PSPRS and pension spiking, part I

The Goldwater Institute, the bête noire of Arizona's public employee unions, has filed a lawsuit to end the practice of pension "spiking" by Phoenix police and firefighters.  This August 15, 2013 article by Craig Harris in the Arizona Republic details the principal issue of the case, the use of lump sum payouts for unused vacation, sick time, and other deferred compensation to increase (spike) the final retirement benefits of police and firefighters.

The article makes a pretty unimpeachable case that this violates state law.  The relevant Arizona statute reads:

"Compensation" means, for the purpose of computing retirement benefits, base salary, overtime pay, shift differential pay, military differential wage pay, compensatory time used by an employee in lieu of overtime not otherwise paid by an employer and holiday pay paid to an employee by the employer on a regular monthly, semimonthly or biweekly payroll basis and longevity pay paid to an employee at least every six months for which contributions are made to the system pursuant to section 38-843, subsection D. Compensation does not include, for the purpose of computing retirement benefits, payment for unused sick leave, payment in lieu of vacation, payment for unused compensatory time or payment for any fringe benefits. (Italics mine)

While it is fair that employees be compensated for unused time after they leave employment, the Phoenix public safety unions and city officials give no justification as to why this time should be included in pension calculations, especially when it is expressly forbidden.  Nor do they explain how pension spiking benefits Phoenix's taxpayers, who pay city taxes on both rent and food.  The usual arguments about pay and benefits revolve around how they are necessary for retention of good employees.  However, this benefit is being paid to individuals who are leaving city employment forever.  The city and union officials have only made a weak statement about this being a legal, negotiated item that can not be changed until the next round of contract negotiations.   This is a ridiculous defense since a contract can not supersede state law.  After the last few years of conflict with the federal government over several state laws, all Arizonans are probably well-versed on the legal concept of supremacy.

The heart of the issue here is, as always, financial.  Pension spiking bleeds PSPRS and soaks taxpayers because it robs the pension of its most important tool to stay solvent--compounding over time.  A pension contribution at the end of a career raises the final benefit though the contribution did not grow over time.  For example, someone retiring from the Phoenix Fire Department (PFD) today who sold back $30,000 in unpaid time would pay an employee contribution (currently 10.35%) of  $3,105 and the city of Phoenix would make an employer contribution (currently 34.95%) of  $10,850.  If this individual retired at 25 years, he would raise his average three-year high salary by $10,000 per year and boost his pension by $6,250 per year for the rest of his life.  If the combined contributions of $13,955 were to compound daily at 8% annual interest, it would increase to $69,108 after 20 years.  The individual would be paid an extra $125,000 pension benefit over those 20 years.  This would leave a deficit to the pension of $55,892.  This shortfall would need to be made up by taxpayers over the years.

Contrast this financial example with one where the $13,955 had been contributed over the 25 years of his career.  This would translate to approximately $21 biweekly over 25 years.  At 8% annual interest, compounded daily, this steady biweekly contribution of $21 would equal $43,667 after 25 years.  If this $43,667 continued to earn the same 8% interest rate, 20 years later it would be worth $216,246.  This would be more than sufficient to cover the spike in the retiree's pension that he received from selling back his unused time.

These calculations, of course, do not take into consideration the changes in either contribution rates or rates of  return on the PSPRS' investments.  It is only meant to show how damaging end-of-career pension spiking is.  Even a retiree who believes he earned his spiked pension benefits because of all the family and leisure time he gave up while employed must acknowledge that this is not sustainable over the long-term.  Nor is it fair to Phoenix taxpayers who must foot the ultimate bill for the extra costs of spiking. They already pay for a very good retirement for their public safety workers.

While this lawsuit may appear to affect only those PSPRS members who work for the city of Phoenix, there is more to the story of pension spiking, and it affects all PSPRS members.  The next post will cover this issue further.

PSPRS members: What happens if progessives think your job can be outsourced?

For those who think that PSPRS and its members are being picked on by The Arizona Republic, check out this August 8, 2013 article, Mission Creep at the L.A. Fire Department, by Hillel Aron of LA Weekly.  For those not familiar with LA Weekly, it is the Los Angeles weekly that follows the same editorial (progressive) and business model (food/entertainment advertising) as Phoenix New Times and Tucson Weekly; LA Weekly and Phoenix New Times are both owned by Voice Media Group, whose flagship paper is New York City's The Village Voice.  These papers all pride themselves on their investigative reporting, coverage of stories ignored by other local media outlets, and bare-knuckle commentary on local politics, as well as being the arbiters of all that is cool and hip in their respective communities.

Mr. Aron's article is interesting because it starts out as the standard article chronicling the burdensome medical call load of the Los Angeles Fire Department (LAFD).  However, the reader who sticks with the article will find that the article is about much more than that.  It details Los Angeles' diminished fire call load, its recent scandal of reporting fictitious response-time data, and the misalignment between LAFD's current resources, both human and equipment, and the community's needs.

