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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...

Tuesday, July 18, 2017

Final interest rates for the Hall case: 4.25% for pre-judgment interest; 5.25% for post-judgment interest

This information about the Hall case came out this afternoon

PSPRS was informed last week that the Hall lawsuit impacting Tier 1 EORP members has finally come to a conclusion. As such, prejudgment interest was awarded at 4.25% up through June 28, 2017. Those interest amounts have been calculated and updated to the Employer and Local Board portals today. As a reminder, the prejudgment interest amounts will be included in the credit amounts available for employer use.  These individual amounts will be available in the Members Only portal within the coming days.
The post-judgment interest rate has been determined to be 5.25% where each employer will need to calculate those individual amounts. As a reminder, the post-judgment interest amounts will not be included in the credits available to employers.
To calculate the post-judgment interest, you may use the following formula:
Post-judgment Interest Amount = Total of Contributions and Pre-judgment Interest x .0525 x Number of Days Between June 29 and Payout /365 
This should be calculated on an individual basis for each of your members. Also, this formula assumes you will pay out the contributions and the interest on the same day. If you are planning to pay them out separately, then apply the same formula to the separate amounts (the only difference will be the entry for the “number of days between June 29 and payout.")

Now that the Hall case is officially over, the courts have begun to address the Parker case for PSPRS members. While the remedies will be similar as to the statutory reference for the amount of interest, the actual rate applied to pre-judgment interest could be different. Therefore, we appreciate your patience as this case is adjudicated to completion.
Before I comment further, I need to see an actual pre-judgment interest calculation as I do not know how they will apply this rate to the excess contributions.  4.25% seems low to me, and it appears that they used the prime rate in effect at the time SB 1609 was implemented in 2011 (3.25%) and added 1%.  The current prime rate is 4.25%.  I checked my own PSPRS account and found no pre-judgment interest total displayed, but PSPRS is updating its member portal and does not appear to be posting any new information there.  The new member portal is supposed to go live on July 21, 2017, but it has already missed a previous deadline.  While I suspect that PSPRS members are being cheated, I need to see more information first.

Thursday, July 13, 2017

The lastest in Parker v. PSPRS: The prejudgment interest rate has still not been determined

Here is the latest from the July 12, 2017 status conference in Parker v. PSPRS:
The parties previously agreed to abide by the decisions in the Hall and Fields cases.  The Court is advised that the trial court in the Hall case has ruled on what prejudgment interest rate to apply and entered a final judgment.  It is unknown whether the Plaintiffs in the Hall case will be appealing the ruling.  The Phoenix Law Enforcement Association ("PLEA") would like this Court to independently decide what prejudgment interest rate to apply.  However, PLEA will discuss same with Defense counsel and determine whether it will wait to see if there is an appeal in the Hall case, or file its own motion.
The parties will also work together to draft a stipulated judgment for the Court’s review and approval.
IT IS ORDERED setting a further Telephonic Status Conference on September 20, 2017 at 9:00 a.m. (time allotted: 15 minutes) in this Division, before Honorable Judge Rosa Mroz . . .
If the parties reach an agreement before the Status Conference and would like to the Court to sign the stipulated judgment expeditiously, the parties are encouraged to contact this Division’s judicial assistant . . .to alert her of the filing.
So there is still some discussion over the final interest rate to be applied.  PLEA obviously does not agree with the rate of interest applied in Hall, but they and PSPRS may be able to work something out before the next court date.  This explains the delay in setting a rate and paying interest.  As I have written before, the right and fair thing for PSPRS to do is pay members what it actually earned on the excess contributions.  This rate is likely to be higher than the prime rate + 1% awarded in Hall, but lower than the 10% the Hall plaintiffs wanted.  PSPRS exists to serve members, not use them as a source of income  Earning some profit off the spread between actual returns and the statutorily required prejudgment interest of rate is immoral.  Applying PSPRS' actual rate return as the prejudgment rate seems like a good compromise to me, and it would settle this matter quickly.

There is no mention of PBI's, so it does not appear that Mr. Parker and his fellow plaintiffs will be contesting the constitutionality of Proposition 124. 


