A bad plan executed badly: The Professional Fire Fighters of Arizona's (PFFA) PSPRS pension reform plan

As the Professional Fire Fighters of Arizona's (PFFA) PSPRS pension reform "fix" continues along, we now have something a little more concrete to analyze in the form of the PSPRS pension reform draft bill, available at the PFFA website.   As of late, PFFA President Bryan Jeffries has been going around the state presenting a slideshow about the PFFA plan to employers and PSPRS members.  The version of the slideshow available at the PFFA website is here.  This slideshow has been altered from the initial slideshow the PFFA was presenting.  The older version, available at the League of Arizona Cities and Towns Pension Task Force ("the Task Force") website, is here under the 10-24-14 agenda, but you will need Powerpoint to read it.

As I have pointed out in multiple posts, the PFFA plan is shortsighted, unfair, and does not solve any of the root problems of PSPRS.  However, in this post I just want to go into the specifics of the PSPRS pension reform draft bill ("the draft bill").  The bill was drafted by Michele J. Hanigsberg, which the state government directory indicates is a member of the Arizona Legislative Council (ALC)-Legislative Services Wing.  The Arizona Legislative Council gives it function as the following :

The Council staff provide a variety of nonpartisan bill drafting, research, computer and other administrative services to all of the members of both houses of the Legislature.

 The ALC appears to be the body that does the actual grunt work of turning a proposal into a bill, and since this bill incorporates all the ideas of the PFFA plan and is linked from the PFFA website, it appears that this is the bill that the PFFA wants.  The devil, of course, is in the details, so let's see what the draft bill actually says and what it means for employers and PSPRS members.

This analysis of the draft bill had an inauspicious start when I first compared the two Powerpoint slideshows on the PFFA and the Task Force websites.  The older slideshow from October 2014 states the following about the new system for funding permanent benefit increases (PBI):

Employees only pay 4% into the PBI fund.

The underscoring of "employees only" is in the PFFA's slide.  Compare this to what is says in the slideshow on the PFFA website:

Employees pay 4% into the PBI fund.

No underscoring and the elimination of the "only" are slight changes, but they mean a great deal for employers and active PSPRS members, because this is what the draft bill states:

In addition to an employer's contributions to the fund pursuant to this subsection, each employer shall contribute an amount equal to one percent to its employees' compensation to the cost-of-living adjustment account maintained within the fund for future benefit adjustments for retirees and survivors pursuant to Section 38-856.02.

It is even worse than this because the draft bill also states that employers will have to continue to pay 1% into the PBI even after an employee enters the Inflation Protection Program, the rebranded Deferred Retirement Option Plan (DROP), of which we will talk more about later.  When looking at the wording of the draft bill, we can see how disingenuous the change in the wording between the two slides is.  A more forthright wording would be:

Employees pay 4% into the PBI fund, and employers pay 1% into the PBI fund.

This 1% extra cost to employers is in addition to an increase in the minimum employer contribution level from 8% to 10%, meaning that employers will now pay at least 11% of their employees' pensionable wages, instead of 8%.  This many not seem like a big deal for those employers who are already paying sky-high contribution rates, but it will be a huge cost for those employers who do not have big unfunded liabilities and are at or under the current 8% minimum.  Furthermore, the increase of the minimum employer contribution is permanent, regardless of the future funding status of PSPRS.

For retirees, there is a crucial provision in the draft bill that is not addressed in the Powerpoint slideshow.  In addition to the three-year freeze on all PBI's, seven-year or 60 year-old waiting period for PBI's, a 2% maximum PBI, and a 25% dispersal limit from the PBI fund, there is this:

The annual maximum percentage adjustment to the base benefit is the lesser of two percent or the percentage change published by the United States Bureau of Labor Statistics of the consumer price index for all urban consumers, using the United States city average, unadjusted, for all items, during the twelve months ending July of the year in which the benefit is to be paid.