However, the most surprising aspect of the article is its unfavorable comparison between LAFD and the Los Angeles County Fire Department (LACoFD).  LACoFD is held up as a model of efficiency compared to LAFD.  And one of the principal reasons for this is the County's use of private ambulance services, instead of using more costly LACoFD personnel to transport patients.  So we have the premier local progressive media source in Los Angeles actually praising the outsourcing of a government service.  Now that's interesting.

The true impact of this for anyone in fire and EMS is that if you eliminate even a small portion of the medical call load, you eliminate the need for a corresponding number of fire and EMS personnel.  When a progressive can employ the words "outsource" or "privatize" without sarcasm or vitriol, it may be time for some of us to worry.

Why is the Professional Fire Fighters of Arizona (PFFA) working with Paycheck Direct?

Several days ago I received another catalog from Paycheck Direct.  This is a company that has recently entered into a relationship with the Professional Fire Fighters of Arizona (PFFA), the state organization representing Arizona's unionized firefighters.  Paycheck Direct is a catalog retailer that offers brand-name items with the option to pay, interest-free, via payroll deduction over a one-year period.  While the welcome letter by PFFA President Tim Hill included in the catalog states, "These great products are intended as a service to you," the true purpose of this partnership is to generate revenue for PFFA, which is paid a commission for any purchases made by PFFA members.

This sounds like a mutually beneficial relationship.  A company gets catalog business while the union gets additional revenue to fund its cause.  I think it is wrong for PFFA to give away personal information to a third party without prior permission, but they have apparently given Paycheck Direct access to members' addresses.  Hopefully, this is all they gave them.  That said, I think it is important to look closer at the cost of using a service like Paycheck Direct.

Here is a sample comparison of some of Paycheck Direct's prices versus Amazon's for the same items:

                                                       Paycheck                               Price           
 Product                                          Direct          Amazon          Difference     Premium

KitchenAid 5-Qt Mixer                  $358.99        $342.02            $16.97           4.96%
Calphalon 10-pc Cookware Set     $218.99        $165.57            $53.42           32.26%
Maytag 24.8 cu ft Refrigerator      $1,799.99    $1,699.50         $100.50         5.91%
Dyson DC40 Vacuum                     $548.99       $390.99            $158.00         40.41%
DeWalt 18v Tool Combo Kit          $548.99       $282.99            $266.00         93.99%
Poulan Pro 20" Chainsaw               $318.99       $188.24           $130.75         69.45%
Char-Broil 42K BTU BBQ              $829.99       $549.00           $280.99         51.18%
Klaussner Queen Bed                     $1,174.99    $1,128.79         $46.20           4.09%
Sleep Number p5 Queen Set          $2,449.99     $1,879.97        $570.02         30.32%
Aspen 3-pc Entertainment Center  $1,424.99     $1,133.57        $291.42        25.70%
Citizen Men's Eco-Drive Watch      $324.00        $285.00            $39.00          13.68%
Toshiba 58" LED TV                        $1,574.99     $1,097.99        $477.00        43.44%
Apple iMac Desktop Computer      $1,518.99     $1,199.98        $319.01        26.58%
Nintendo DS Cosmo Black              $218.99       $178.65            $40.34           22.58%
 
The prices include shipping.  Many of Amazon's products include free shipping, but with the exception of appliances, Paycheck Direct charges a minimum shipping charge of $19.00.  I did not include sales tax, which would further increase Paycheck Direct's prices as the tax would be applied to a higher initial price in each case.  The premium is the percentage one would pay over Amazon's price.  For the sample of items the premium ranges from 4.09% to 93.99%.

Here is where we have to start thinking financially about Paycheck Direct.  While Paycheck Direct does not charge interest on purchases, the premiums over Amazon's prices are the equivalent of an annual interest rate one would pay to use Paycheck Direct rather than paying cash at Amazon.  These premiums (interest rates) range from low (4.09%) to offensively high (93.99%).  The highest annual percentage rate (APR) on an Amazon Visa rewards card is 22.24%  Of the 14 items sampled, the premium on only three items is below 22.24%.  This means that the final cost of most items, including purchase price, shipping and interest, would be less if bought with an Amazon Visa credit card and paid off in one year than if purchased through Paycheck Direct.  22.24% is a rather high interest rate, so it would be cheaper still with a lower interest rate credit card.

Readers can judge for themselves if Paycheck Direct is a service of value to them. There may very well be some individuals who find that it meets their particular needs.  In the end, it is a business that must make money from the service it provides, though it could be argued that the only real service Paycheck Direct provides, payroll deduction, is more a service to them than it is to the purchaser. 

The real issue here is whether PFFA, which is supposed to look out for its members' financial well-being, should promote a service of dubious value to its members.  According to the PFFA's IRS Form 990 for the fiscal year ending June 30, 2012, they had total assets of $2,384,940 and total revenue of $762,455, of which $562,601 was member dues.  This hardly seems to be an organization short of funds, so why would it encourage members to shop through Paycheck Direct?  Is the kickback that PFFA gets in the way of commission worth having its members pay as much as 90% more for products?

I certainly can not answer for those that signed PFFA up for this program, but I do know that the union is supposed to work for the members, not the other way around. 

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.