The short life and quick death of an Arizona pension: EORP (July 1, 1981 - December 31, 2013)

For members of PSPRS, the big news out of Phoenix is not the expansion of its Medicaid program or the passing of the state budget.   Rather it is Governor Jan Brewer's signature on HB 2608, which will change the Elected Officials Retirement Plan (EORP) from a defined benefit pension to a defined contribution pension.  Starting January 1, 2014 any new members of EORP will be forced into a 401(k)-style retirement system; those already in EORP prior to this will remain in a defined benefit pension.  This Arizona Republic article by Craig Harris, Statute will alter state pensions, goes into more detail about HB 2608.

To be sure, EORP was the low-hanging fruit among the state's pensions, and it can be argued that there was no other choice but to change it to a 401(k)-style pension.  It is underfunded with more retirees drawing from it than active members paying into it and, to some people, is overly generous in its benefit calculation.  Depending on when one was hired, a retiree can receive up to 80% of the average of his high three-years pay (4% per year of service)  after 20 years or up to 75% of the average of his high five-years pay (3% per year of service) after 25 years.  This calculation is more generous than any other state pension, though to be fair it must be noted that as of June 30, 2012 only about 25% of EORP retirees have at least 20 years of service.  The other 75% retired with less than an 80% benefit.  Also, the pay for many positions covered by EORP is quite underwhelming.  Arizona state legislators make only $24,000 a year for their service.  Governor Jan Brewer's annual salary is a mere $95,000.  The Chief Justice of the Arizona Supreme Court, the top judge in the state, makes $160,000 a year.  For some perspective, three PSPRS employees are in the top ten of state salaries, each making over $200,000 a year, according to the Arizona Republic database.

The significance of HB 2608 and EORP reform has been detailed in posts here and  here.  It remains to be seen how this will ultimately affect PSPRS.  The combination of term limits, retirements, and reelection defeats will greatly diminish the ranks of those with a defined benefit pension over the next ten years, and any institutional memory of the defined benefit pension in the Arizona legislature will be lost.  The ranks of judges  with defined benefit pensions will likely take longer to decrease since judges are not subject to the same attrition factors as the legislature.  However, the defined contribution pension will eventually be viewed as the norm for those in elected office and judgeships, and defined benefit pensions like PSPRS may not be viewed as sympathetically.  Going forward, legislators and judges will be viewing the costs of saving defined benefit pensions more and more from the standpoint of taxpayers and  not as participants.  That could make a big difference for the future of PSPRS.

The public pension COLA wars reach the Arizona Supreme Court

The first case challenging SB 1609's public pension reforms has reached the Arizona Supreme Court.  This Arizona Republic article, State’s high court weighing judge-pension case, by Beth Duckett covers the arguments by the plaintiffs, retired judges seeking to overturn the change in how retirees' cost of living allowances (COLA) are determined, and the Elected Officials Retirement Plan (EORP).  The state of Arizona became involved in the case, and an Assistant Attorney General is arguing the case on behalf of EORP.

The issues of this case have been covered in several prior posts, including this one, which updated all the case currently pending against PSPRS and EORP.  For retirees, at least, my (strictly amateur) reading of the vesting laws and the Arizona Constitution seems to make it clear that their benefits, including COLA's, can not be changed after they retire, and this is how the lower courts have already ruled.  The only winning argument I can see for the state would be that the reforms are absolutely necessary to avoid EORP's default.

The outcome of this case will immediately resolve the Rappleyea case since they involve the exact same COLA issue.  The only difference is the parties: Rappleyea involves retired law enforcement officers versus PSPRS.  The Hall vs. EORP and Parker vs. PSPRS cases involve active employees and still await their day in the high court.  The article states a decision is expected by the end of summer.  If the state loses this case, the article says that some legislators may propose to amend the state Constitution in order to lessen some public pension guarantees.  Any amendment would have to be approved by the state's voters.  I do not know the odds of approval, but the election would undoubtedly cost a lot of money and bring national attention to another Arizona legal fight.

Stay tuned.

First they came for the Elected Officials Retirement Plan (EORP) . . .

This previous post discussed House Bill (HB) 2608, which would close the Elected Officials Retirement Plan (EORP) to new hires, and this article by Associated Press reporter Bob Christie, Arizona bill on politicians' pensions passes Senate on 2nd try, gives the latest information of HB 2608's progrss.