While I am a strong advocate of an adequately funded PSPRS paying true cost of living adjustments (COLA) based on some measure of inflation, this is another case of an egregiously bad formula for PBI's.  This provision means that, regardless of the funding level of the PBI fund and/or the rate of inflation, retirees can only get a 2% maximum PBI per year, but in any year that the CPI is less than 2%, regardless of the funding level of the PBI fund, they could get less than 2% all the way down to nothing at all.  The same inexcusable lack of foresight that burdened us all with the current, unsustainable excess earnings PBI formula exists in this PBI provision.  Retirees can see one year of 5% inflation and receive a 2% PBI, but the next year see 0% inflation and get no PBI, despite the fact that they are still 3% behind in their purchasing power.  It this post you can see recent COLA's paid by Social Security.  The four-year period from 2009 to 2012 show two years of 0% inflation in 2010 and 2011 bookended by 5.8% and 3.6% inflation in 2009 and 2012, respectively.  Under this PBI provision, a retiree would have received 4% in PBI's against 9.4% inflation, leaving him a 5.4% difference.  (These percentage amounts are non-compounded for simplicity but would be worse if they were.)  If the PBI fund was adequately funded, a 2% PBI each year would have left him only a 1.4% difference.

The most blatant misrepresentation by the PFFA relates to the new Inflation Protection Program (IPP).  As stated earlier, the IPP is the new name for the DROP, the ill-conceived program born of PSPRS' brief period of overfunding during the late 1990's and early 2000's, that has garnered bad press because of the huge payouts received by some PSPRS retirees.  The Powerpoint slideshow on the PFFA website says the following about the IPP:

The DROP will become the Employee Self-Funded Inflation Protection Program.

• Tier 1 (members with 20 or more years on the job as of 1/2015)
• No contributions
• Interest rate = assumed rate of return for PSPRS

• Tier 2 (everyone else)
• Contributions during the program period
• Interest rate = minimum 2% or 7-year average of PSPRS investment returns (whichever is greater)
• Return of member contributions

The statements about member contributions are expressly contradicted by the draft bill which states:

A member who elects to participate in the Inflation Protection Program shall make member contributions to the the fund and the separate cost-of-living adjustment account in an amount equal to the member contributions required pursuant to Section 38-843, Subsections E, F, and G.  Member contributions made pursuant to Section 38-843 during the Inflation Protection Program participation period are not eligible to be refunded to the member.

As the DROP stands now, PSPRS members with at least 20 years of service as of December 31, 2011 (aka Tier 1) pay no member contributions and receive a variable interest rate based on PSPRS' returns with a minimum of 2% per year.  Those who were PSPRS members as of December 31, 2011 but did not have 20 years of service (aka Tier 2) receive the same interest rate as Tier 1 members, but they continue to pay member contributions.  (The DROP is not available to those hired in 2012 or later.)  These member contributions are refunded when the member leaves the DROP along with 2% interest.  The PFFA slide about the IPP appears to copy these provisions, even though the draft bill is very clear that IPP participants will pay contributions, and these contributions will not be refunded to them.  The draft bill also does not categorize Tier 1 and Tier 2 employees.  Conditions are the same regardless of  when a member joined PSPRS, and all will be paid the variable interest rate with the 2% minimum.

An employee averaging $70,000 per year for the five years in the IPP would make over $40,000 (11.65% employee contribution rate) in member contributions to PSPRS, so we are talking a significant amount of money.  The PFFA is selling the IPP to active employees as if it were no different than the current DROP, even though it will cost them thousand of dollars.  The draft bill gives an end date on the DROP program of December 31, 2016, so active members may want to consider their financial options beforehand.  If this does get approved by the voters in 2016, you will have less than two months to decide if you want to participate in the DROP before it disappears forever.

Unlike Obamacare, we don't have to pass this draft bill in order to see what's in it.  I appreciate that the PFFA has posted the draft bill on their website, but I do not understand why their are selling their "fix" in a way with incomplete and, in at least one major way, blatantly incorrect information.  While I do not believe that they are deliberately trying to deceive anyone, the fact that they started this reform process without a fully formed plan as to what they wanted to do does not inspire confidence.  The PFFA presented its slideshow to the Task Force on October 24, 2014 and this bill was drafted on January 9, 2015, yet in less than three months, they produce a bill that has significant changes and undisclosed provisions that were not presented to the Task Force.  You have to know where you want to go first before you try to lead.  It is no wonder the Task Force has created their own competing proposal for PSPRS reform, which we will cover in the next post.