A commenter asked what PSPRS' actual rate of return has been and how that translated into actual dollars.  I went back to a spreadsheet I used for this post that estimated prejudgment interest on a $12,000 refund.  I changed it up by using the actual net rates of return for the following fiscal years (FY's):

 Rate of
 FY Return
2012 -0.79%
2013 10.64%
2014 13.28%
2015 3.68%
2016 0.63%
2017* 10.26%

The rate of return for FY 2017 are only through April 2017, which is the latest PSPRS has provided, and a half-percent was subtracted from the gross return to keep it consistent with the net returns for the other FY's.  As before, I divided the annual rate of return by 26 pay periods and ran a running total of the simple interest.

The $12,000 in excess contributions generated $1,420 in simple interest at 5.0% and $1,489 at 5.25%, as of the end of June 2017.  The prime rate at the time of the Hall decision was 4.0%, but it increased to 4.25% several days after the decision.  I do not know which rate will be used if they use prime rate + 1%.  Using PSPRS actual rates of returns generated $2,223 in prejudgment interest, a significant increase of around $735 or $800, depending on which prime rate we use.

Prejudgment interest of $2,223 would produce an annualized rate of 8.1% going back the full six year period to July 2011, so we can see the incentive PSPRS has to keep the rate at the much lower prime rate + 1%.  The spread was higher than I thought it would be, but this is due to the high returns in the current FY, which is when the refund amount was largest.  If PSPRS maintains an annual rate of 10.26%, about $58 will be earned every pay period on the $12,000 refund amount versus only about $24 at 5.25%.

Friday, July 7, 2017

PSPRS investment returns through April 2017

The following table shows PSPRS' investment returns, gross of fees*, versus the Russell 3000 through April 2017, the eighth month of the current fiscal year (FY), with the FY end 2014, 2015, and 2016 returns included for comparison:

Report PSPRS PSPRS Russell 3000 Russell 3000
Date Month End Fiscal YTD Month End Fiscal YTD
6/30/2014 0.78% 13.82% 2.51% 25.22%
6/30/2015 -0.73% 4.21% -1.67% 7.29%
6/30/2016 -0.32% 1.06% 0.21% 2.14%

7/31/2016 1.62% 1.62% 3.97% 3.97%
8/30/2016 1.76% 3.40% 0.26% 4.23%
9/30/2016 0.71% 4.14% 0.16% 4.40%
10/31/2016 -0.27% 3.86% -2.16% 2.14%
11/30/2016 1.17% 5.07% 4.48% 6.71%
12/31/2016 1.30% 6.43% 1.95% 8.79%
1/31/2017 1.03% 7.52% 1.88% 10.84%
2/28/2017 1.17% 8.78% 3.72% 14.96%
3/31/2017 1.06% 9.93% 0.07% 15.04%
4/30/2017 0.75% 10.76% 1.06% 16.26%

There is usually about a two-month lag in PSPRS reporting its investment returns.

This post is more than a little late because of all the Hall case doings that have taken place over the last two months.  Through April 2017, PSPRS is returning about 2/3 of the Russell 3000, which is very good and exceeds the 55-60% range that we have seen in the past.  So kudos to PSPRS through April 2017.  The Russell 3000 ended the fiscal year 2017 with an annual return at just about 18.50%, so if PSPRS gets to 2/3 of that, it would return 12.21% for the fiscal year.  Even at 55-60% of the Russell 3000, it would produce an annual return in the range of 10.18% to 11.10%.  All of these would well exceed the expected rate of return of 7.40%.  PSPRS' Cancer Insurance Plan (CIP) has returned 8.30%, net of fees, through April 2017, so if we subtract 0.50% from PSPRS fiscal YTD returns, PSPRS is surpassing the CIP by almost 2%.

PSPRS has positive returns in all its ten major asset categories and in its short-term investments.  The CIP has positive returns in four of its five major categories, as well as its short-term investments.  The CIP has lost about 1% on its fixed income investments for the fiscal YTD, though PSPRS has returned 4.60% on its fixed income portfolio, a 5.60% difference.  The fiscal YTD returns on US and non-US equity, the only other two categories that the two funds share, showed much smaller differences, a 0.48% return in the CIP's US equity and a 0.75% higher return in the CIP's non-US equity.  Fixed income makes up 26.60% of the CIP's total portfolio, while it makes up only 5.49% of PSPRS' total portfolio.  I am not sure why the CIP would have a different fixed income portfolio than PSPRS, nor do I know if they have different investment managers, and not to rain on PSPRS' parade, but obviously, the CIP's fiscal year to date return would have been much closer to PSPRS' fiscal YTD return if the CIP had invested in the same fixed income portfolio as PSPRS.  This shows an element of luck in choosing investments that underlies all actively managed portfolios.

