthermore, they will not be able to receive COLA's until 7 year after they have retired or turn 60 years old.  Why is this good for Tier 3 members but no one else?

10. Governance reform is all about the who, not the how many.  The presenters make a point of how now that there is a 50/50 split in normal costs there should also be more equal representation on the PSPRS Board of Trustees.  Perhaps, but look at what has happened recently with PSPRS.  Ryan Parham, PSPRS' chief investment officer, came out publicly with what amounted to an admission that PSPRS was deliberately trying to lowball its investment returns so as not to pay COLA's.  I believe that this is a cover story for an investment team that is unable to earn the ERR  PSPRS' returns are so low because its investment strategy does not work.  Nonetheless, the fiduciary duty of the chief investment officer is to earn returns.  That's it, and if he is not trying to do this, he is failing PSPRS and its members.  Yet, Mr. Parham's admission passed without protest, despite there being a fire and a law enforcement representative on the Board of Trustees.

If PSPRS had a retiree representative who could have taken issue with this, maybe there would have been an issue.  Stacking PSPRS' Board of Trustees will do no good if they act like the current Board of Trustees and follow the lead of PSPRS' staff rather than acting as watchdogs.  The League of Arizona's Cities and Towns wants a Board made up of experts that will be able to understand what PSPRS' staff is doing, not more narrow constituents with a political agenda.  That sounds like a better idea.

10. The Hall case could add an interesting twist to all this.  If the case is decided in favor of the plaintiffs and Tier 1 and Tier 2a members are to return to a member contribution rate of 7.65%, they will be due a refund and have a lower rate than either Tier 2b or Tier 3 members.  If Tier 3 members do have a 9% rate, they will have a lower rate than Tier 2b members, who came on before them but are legislatively required to pay 11.65%.  It does not appear that anyone is saying what will happen if the Hall plaintiffs win.  Will the legislature force them into equal cost sharing or drop them back down to 7.65%?

11. The final point I would like to make is that this will likely be the last reform for PSPRS.  This is definitely not because it is such a great plan.  It is because in it are planted the seeds of PSPRS' own destruction.  Whether consciously or unconsciously, the union leaders have acquiesced to a poison pill policy for Tier 3 members.  While there are important safeguards, like equal sharing of normal costs and immediate payment of any benefit increases, to dissuade Tier 3 members from destroying PSPRS again, you cannot count out the selfishness and greed of people, who will always be looking to get something for nothing.

By including a DC-only option for Tier 3 members, PSPRS will have in place a mechanism to wind PSPRS down if it goes off the rails again.  In the future, if PSPRS becomes grossly underfunded again, new hires will likely opt into the DC-only plan, slowly robbing the DB plan of members and funding.  This will cause a downward spiral that will eventually lead to the end of the DB plan.  Did the union leaders who agreed to this know this or were they snookered by Reason Foundation into accepting this?

If you are a Tier 1 or Tier 2a member, you have nothing to be unhappy about, if you care only about your own benefits.  The only thing you will be giving up is the old COLA formulation, which is virtually worthless since PSPRS' investment staff has neither the inclination nor the ability to earn its ERR, much less the 9% threshold that would trigger COLA's.  If you care about fairness and shared sacrifice with your future fire and law enforcement brothers and sisters, you are probably uneasy about this "reform" plan.  Tier 2b and Tier 3, in particular, are being forced to pay for the retirements we did not properly fund ourselves.  That is a disgrace.

The union leaders will tell you that it will all be good, but we have seen this plan change several times over the past five years.  I do not believe that they know what they are doing.  All they know is that they, as senior personnel, do not want to give up anything and will use all their power to protect what they have.  For heaven's sake, the PFFA plan they were selling all last year was worse than what we have now.  We actually have to be thankful that Reason Foundation got involved in this process!

Senior members (Tier 1and Tier 2a) are giving up NOTHING in this "reform," and the sacrifice will all be borne by the most vulnerable members in Tier 2b and Tier 3.  The realist in all of us can accept that this is how our union leaders do business, after all they're just self-interested human beings like everyone else.  But the realist in all of us doesn't have to buy the fiction that this "reform" is equal, fair, or ethical.  It's a sellout, plain and simple, no matter what Bryan Jeffries and Will Buvidas say.  To paraphrase Groucho Marx, are you gonna believe them or your own eyes?


  1. LMAO! shared sacrifice. The fund has become a ponzi, period.
    How did it go from 120% funded to 48% funded??? Yes some poor choices have been made by the fund managers, like the municipalities not paying into the fund for years as well as PBI. I don't care what system you have, defined benefit or defined contribution, if you can't make a consistent rate of return over time you're sunk. Our boom bust stock markets and centrally planned interest rate markets are to blame. The blame should not go to a guy who has worked his butt off for 25 years and played by the rules.

    BTW you should add to your survey top left that you will get everything you were promised but it won't buy you jack.

  2. I am a CORP retiree who retired in 2008 after 20 years with the ADOC. These tiers don't seem to apply to me. Will I ever see a PBI/COLA increase to my pension in the future?

    1. Thank you for your comment. While it is difficult for me to tell for sure since they seem to use the term “PSPRS” both collectively for PSPRS, CORP, and EORP, and specifically just for PSPRS only, it appears that you will be covered under the new PBI/COLA changes in the reform proposal since the changes to CORP from SB 1609 in 2011 appear identical to those made to PSPRS. You are under what they call the “old law,” meaning you will get a PBI if PSPRS earns over 9% and funds can be placed in the reserve fund for PBI’s. PSPRS did not come anywhere near earning that last fiscal year, and barring a miracle, will not earn that this fiscal year. Though it looks like starting this year, the legislature can award you one-time benefit increases based on an analysis of the system.

      If you are covered under the new it would give you the lower of 2% or the regional CPI, so as long as there is some inflation, you will be getting some type of benefit increase. This might be better than counting on PSPRS to earn 9%.

    2. Did you notice that they just pulled a judge from the hall case at the last minute, and replaced him with the former VP of the Goldwater institute? Very interesting timing, and choice.

  3. So would you rather nothing be done? I don't see any plan from you.

  4. Nothing is exactly what is being done by Tier 1 and Tier 2a members to help PSPRS. They are giving up nothing and passing the entire financial burden of fixing PSPRS onto a future generation of firefighters and law enforcement. You’ve made a false dichotomy, and logical fallacies do not give anyone moral cover to justify the injustice being committed. So you would support any reform plan in order to do something, regardless of how unfair and unethical it is?


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