HB 2608 would lead to the eventual elimination of defined benefit pensions for elected officials and judges in Arizona.  The pension will continue for those retirees already in EORP as well as for those active members of EORP who have not yet retired, but future hires will be put into a new defined contribution plan.  As current Arizona legislators retire, lose reelection, or are term-limited out, the number of state-level decision-makers with a defined benefit pension like PSPRS will dwindle down over the years.  Judges with defined benefit pensions will also become rarer and rarer as current judges are replaced over the years.

HB 2608 will still need to return to the Arizona House to approve amendments made in the Senate and need Governor Jan Brewer's signature to be passed into law.  It has already passed in the Arizona House once and should easily pass again.  While I can find nothing that indicates the Governor's intentions, it seems unlikely that Republican legislators would have brought forth this bill without a good expectation that she would sign it.  While the passage of HB 2608 ostensibly should have no tangible impact on PSPRS since they are two separate systems, the symbolic impact of this bill is highly significant.

The legislature appears to be voluntarily giving up their own defined benefit pension.  Of course, none of those who are currently voting for it are giving up their own personal defined benefit pensions, but they are committing future legislators and judges to a less generous retirement.  This will create a two-tier system, not unlike the two-tier system in PSPRS for those hired before 2012 and those hired in 2012 and after, though the disparities between the two tiers for elected officials will be much greater than those in PSPRS.  Of course, today's legislators will save future legislators from any charges of hypocrisy if those future legislators want or need to enact more reforms to PSPRS, the Arizona State Retirement System, or the Corrections Officer Retirement Plan.  Going forward, this will be the real impact of HB 2608.

Vesting of benefits for PSPRS members (an update)

With sincere apologies for the long time between posts, here is a further update about the vesting of benefits for PSPRS members.  This Pension Committee Report comes courtesy of the Fraternal Order of Police Arizona Valley Lodge 44's Facebook page and is dated July 7, 2012.  It is a summary of a PSPRS monthly meeting held on June 6, 2012.  It contains specific information from PSPRS Administrator Jim Hacking about the Arizona Revised Statutes (A.R.S.) that deal with the vesting of benefits for PSPRS, EORP, and CORP members.  These statutes are pertinent to the lawsuits against PSPRS relating to reforms made by SB 1609.  As web links can often disappear without notice, the following is taken verbatim from the Facebook post:

PSPRS: A.R.S 38-844.01
Effective 07/27/1983. This states those hired after 07/27/1983 are not vested until the member applies for and is approved for retirement benefits.

CORP: A.R.S. 38-900.01
Effective 07/18/2000, but is retroactive to, from and after 06/30/1986. This states those hired after 06/30/1986 are not vested until the member applies for and is approved for retirement benefits.

EORP: A.R.S. 38.810.02

Effective 07/18/2000, but is retroactive to, from and after 08/06/1985. This states those hired after 08/06/1985 are not vested until the member applies for and is approved for retirement benefits.

This post is extremely helpful because it gives firm dates when the relevant vesting statutes went into effect.  According to this, only those who joined PSPRS before July 28, 1983 would be affected by a victory in the Parker vs. PSPRS lawsuit.  This would seem to mean that a PSPRS member would have to have nearly 30 years in the PSPRS system in order to be affected by a victory.  I do not know the length of PSPRS service of the plaintiffs in the Parker lawsuit, but PSPRS' 2012 Consolidated Annual Financial Report shows only 58 active PSPRS members with at least 30 years of service as of June 30, 2012.  A layman's read of this would mean that a victory in the Parker lawsuit would have no effect on the vast majority of active PSPRS members as it relates to the new contribution rates and new cost of living allowance (COLA) formulas that were imposed by SB 1609.

However, this is in the courts and will eventually get to the Arizona Supreme Court.  A recent victory (PSPRS lawsuit update: Arizona Judges 2, EORP 0) by active judges against EORP shows that the judge in that case did not allow the use of retroactive vesting back to1985 referenced above and instead used the year 2000.  This shows that the situation will be highly dependent on the judgment of a small number of judges and Supreme Court justices, whose opinions are the only ones that matter.  Stay tuned.