PSPRS investment returns through March 2015

The following table shows PSPRS' investment returns, gross of fees*, versus the Russell 3000 for March 2015, the ninth month of the current fiscal year, with the June 2014 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%
7/31/2014	-0.67%	-0.67%	-1.97%	-1.97%
8/31/2014	1.73%	1.05%	4.20%	2.14%
9/30/2014	-1.53%	-0.49%	-2.08%	0.01%
10/31/2014	0.40%	-0.09%	2.75%	2.76%
11/30/2014	0.92%	0.82%	2.42%	5.25%
12/31/2014	-0.18%	0.64%	0.00%	5.25%
1/31/2015	0.01%	0.65%	-2.78%	2.32%
2/28/2015	1.91%	2.58%	5.79%	8.25%
3/31/2015	0.83%	3.42%	-1.02%	7.15%

There is usually about a two-month lag in PSPRS reporting its investment returns.  March 2015 was a particularly good month for PSPRS, and not just because it had a positive return. Overall, PSPRS bested the Russell 3000 by a whopping 1.85%, and if we look at the individual returns for each of the eleven different asset classes, PSPRS did better than the Russell 3000 in all eleven.  The March 2015 returns ranged from -0.73% in its non-US equity investments to 3.58% in its private equity investments.  PSPRS had positive returns for March in all its asset classes, except US and non-US equity.  Of course, this is only one month's worth of returns, and while it will still be a stretch for PSPRS to reach it expected rate of return of 7.85% by the end of June 2015, this is a bit of good news during some rather discouraging times.

The Russell 3000 shows a 0.45% gain for April 2015.  The May 2015 return for the Russell 3000 has not yet been posted, but daily returns through June 9, 2015 show that the Russell 3000 has gained another 0.31% since the end of April.  Today (June 10, 2015) the markets are having another big day with the DJIA up about 1.30% and the NASDAQ up about 1.25%, so it is anyone's guess how the markets will end on June 30, 2015 when PSPRS' fiscal year ends.

* 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.  The past two years fees have reduced the final annual reported return by about one-half of a percent.

Belling the PSPRS cat: a fable brought to you by the League of Arizona Cities and Towns PSPRS Pension Task Force

Back in February, I attended one of the PSPRS employer seminars.  It was among one of several that PSPRS and the League of Arizona Cities and Towns PSPRS Pension Task Force ("the Task Force') put on in different locations throughout the state.  The handouts from these seminars are available here at the Task Force website.

The seminar was broken into two parts, the first part presented by PSPRS and the second by the Task Force.  The PSPRS was handled mostly by PSPRS' Acting Administrator Jared Smout and covered a broad range of topics, ranging from general discussions about pensions and PSPRS to more specific discussions about the causes of PSPRS' underfunding, COLA's, and the lawsuits challenging SB 1609.  I was interested in two particular issues when it came to the PSPRS presentation.  The first was what is the status of Hall v. EORP (CV2011-021234), which is challenging the SB 1609 changes to the COLA formulation for EORP members who were still active when SB 1609 became law and the increase in employee contribution rates.  The successful Fields decision only challenged the change in the COLA formulation, as the plaintiffs in that case were already retired.  There is a shadow case against PSPRS, Parker v. PSPRS, that is challenging PSPRS on the same grounds as Hall.  The decision in the Hall case will settle both cases, so it has great relevance to any PSPRS member who was active when SB 1609 went into effect.

Unfortunately, the case still remains in the courts and the latest information shows it is under appeal.  This case will have to be settled by the Arizona Supreme Court, so we are still stuck in a holding pattern.  My amateur interpretation and prediction from an analysis of the Fields decision is that the plaintiffs will win on the question of COLA's but lose on the question of employee contribution increases.  The COLA question is a slam dunk for the plaintiffs and was already addressed in Fields.  COLA's were deemed a pension benefit and could not be changed per the Pension Protection Clause of the Arizona Constitution.  The question of employee contribution rates will depend on how the Arizona Supreme Court interprets the Contracts Clause in the state and federal Constitutions.  The Fields decision did not consider the Contracts Clause, but a reading of the decision shows that the question of employee contribution rates has no clear precedence and may not be covered under the Pension Protection Clause.  We will all have to wait and see how the justices rule.

