A little perspective through a tale of two pensions

The Arizona Republic has continued its excellent reporting on the Public Safety Personnel Retirement System (PSPRS) with a four-day series by Craig Harris and Beth Duckett that ran in May 2013.  It is a must-read for anyone concerned about the future of PSPRS.

The series covers several issues, including pension spiking, the Deferred Retirement Option Plan (DROP), the ballooning pension cost of employers, and the trade-offs between pension funding and providing services to citizens.  While these issues can often descend into dry financial data and analysis, the first article of the series tries to put a human face on some of the issues by comparing the pensions of two retirees on opposite ends of the pension spectrum.

The article uses as examples the pensions of an assistant fire chief who retired from the Phoenix Fire Department and a retiree (his rank is not given but I will refer to him as a firefighter throughout) from the Lake Havasu Fire Department.  Through the use of unpaid sick leave, vacation, and other deferred payments, the chief, who retired in December 2011 after 37 years of service, was able to amass a DROP payout of almost $800,000, as well as an annual retirement of $130,000.  This chief then became Peoria's Fire Chief where he makes an annual salary of $145,000 and is eligible to participate in another retirement plan.  By comparison, the retired 61-year-old Lake Havasu firefighter, who retired in 2000 after 20 years of service, has an annual pension of "just under $40,000."  He states that his medical expenses have become so high that he has had to forgo his family's dental insurance.

The initial visceral reaction to this pension comparison is to be concerned or outraged by the nearly million-dollar payout to the retired chief.  Estimating from numbers given in the article, the chief was able to increase his average annual salary during his last three years by $56,186 (one-third of his total unused vacation time, sick time, and deferred compensation benefits) through the sell-back of this unused time.  Entering the DROP after 32 years of service meant that he would receive 80% of that in retirement, or an additional $44,948 per year, for the rest of his life.  If the chief lives another 20 years, he will make almost $900,000 more in retirement through this spiking of his pension.  This is in addition to the nearly $800,000 DROP payment he has already been paid. 

Depending on where you stand, this comparison has multiple ways to concern or outrage you.  The most obvious is a near-million-dollar first-year payout to the retired chief, which viscerally seems wrong for a public servant.  This big payout is even more troubling when one considers the financial burden being shifted to taxpayers, who are on the hook for most of the shortfall in PSPRS.  There is also the wide disparity between the pensions of the retired chief and firefighter, though it must be noted, the chief worked the maximum years and participated in the DROP while the firefighter worked the minimum years and retired without taking advantage of the DROP.

The retired firefighter expresses no animosity toward other retirees with large pensions.  He states, "I know these guys went above and beyond to serve the community.  I understand why some may not understand — or may just be jealous.”  The article states that this 61-year-old firefighter retired in 2000 after 20 years of service and has a current pension of "just under $40,000."   This again is an estimate based on figures from the article, but if we use an annual pension of $39,000, he would receive a monthly retirement check of $3,250.   Between 2001 and 2012 there have been a total of $1,524 in COLA increases to his monthly benefits.  Subtracting the COLA's from his current benefit would mean his initial monthly benefit was $1,726 after 20 years of service.  Doubling this and multiplying by twelve gives an average annual salary for his high three years of $41,424 in 2000.  If he had worked five more years and retired at 53, instead of 48, this would have earned him an extra $431 per month.

The article uses the pensions of the two men to show that not every retired PSPRS member is walking away with an unseemly financial windfall.  However, we need to look beyond just the amounts of money mentioned. The retired chief worked for the largest fire department in the state for 37 years and ascended to one of its highest-ranking positions.  If we assume he started at age 20, he would have been 57 years old at retirement.  The retired firefighter worked for a small department and retired as early as possible at only 48 years old.  While making no judgments about either man's career or personal choices, it is obvious that one man had to work harder and longer to achieve both his position and his benefits.  He retired nine years older and worked 17 years longer, and no doubt, had to spend countless hours of his own time to study for promotions and learn the skills necessary to qualify for those promotions.  This work was obviously worthwhile to him as he took a job as Fire Chief in another city after retirement.

The retired firefighter chose a different path.  He earned an intangible but equally, and some might say more valuable, benefit in retirement: time.  He retired at 48, an age when many are still in their peak earning years.  He was able to immediately begin drawing retirement benefits when many can not draw them until 59 1/2 years of age, or in the case of Social Security, 62, 65 or 67 years of age.  He was able to work for a mere 20 years yet will draw benefits until he dies (with spousal benefits continuing if he has a surviving spouse).  Even if we count his work life as beginning at age 18, he is still likely to draw a benefit check from PSPRS for more years than he worked.  Retiring at 48 is a dream for most people. He achieved it and has lived it for the past 13 years.

Once again, the idea here is not to criticize either the retired chief or the retired firefighter.  Both did their jobs and took advantage of the benefits available to them.  Neither has anything to apologize for.  However, we have to look at this through the eyes of the taxpayers and the Arizona legislature.  A legislature, I might add, that beginning next year will no longer have its own defined benefit pension for any newly elected members.  The retired chief looks bad because the sheer amount make it look like he gamed the system to enrich himself.  As more such cases like this are publicized, the pressure to end pension spiking will become greater.

What of the retired firefighter?  I do not know the authors' intent, but if he was meant as a sympathetic character, he does not fit the bill.  There is an undertone of entitlement in his comments, whether he meant it or not.  The "struggle" of living on $3,250 per month would not seem so bad if he was aware that the maximum Social Security benefit for a 70-year-old retiring this year is a whopping $3,350 per month.  (See here for a comparison of PSPRS versus Social Security.)  Working 22 more years to get an extra $100 a month does not seem like a good trade-off to me.  While the retired firefighter's pension is portrayed as less than adequate, he appears to be in an very enviable position when his retirement is placed in perspective with those of non-PSPRS members.

While it is easy to fixate on the huge payout made to the retired chief, I would argue that each man has done quite well for himself.  The difference between them is that one man's choice paid off better in time while the other man's paid off better in financial reward.  This is a choice that most workers can only imagine when it comes to their retirement.  The purpose of a pension is to provide you with income when you can no longer work.  PSPRS, in its current state, not only fulfills this purpose but goes well beyond it.  If you are concerned about the public image of PSPRS it is important to remember that while a $1 million payout to a retiring civil servant looks bad to most taxpayers, retirement at 48 years old looks pretty good to most working people.

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.