Vesting of benefits for PSPRS members

In the previous post about the Hall lawsuit versus the Elected Officials' Retirement Plan (EORP), an intriguing point was raised regarding when pension benefits vest.  The active judges suing EORP are attempting to overturn the reforms of SB 1609 that change how the cost of living allowances are calculated and the increase in employee contributions.  They were not completely successful in the lawsuit since there was a law passed in 2000 that changed the timing of vesting from the start of employment to the date of retirement.  This means that those hired after 2000 are subject to the reforms of SB 1609, while those hired in 2000 or prior are not.  This will obviously have a major effect on those active law enforcement personnel who are suing PSPRS over the same changes to COLA's and employee contributions in Parker v. PSPRS.

The Arizona Revised Statute (ARS) 38-844.01 relating to PSPRS states:

A member of the system does not have vested rights to benefits under the system, except as provided in section 38-854, until he files an application for benefits and is found eligible for those benefits as provided in this article. An eligible claimant's rights to benefits vest on the date of his application for those benefits or his last day of employment under the system, whichever occurs first.(italics mine)

This is quite clear that for PSPRS members benefits do not vest until they retire.  However, I can not find a date for this particular statute, so I do not know to whom it may apply.  It could apply to every law enforcement officer and firefighter currently serving or only some, depending on when it was passed by  the legislature.  Making this even more confusing is that the ARS Article dealing with EORP does not have any similar language clearly stating when members' benefits vest, although such language must exist as it was referenced in the most recent decision in the Hall lawsuit.  Furthermore, the annual reports for PSPRS and EORP state, "Generally, all benefits vest after five years of credited service."  Unfortunately, all of this makes it difficult for the layman with a stake in the outcome to know how the Hall and Parker lawsuits will affect him. I guess this is why attorneys make hundreds of dollars an hour.

Once again, we will have to wait for Arizona Supreme Court to rule before we have any definitive answers.  Stay tuned.

PSPRS lawsuit update: Arizona Judges 2, EORP 0

The results of the latest skirmish in the battle to reverse the pension reforms enacted by SB 1609 are available in this article, Arizona judges mostly victorious in pension plan dispute, by Howard Fischer of Capitol Media Services and appeared in the Arizona Daily Star.

This lawsuit, Hall v. EORP, involves the constitutionality of changing both the cost of living allowance (COLA) formula and raising the contribution rates of sitting judges who are members of the Elected Officials' Retirement Plan (EORP).  A quick explanation is necessary about EORP, the Corrections Officer Retirement Plan (CORP), and the Public Safety Personnel Retirement Plan (PSPRS).  While EORP, CORP, and PSPRS are three separate Arizona public employee retirement plans and have features that are unique to each, they are all managed under PSPRS.  PSPRS is far and away the largest plan, and the funds of the other two plans are lumped in with it to save investment and management costs.  However, each plan's financial condition is reported separately with no sharing of funds or liabilities between plans.  SB 1609's reforms affected PSPRS, EORP, and CORP, so any legal decisions affecting one has great implications for the other two.  Arizona has three other large public pension plans: Arizona State Retirement System (ASRS) and the pension systems operated by the cities of Phoenix and Tucson.  None of these plans were affected by SB 1609.

The success of this latest lawsuit is the second victory for Arizona judges.  Last year, retired judges were successful in their lawsuit, Fields v. EORP, that challenged SB 1609's change to the system used to calculate COLA's for retirees.  The same constitutional argument was used successfully in Fields as the most recent decision.  The change in COLA's violated both the contracts clause and the amendment that prohibited the impairment of retirement benefits.  The Hall lawsuit deals with the increase in employee contributions of active judges, as well as the COLA's that they would receive after they retire.  The article states that only judges hired in 2000 or before can see their contribution level drop since a law in 2000 changed the vesting of benefits from hire date to retirement date.  I do not know if this vesting law affected PSPRS employees as well but will try to research it.

For PSPRS members, these lawsuits will have enormous impact on their pensions.  There are two lawsuits against PSPRS making the same constitutional arguments to overturn the SB 1609 reforms to PSPRS regarding contribution rates and COLA's.  PSPRS' latest status regarding these lawsuits can be found here: Latest update to lawsuits against PSPRS, and the implications of these lawsuits on PSPRS' financial condition can be found here: PSPRS lawsuits: Sacrifice is for the other guy.

These cases will all end up before the Arizona Supreme Court, but the decisions now could indicate what the final outcomes will be.  Stay tuned