The second issue I was hoping the PSPRS presentation would deal with was simpler: what a victory by the Hall plaintiffs would cost PSPRS.  According to PSPRS' esitmates, a plaintiff victory would cost PSPRS $931 million and drop PSPRS' aggregate funding ratio 4% and raise its aggregate contribution rate 6%.  He did not break down what would happen if the plaintiffs only won on just one of their questions, so this appears to be the cost of a total victory by the plaintiffs.  Remember that if the plaintiffs succeed on the question of employee contribution rates, anyone active at the time SB 1609 went into effect will be owed a refund of all contributions they paid in excess of 7.65%.  For the current fiscal year alone, that would 3.4% of pensionable income.  This would be a significant refund due of $2,040 for someone who had $60,000 in pensionable income in the current fiscal year.

I was more interested in what the Task Force had to say.  This portion was conducted by members of the Task Force, including former Tucson Chief Financial Officer and Deputy City Manager Kelly Gottschalk, who has since been hired to run the Dallas Police and Fire Pension System.  To say that their presentation, and particularly their recommendations to cities and towns dealing with pension costs, was a disappointment would be a huge understatement.

The Task Force was set up in June 2014 and made up of 15 members, mostly high-ranking municipal finance and administrative officials from throughout Arizona.  Last summer and fall, they had several meetings where they received presentations from various stakeholder groups and others with pension expertise.  There is a wealth of information on the Task Force website, and I was encouraged that finally something worthwhile was being done regarding PSPRS.  I thought that those municipal officials dealing with the harsh consequences of PSPRS' financial woes would finally have a chance to come together, brainstorm, and come up with some great reform ideas to present to the Arizona Legislature.  Boy, was I wrong.

Following are the Task Force's seven recommended practices for employers:

1. Budget contributions for DROP members
2. Prepay your budget contributions
3. Do not defer the Fields case
4. Review local board practices
5. Prepare a comprehensive study
6. Pay off unfunded liability (debt) earlier
7. Create a pension funding policy

If we eliminate the three practices (numbers 4, 5, and 7) that are essentially administrative tasks, the other four come down to telling employers to pay more.  Of all the recommended practices, the first is the most ridiculous of all.  Recommended practice number 1 tells employers to budget for and continue to pay contributions for members who have entered the Deferred Retirement Option Plan (DROP).  However, the DROP was supposed to be a "win-win" for employees and employers where experienced employees remained on the job but neither employees nor employers would have to pay pension contributions for up to five years while the employee was in the DROP.  The Task Force is now saying that employers should continue to pay pension contribution for employees once they enter the DROP, meaning the employer gets no financial benefit from the DROP.  The most logical recommendation would have been to advocate for the complete elimination of the DROP, a program that has been starving PSPRS of funding for 15 years and will continue to do so as long as it remains active.

Recommended practices numbers 2, 3, and 6 all advise employers to pay money they do not have.  I agree with recommendation number 3 because it sets a bad precedent in a state where employers have always paid their full, required contributions.  Not paying full, required contributions is one of the surest ways to put a city on the path to financial ruin.  However, no one is advising employers to defer the additional costs imposed by the Fields decision, but Phoenix, Tucson, and other cities chose to do so because their elected leaders feel like they have no other choice since they simply can not afford the higher contributions right now.  Prepay your budget contributions?  Pay off the unfunded liability earlier?  With what funds?  If the cities had the extra money to do what the Task Force recommends, they would already being doing it.

The Task Force's recommended practices amounts to belling the cat.  The Task Force had a chance to offer some bold proposals and recommend some necessary reforms to PSPRS.  They did neither and wasted a valuable opportunity to have their voice heard.  Instead, they provided a list of embarrassingly impractical recommendations.  The work of the Task Force will be ignored by anyone serious about reforming PSPRS.