If PSPRS were to end the year at 12.21% returns, this would mean that under the old PBI system about 1.60% of the fiscal year's returns would be sequestered in the Fund for Future Benefit Increases to be used for PBI's.  PSPRS ended FY 2016 with $8.291 billion in investments; 1.60% of that would be over $132 million available to pay PBI's.  The first COLA under the new system will not be paid until next fiscal year (FY 2019).  Inflation through the 12 months ending May 31, 2017 was 1.9%.

* Returns, gross of fees, are used because PSPRS usually does not report returns, net of fees paid to outside agencies, except on the final report of the fiscal year.  Returns, gross of fees, are used in the table for consistency.  The past two years fees have reduced the final annual reported return by about a half percent.  Returns, net of fees, were 13.28% in FY 2014, 3.68% in FY 2015, and 0.63% in FY 2016.

Tuesday, July 4, 2017

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 permanent benefit increase (PBI) formula with the new cost of living allowance (COLA).  This change was put in place by the passage of Proposition 124, the Public Retirement Benefits Amendment, in May 2016.  It amended the Arizona Constitution via referendum to allow a change in a public pension benefit.  This referendum was passed by Arizona voters by a 70-30% margin. 

However, changing a public pension benefit is considered an unconstitutional act in Arizona based on Article 29 of the state constitution, which states “Public retirement system benefits shall not be diminished or impaired . . . “  This was the legal justification for Kenneth Fields' and Philip Hall’s successful challenges to the change in the PBI formulation under the Elected Officials’ Retirement Plan (EORP).  The EORP PBI is a retirement benefit, and it could not be “diminished or impaired” unilaterally by the Arizona legislature under SB 1609.

In order to avoid the same legal problems caused by SB 1609, which was only approved by the legislature, Proposition 124 added the following (italicized) language to Article 29 after a vote by the state’s citizens:
Public retirement system benefits shall not be diminished or impaired, except that certain adjustments to the public safety personnel retirement system may be made as provided in senate bill 1428, as enacted by the fifty-second legislature, second regular session.
This ostensibly allowed the state to “constitutionally” change a public pension benefit, eliminate the PBI formulation for all PSPRS members, and move to a strict COLA for existing retirees and all defined benefit tiers.  Proposition 124 did not affect EORP members, and the Arizona Supreme Court ("the Court") quickly dealt with the PBI issue in one short paragraph in its decision in Hall.  The change was unconstitutional under Article 29, just as it was in Fields, and it did not matter if a member was retired or active.

This is where it gets interesting for PSPRS members.  Outside of Article 29, another argument that was used by plaintiffs in their cases against SB 1609 was that it violated the Contract Clauses of both the Arizona and United States Constitutions.  Since Hall only dealt with EORP, which was not affected by Proposition 124, there was no reason to decide if changing the PBI via referendum violated the Contract Clauses.  The Supreme Court even avoided the consideration of the Contract Clause in its original decision saying:
The dissent also maintains that the Bill’s changes to the Plan may be upheld under the Contract Clauses of the United States and Arizona Constitutions. U.S. Const. art. 1, § 10; Ariz. Const. art. 2, § 25. See infra ¶ 107. As we have explained, however, the Bill’s unilateral and retroactive changes to the vested terms of the Plan violate Yeazell and the Gift Clause. See supra at ¶¶ 19–23. Consequently, analyzing whether the Bill would pass review under the Contract Clauses were it not for Yeazell and the Gift Clause is unnecessary and violates the principle of judicial restraint. See Superintendent, Mass. Corr. Inst. v. Hill, 472 U.S. 445, 453 (1985) (stating that judicial restraint requires “avoid[ing] unnecessary resolution of constitutional issues”).
The Supreme Court was using other guidelines in its decision and was not going to go there when it came to the Contract Clauses.  It even refused to do so in a Motion for Reconsideration filed after its decision.