Invested in it: Chief Investment Officer Ryan Parham, PSPRS' investment strategy, and investment returns through February 2015

The following table shows PSPRS' investment returns, gross of fees*, versus the Russell 3000 for February 2015, the eighth month of the current fiscal year, with the June 2014 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%
7/31/2014	-0.67%	-0.67%	-1.97%	-1.97%
8/31/2014	1.73%	1.05%	4.20%	2.14%
9/30/2014	-1.53%	-0.49%	-2.08%	0.01%
10/31/2014	0.40%	-0.09%	2.75%	2.76%
11/30/2014	0.92%	0.82%	2.42%	5.25%
12/31/2014	-0.18%	0.64%	0.00%	5.25%
1/31/2015	0.01%	0.65%	-2.78%	2.32%
2/28/2015	1.91%	2.58%	5.79%	8.25%

There is usually about a two-month lag in PSPRS reporting its investment returns.  There is not much new to report here.  PSPRS still lags the Russell 3000 and will be hard-pressed to achieve it 7.85% expected rate of return (ERR) by June 30, 2015, especially when we consider that the Russell 3000 lost one percent in March 2015.

I suppose now is as good a time as any to take stock of PSPRS' new investment strategy, which moved away a domestic equity-heavy, stock-picking portfolio to a more diversified and balanced approach.  In the 2012 Annual Report Summary, Chief Investment Officer Ryan Parham wrote:

Recent stress tests of on our portfolio indicate that we will capture approximately 70% of a strong up-market but only approximately 40% of a strong down-market.  Preventing that see-saw of returns produces a superior long term compounded return.This has been a key feature of the endowment investment universe which has historically produced better returns than public pensions.

Is the new strategy working as Mr. Parham's stress tests predicted?  Yes and no.  For fiscal year (FY) 2014, PSPRS captured 54.80% of the Russell 3000.  This is not 70%, but we must remember that PSPRS was never 100% invested in US equities, so it is not fair to compare it 100% vis-a-vis the Russell 3000.  Mr. Parham wrote in the 2013 Annual Report Summary , "At times more than 70% of the total fund was invested in U.S. large cap stocks." The maximum appears to be at the end of FY 2000 when PSPRS was 77.61% invested in common stock of what looked to be all US companies.  With this in mind, the 54.80% captured may be considered successful. 

However, for the current fiscal year to date, PSPRS is only capturing 31.27% of the Russell 3000 and failing to work as predicted.  In the three months that had a negative return, two were less than 40% of the monthly loss of the Russell 3000.  The third month grossly exceed the loss threshold at 73.55%.  In the four months that had a positive return, the highest was only 41.19% of the monthly gain of the Russell 3000. Depending on whether you consider the month in which the Russell 3000 had a zero return a loss or gain, PSPRS could have succeeded or failed.

While it may be too early to tell about the long-term prospects of PSPRS' new strategy, it did not stop Mr. Parham from boasting about the new strategy in the 2014 Annual Report Summary:

The Trust’s portfolio returns for the fiscal year ending June 30, 2014 continue to come from many diversified sources (10 separate asset classes.) We expect that diversification to help us to capture most of strong positive markets and to protect us from the worst of devastating negative markets. This was demonstrated in 2014 where we captured almost 3/4 of the returns of stock heavy portfolios. But in Q3 2014, when stocks were hard hit we had only 1/3 of the losses of those portfolios.

So if we extrapolate from Mr. Parham's rosy assessment of FY 2014, the Russell just needs to average to 14.32% every year in order for PSPRS to reach its 7.85% ERR (54.80% of 14.32%) every year.  In order to reach 9%, the Russell 3000 needs to just average 16.42% each year.  No problem, right?  The current 10-year annual rate of return on the Russell 3000 is 8.80%.  It will be interesting to see what new excuses Mr. Parham makes in the 2015 Annual Report Summary when PSPRS cannot even achieve its ERR for the current fiscal year.

* 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.  The past two years fees have reduced the final annual reported return by about one-half of a percent.

PSPRS investment returns through January 2015

The following table shows PSPRS' investment returns, gross of fees*, versus the Russell 3000 for January 2015, the seventh month of the current fiscal year, with the June 2014 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%
7/31/2014	-0.67%	-0.67%	-1.97%	-1.97%
8/31/2014	1.73%	1.05%	4.20%	2.14%
9/30/2014	-1.53%	-0.49%	-2.08%	0.01%
10/31/2014	0.40%	-0.09%	2.75%	2.76%
11/30/2014	0.92%	0.82%	2.42%	5.25%
12/31/2014	-0.18%	0.64%	0.00%	5.25%
1/31/2015	0.01%	0.65%	-2.78%	2.32%

There is usually about a two-month lag in PSPRS reporting its investment returns.  Seven months into the fiscal year and PSPRS has essentially broken even.  PSPRS' non-US equity portfolio had better returns than the US equity portfolio in January, but it still stands at -8.67% for the fiscal year to date while US equities still show a positive return of 1.42%.  The Real Assets portfolio remains the only other asset class with a negative return for the fiscal year at -3.00%.

PSPRS' monthly return for February 2015 should be significantly better.  The Russell 3000 shows a huge 5.79% gain for February 2015, which hopefully will help PSPRS make up for a lot of lost ground this fiscal year.  March 2015 has been another volatile month, and as of the last close on March 20, 2015, the Russell 3000 is up 0.69% month-to-date.  It will still be difficult for PSPRS to achieve its expected rate of return of 7.85% by fiscal year end, but I am little more optimistic than I was a month ago.

* 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.  The past two years fees have reduced the final annual reported return by about one-half of a percent.

We have a new Administrator, eh: The Board of Trustees goes north to keep PSPRS from heading south

The Arizona Republic yesterday published this article by Paul Giblin, Canadian to lead Arizona public safety retirement fund.  Kevin Olineck, the Vice-president, Member Experience for the British Columbia Pension Corporation (BCPC), has been selected as the new PSPRS Administrator.  He will permanently replace James Hacking, who was forced out of the job in July 2014 after it was discovered that he had given staff raises without approval from the Arizona Department of Administration, as required by law.  Mr. Olineck, along with Jared Smout, the current Acting Administrator, and Hewlett-Packard Enterprise Services retirement portfolio executive Amy Timmons, were the final three candidates.  A fourth candidate, Maricopa County Supervisor Andrew Kunasek, dropped out before the Board of Trustees made its final decision.  Following is Mr. Olineck's biography from the BCPC website:

Kevin Olineck joined the BC Pension Corporation as Vice-President, Client Services Division, in May 2009. He is now Vice-President of the Member Experience Division. Prior to joining the Pension Corporation he worked as Vice-President, Pension Services, for the Alberta Pension Services Corporation. In addition to his experience in public sector pension administration, Kevin has held management positions within the Pension and Investment Management Division at Canada Life Assurance Company/Crown Life Insurance Company.

Since joining the corporation, Kevin has focused on defining and implementing a service delivery model for the corporation’s clients as well as providing strategic leadership to the Member Experience Division, which has responsibility for plan board, member and employer communications.

Kevin has a degree in Public Administration from the University of Saskatchewan, a Certified Employee Benefits Specialist (CEBS) designation and a Pension Plan Administration Certificate (PPAC). He has been a member of the Canadian Pension Benefits Institute (CPBI) for many years and is currently a member of the Pacific Council.

Mr. Olineck seems to be an extremely well-qualified choice, and I am personally glad that they brought in a complete outsider, not from within PSPRS, not from the Phoenix valley, not from Arizona, and not even from the the United States.  Mr. Olineck will bring a fresh perspective from his position in British Columbia (BC), Canada, and he is not beholden to any political party, union, business, family member, or other outside connection.  Being a Canadian citizen with a proven track record in his home country, he is probably not even that concerned about his pay and benefits since he could return to Canada and would be hired for another job in about two minutes if he decides to leave the PSPRS job.  Hopefully, this will give him the independence to bring about necessary changes to PSPRS.