Before we discuss this further, a little refresher on what exactly was changed by Proposition 124 might be helpful.  The old PBI, which was often incorrectly called a “COLA”, was not based on any measure of inflation.  It worked by taking half of any annual investment earnings over 9% and putting it in a Fund for Future Benefit Increases (“the Fund”).  The money was sequestered and could only be used to pay PBI's.  From the Fund, PBI’s of up to 4% of the average normal retirement could be paid to retirees.  For many years, the Fund had an excess, so PBI’s became a regular and expected annual raise for retirees.  The problem with the PBI formula was that it worked in only one direction.  Whenever PSPRS earned over 9%, money was moved to the Fund, but if PSPRS lost money, nothing went back to PSPRS’ investment pool to help mitigate losses.  If PSPRS lost 10% one year, then earned 10% the next year, 0.50% of the second year’s earnings would still be bled off into the Fund, even though averaged only 0.25% for the two years.  The rough years of the 2000’s showed the ugliness of this system.  While PSPRS became more underfunded every year and employer contribution rates increased, PSPRS was still forced to take much-needed investment earnings and use them to pay PBI’s.

To further illustrate this, we can use the current fiscal year (FY) as an example.  Let's say PSPRS ends the current FY with a 13% annual return.  Under the old PBI system, half of the amount over 9% annual return was required to be transferred to the Fund.  With $9 billion in investments, this would be $180 million taken from PSPRS’ investment pool to be used for PBI’s.  This would be despite the fact that PSPRS is less than half funded and many employers are already straining their budgets to make their annual contributions. 

If we look at the FY 2016 PSPRS annual report, there were 11,863 retirees or survivors, and the average normal retirement was $4,632 per month.  A 4% monthly increase would on the average normal pension would be $185.28.  The cost of this PBI per year would be $26.375 million, leaving over $150 million for PBI’s in future years.  Any future FY’s that achieved returns greater than 9% would continue to add to the Fund, and PBI’s of up to 4% would be paid as long as there was money in the Fund.  This PBI, as the name says, is permanent, not just for that year of excess earnings, so it would have to be paid to all retirees who received it until they or their surviving spouses died.  Remember too that as long as there is money remaining in the Fund, more PBI's could be awarded in future years, compounding the unfunded benefit increases.  Also, as the average normal retirement benefit increased over the years, whether through wage inflation of those still working or via PBI's, future PBI’s would increase as well.  This allowed monthly retirement benefits to steadily increase over the years, especially for those with less-than-average benefits, as their PBI’s were a higher percentage of their monthly benefits as compared to those retirees with average or above-average monthly benefits.

The new COLA system that was put in place with the passage of Proposition 124 is much simpler.  It allows for the payment of an annual COLA that is the lower of 2% or a local consumer price index for the Phoenix area.  The COLA is also paid on an individual’s own retirement, not the average normal benefit, so a retiree cannot see his retirement grow any faster than 2% per year.  If inflation is higher than 2%, retirees will see a loss in earning power that year.  If it less than 2%, they will only get a COLA that matches that annual inflation rate.  If inflation is 1% one year and 5% the next year, the retiree will see his benefit increase by 1% the first year and 2% the next year.  The other 3% of inflation will have to be absorbed by the retiree.  The COLA’s will be paid for in the employer contribution rates in FY 2018, which started July 1, 2017.  The first COLA will not be paid to PSPRS retirees until FY 2019, sometime after July 1, 2018.

So we can see that there is a dramatic difference between the old PBI and new COLA systems.  I would be the last person to defend the old PBI system.  It was a system designed by selfish, shortsighted, and foolish people who thought that PSPRS would never earn less than 9% a year and that high inflation would be a permanent condition in the economy.  They never took in to consideration the compounding effect of this benefit, which anyone with any common sense could have seen would eventually harm the pension.  While not as bad as the PBI system, the new COLA system has its own cabal of selfish, shortsighted, and stupid proponents.  The only difference is that these people think that low inflation and low market returns will be the new normal.  The disgraceful sellouts in the state-level fire and police unions have designed and/or supported a system that will rob retirees of purchasing power in order to bring PSPRS back to financial solvency.  Of course, this is not the subject of this post.  Those who want to read more about what has happened in the reform efforts can look back at older posts. 
Returning to our original topic, I do not know if the plaintiffs in Parker v. PSPRS will challenge the constitutionality of Proposition 124.  They would seem to have a good case under the Contract Clauses of the Arizona and United States Constitutions.  Here is what Article I, Section 10 of the United States Constitution says:
No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.
I have place in boldface the relevant part about contracts.  Article II, Section 25 of the Arizona Constitution has nearly identical language and says, “No bill of attainder, ex-post-facto law, or law impairing the obligation of a contract, shall ever be enacted.” 

The United States Constitution makes it very clear that no state can void a contract through passage of a law.  The Arizona Constitution specifically prohibits the Arizona Legislature from doing so.  Yet this is exactly what the Arizona Legislature did by passing SB 1428 and referring a constitutional amendment to the ballot.  I am not a constitutional scholar but what the Arizona Legislature did would seem to violate the letter and spirit of the Contract Clauses.  They passed an unconstitutional law then referred it to the voters in order to make it “constitutional” under Article 29, but this still violated the Contract Clauses.

Under this same guise, couldn't the Arizona Legislature have changed our pension in any way they wanted?  All it would take is for them to pass a law and send it to the voters for approval as a constitutional amendment to Article 29 of the Arizona Constitution.  Proposition 124 set the precedent for any abrogation of pension promises as long as the voters approve an amendment to Article 29, but the pension is still a contract between employees and the state pension system.  Can it be this simple to change this contract?  Article 29 of the Arizona Constitution is meant to give additional protection to the pension contract between public employees and their government employers, but does its public pension-centric focus allow for amendments that can actually override the Contract Clauses?  This seems to be what the Arizona Legislature and state public safety union leaderdship believe.

If we look deeper into the Hall decision, the Supreme Court time and time again refers to the plaintiffs as being in a contractual relationship with the State:
Yeazell thus protects the specific terms of a public pension contract from unilateral retroactive alteration. Even the dissent in Yeazell recognized this as the Court’s holding. See id. at 118, 402 P.2d at 547 (Udall, J., dissenting) (stating that the majority’s holding was based on the “erroneous premise that there was created upon employment an absolute binding ‘contract’ to a specific pension,” which meant that the majority was holding that “the legislature, by subsequent enactment, can modify the original pension terms only if the employee consents”).
The Bill’s changes to the Class Members’ pension contracts are consequently invalid under Yeazell. When the Class Members were elected or appointed as judges, they entered a contractual relationship with the State regarding the public retirement system of which they became members. Their retirement benefits were a valuable part of the consideration the State offered upon which the Class Members relied when accepting employment. See Fields, 234 Ariz. at 220 ¶ 27, 320 P.3d at 1166 (“As in Yeazell, Fields has a right in the existing formula by which his benefits are calculated as of the time he began employment and any beneficial modifications made during the course of his employment.”). Under their contracts, the Class Members received retirement benefits as terms of their contracts for which they agreed to share the cost with their employers. Thus, an increase in the Class Members’ proportionate share of the contribution rate above 7% and the change in the statutory formula granting permanent benefit increases without the Class Members’ consent are breaches of that contract and infringe upon the Class Members’ contractual relationship with the StateSee Thurston, 179 Ariz. at 52, 876 P.2d at 548 (“Where the modification is detrimental to the employee, it may not be applied absent the employee’s express acceptance of the modification because it interferes with the employee’s contractual rights.”). By including in its scope Class Members who were Plan members at the time of enactment, the Bill retroactively, unilaterally, and substantially changed the contract terms that the parties previously agreed to. This violates Yeazell.
As can be seen by all the portions I have put in boldface, the sanctity of the contractual relationship between EORP members and the State was considered the crux of the matter by the Court. This was based on the precedent set in the Yeazell v. Copins case, which dates all the way back to 1956.  The Court could easily dismiss the State's arguments for changing EORP's PBI system to a strict COLA by pointing to Article 29, as the post-retirement benefit increase mechanism was very clearly a retirement benefit that cannot be "diminished or impaired."  However, when it came to the increase in employee contribution rates, the Court used the pension contract-centric Yeazell to overturn the State's actions in SB 1609.  The Court reminds us that employees make a decision on whether to accept employment with an Arizona government entity based on the conditions existing at that time.  EORP members are not like Tier 3 PSPRS members who will enter PSPRS knowing that they will not have a fixed contribution rate and must split normal contributions 50/50 with employers during their entire careers.  Tier 3 employees should be aware of this risk when they are offered employment.  If they are not comfortable with this situation, they can either go into a separate defined contribution plan or decline to work for the state agency.