BCPC, is an umbrella administrator over BC's five public pension plans.  Unfortunately, BCPC has no pension like PSPRS that covers only public safety employees, so there is no real counterpart to PSPRS.  However, for comparison, the BCPC Municipal Pension Plan (MPP), which is the one that seems to cover most law enforcement and firefighters in BC, will have to do.

The last MPP annual report on the website is for the calendar year 2013.  MPP earned 15.1% that year and had a 5-year and 10-year annualized rate of 9.8% and 7.5%, respectively.  On December 31, 2013 PSPRS had a 1-year, 5-year, and 10-year annualized rate of return of 13.26%, 10.44%, and 5.86%, respectively.  This is not an overly unfavorable comparison with PSPRS.  The MPP is much better funded, though, at 96.5% at the end of 2012.  It was 95% and 97% funded at the end of 2009 and 2006, respectively.  There are several reasons for the MPP's better funding ratio.

The MPP does not guarantee COLA's, which are awarded based on the Board of Trustees' analysis of the plan's ability to pay for them, and they are limited to the rate of inflation as expressed in the Consumer Price Index (CPI).  They also have an independent actuarial valuation every three years to assess the plan's financial health and adjust contribution rates accordingly.  Annual contribution rates are split equally between employees and employers.   Contribution rates are also higher on annual salary over a certain limit.  The MPP uses a high-five year average to determine the pension benefit.  There are multiple "membership groups" but it looks like the newest membership group, Group 5, includes newer firefighters and law enforcement personnel.  In 2013 Group 5 had a contribution rate of 9.74% on salary up to $51,100, and a contribution rate of 11.24% on everything over that.  The Group 5 multiplier is 2.33%, which after 25 years would be 4.25% less than the 62.5% you would get in PSPRS, but it would give you a higher benefit if you (can) retire between 20 and 24 years.

As can be seen, the MPP operates more like the Arizona State Retirement System (ASRS) than PSPRS, and both the MPP and ASRS are in much better financial shape than PSPRS.  This is not by accident.  I previously wrote about the wisdom of ASRS here, but these passages from the "Message from the Trustees," in the 2014 annual report from one of the other BCPC plans, the Public Service Pension, distill some of that wisdom down:

The plan is responsible. 

From plan design to the way we as trustees invest and tolerate risk, we act responsibly. Our decisions are made after careful consideration; our responses to challenges are well considered, well debated and well thought out. Trustees are always keeping an eye on the future.  How else is the plan responsible?  We act responsibly by closely monitoring the plan through regular actuarial valuations and adjusting contribution rates as necessary. We demonstrate the success of our monitoring and rate adjustments by the fact our valuations have shown the plan to be at or near 100 per cent funded for more than a decade.  Agencies that establish credit ratings for governments appreciate the value of BC’s strong public sector pension plans like the Public Service Pension Plan. These agencies cite this strength as a factor in supporting BC’s triple-A credit rating. 

The plan is fair. 

As trustees, we consider fairness when making our decisions. The law mandates us to act evenhandedly and consider the interests of all members when making decisions. Our backgrounds reflect the various employer and member groups participating in the plan. We are diverse, but act together in the best interest of all members.The plan is fair to members of all generations because it is pre-funded. This means each generation pays in advance for its own pensions.  On a broader scale, the plan is fair to taxpayers. Why? Because employees bear more than 50 per cent of the plan’s risks. While contributions to the basic pension benefit are shared 50/50, plan members bear all the risk associated with contingent benefits such as inflation adjustments and group benefits.

Responsibility, careful consideration of decisions, keeping an eye on the future, acting together in everyone's best interest, fairness to all generations, fairness to taxpayers?  What a radical philosophy!  Perhaps Mr. Olineck should nail these passages to the door of PSPRS' headquarters, so that those like the Professional Fire Fighters of Arizona (PFFA), whose horrible reform plan is the antithesis of responsibility and fairness, will know that things must change if PSPRS is to survive.

Congratulations on your new job, Mr. Olineck, and best of luck.  You All of us are going to need it.