But what about the dire financial state of EORP and PSPRS?  There are certain conditions under which a contract can be changed retroactively.  Here the issue is brought up in the Hall decision:
EORP and the dissent both argue that this is not the end of the analysis. They note that Yeazell commented that if a governmental entity shows that its pension plan is actuarially unsound, “the law governing mutual mistakes of fact” applies. See 98 Ariz. at 116, 402 P.2d at 546. They interpret this comment to mean that if EORP and the State could show that the parties to the Plan made a mistake about the Plan’s financial viability, the Bill’s retroactive changes would be permissible modifications of the Plan under Yeazell. But EORP and the dissent over-read Yeazell’s comment. Although this Court indeed said that the law of mistakes of fact applied to a pension plan if it was actuarially unsound, we expressly and carefully declined to address the consequences of such an application: “We do not, however, mean to imply what rights or remedies might be available to either party in a situation where it is established that a retirement plan is actuarially unsound. This is a matter beyond the issues of the present litigation.”
However, the Court quickly rejected the State's arguments in the following paragraphs:
This Court’s reticence was appropriate. While the defense of mutual mistake of fact applies in any contract dispute, EORP and the State are unable to prove that defense as a matter of law. That defense requires that the party seeking to void a contract prove that (1) the parties made a mistake about a basic assumption on which they made the contract, (2) the mistake had a material effect on the exchange of performances, and (3) the party seeking avoidance does not bear the risk of the mistake. Restatement (Second) of Contracts § 152(1) (1981); see also Renner v. Kehl, 150 Ariz. 94, 97, 722 P.2d 262, 265 (1986) (applying § 152 in resolving claim of mutual mistake of fact). EORP and the State cannot prove two of these elements.
First, EORP and the State cannot show that the parties made a mistake about a basic assumption of the Plan. They claim (and the dissent accepts, see infra ¶¶ 73, 104) that the mistake was the parties’ shared assumption that the Plan was actuarially sound, meaning that the parties mistakenly believed that the Plan’s investment returns would be sufficient to maintain the Plan’s actuarial soundness without changing the benefit increases formula or the employee contribution rate. But disappointment about anticipated investment returns does not qualify as a mistake. See Restatement (Second) of Contracts § 152 cmt. b (noting that “market conditions and the financial situation of the parties are ordinarily not such assumptions,” and “mistakes as to market conditions or financial ability do not justify avoidance under the rules governing mistake”).  Moreover, the Plan’s actuarial soundness is within the Legislature’s control. The Legislature is responsible for setting the amounts of the employer contributions and court filing fees, see A.R.S. § 38–810(B)–(D), and the Legislature may not “reduce the amount of the contributions to the fund if thereby the soundness of the fund is jeopardized,” Yeazell, 98 Ariz. at 116, 402 P.2d at 546. If the Plan is underfunded because of inadequate investment returns, the State may increase employer contributions and filing fees.
Second, even if unanticipated reductions in investment returns could qualify as a mistake, EORP and the State cannot show that the State did not bear the risk that this mistake might occur. The Legislature designed the Plan so that the State accepted the risk of variable investment returns. When investment returns are high, the State’s funding obligation through employer contributions is reduced or eliminated, as happened from 1998 to 2001. But when investment returns are low, the State’s funding obligation is necessarily increased. In either situation, however, the Class Members’ contribution rate remains fixed. Thus, the Class Members are not permitted to obtain any cost savings from higher investment returns, but they likewise are not required to pay more because of lower investment returns. The reward and risk of investment returns falls on the State. This is simply the nature of defined benefit plans. See Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 439 (1999) (stating that in a defined benefit plan “the employer typically bears the entire investment risk” and “must cover any underfunding as the result of a shortfall that may occur from the plan’s investments”). Because the State bears the risk of the claimed mistake, the State cannot rely on the defense of mutual mistake of fact to justify changes to the Plan.
Again, I have highlighted the numerous portions where the Court repeatedly argues that the poor financial performance of the pension's investments is not a justification for unilaterally changing, to the employees' detriment, the conditions of the pension contract in place at the time of hire.  I would argue that the sheer stupidity of the PBI formula, which was destined to lead to where we are now, was a mistake and enough to make its elimination or replacement constitutional.  This does not even take into consideration the immorality of the PBI formula as a form of inter-generational theft.

So, we can see that the Court did everything possible to lay the groundwork for a constitutional challenge to Proposition 124 by declaring the contribution rates at the time of hire a contract that cannot be changed simply because of the disappointing financial performance of the pension.  The Arizona Legislature did not subject EORP members to the same changes affecting PSPRS members.  This was probably due to the small size of EORP's membership, 1,591 total active and retired members as of the end of FY 2016, versus 30,569 active and retired members in PSPRS.  For some perspective, the Phoenix Police Department alone had 2,486 active members at the end of FY 2016.  I also suspect that the State and EOR did not want to tangle again with retired Judge Kenneth Fields, a committed fighter who would have surely challenged any changes to the PBI formula for EORP members.  Without EORP members being subject to Proposition 124, there was no reason for the Court to even consider the Contract Clause of the Arizona Constitution.  The Court found all it needed to make its decision in Yeazell and did not want to look any deeper or broader into the Arizona Constitution, and based on what they did put in the Hall decision, it seems to me that the Contract Clause would have only bolstered the decision in favor of the plaintiffs.

So what happens if Arizona voters approve an amendment to the State's Constitution that violates another part of the Constitution, as it seems like was done here?  I was hoping that there would be something in the Arizona Constitution that addressed this situation, but I found nothing in Article IV, Section 1 of the Arizona Constitution, which deals with the initiative/referendum process.  I did not read the entire Constitution, but my guess is that that is why we have an Arizona Supreme Court to decide difficult issues such as this.  Only they could decide which part of the state's Constitution has  has precedence over the other, and even their decision might not be final, as this could be an issue that goes all the way up to the United States Supreme Court.

I think that will eventually occur in some pension lawsuit somewhere in the United States.  As more and more states find themselves in the position of Illinois with pension burdens so onerous that they cannot pay for other necessary government functions, some state will, via the initiative or referendum process, attempt to greatly reduce the pension benefits of state employees and/or retirees.  I suppose Parker v. PSPRS could be as good a test case as any.  However, I have no insight into what Thomas Parker and his fellow plaintiffs and lawyers have in mind when they go before Judge Jo Lynn Gentry.  The excess contribution issue is already settled with only the final rate of interest to be decided, but could they ask Judge Gentry to consider the constitutionality of the replacement of the old PBI system with the new COLA?  What of L. Lee Rappleyea, the PSPRS retiree who sued PSPRS over the constitutionality of SB 1609?  Her case was never actually litigated because the decision in Fields was applied to her case.  Now she and her fellow plaintiffs are losers without ever having had their day in court.  Could she refile her case, claiming that Proposition 124 is violating her rights under the Contract Clause?  Or could someone else take up this fight?  I don't know.  Searching the Maricopa County Superior Court website, I find no new cases filed against PSPRS in 2016 or 2017, but I suppose a case could be filed in any court in the state.

If Proposition 124 were found to be unconstitutional, it would upset the whole apple cart of pension reform, and it would only take one PSPRS retiree or one active Tier 1 member to do this.  This would be a disaster for PSPRS, which if I had to predict, would lead to the final PSPRS reform: the complete elimination of any defined benefit pension plan for Arizona's future public safety personnel.  After all, this is what happened to EORP, which is now exclusively a defined contribution pension.  A successful repeal of Proposition 124 would show that any type of retroactive pension reform, with the possible exception of bankruptcy, is impossible.  It will just be simpler to go with a defined contribution plan that has predictable costs and benefits.

The next court date in Parker is for a status conference on July 12, 2017.  It will be interesting to see what happens and if a court date for oral arguments is eventually set for some time in the future.