FIXING THE PSPRS PENSION FUND

FIXING THE PSPRS PENSION FUND
OUR GOALS
1.
A FULLY FUNDED PSPRS IN LESS THAN 20 YEARS.
2.
EMPLOYER CONTRIBUTION RATES AT OR BELOW LABOR
MARKETS IN THE PRIVATE SECTOR (AROUND 10%).
3.
REDUCE UNFUNDED LIABILITIES.
4.
NO CUTS TO SERVICE.
5.
ONCE PSPRS IS STABILIZED, PROTECT SUSTAINABILITY
WITH REALISTIC ASSUMED EARNINGS, MODEST
BENEFITS AND WISE INVESTMENT RULES.
6.
WE DID NOT CAUSE THIS; HOWEVER TO SAVE THE
SYSTEM AND SERVICE WE WILL PAY MORE, RECEIVE
LESS AND WORK LONGER.
THANK YOU TO OUR
PARTNERS
Lewis and Roca
Coppersmith Brockelman
Gabriel, Roder, Smith & Company
Triadvocates
Fraternal Order of Police
Arizona Police Association
Arizona Highway Patrol Association
Arizona Fire Chiefs’ Association
Arizona Fire Districts’ Association
SOME BRIEF HISTORY
1968 - PSPRS is born
1970’s - agencies joining plan one by one
1980’s - a COLA system became necessary
1985 - Excess earnings system for COLA added
1990’s – the fund was well over 100% funded and growing, while employer
contributions were minimal.
1998 - Constitutional protection in AZ Constitution
passes in a landslide
1999-2001 - Administrator had investments heavily weighted in tech bubble,
which burst. Administrator continued to believe in tech phenomenon and
doubled down leading the fund to lose 1/3 of total assets.
2002 -New board members, new administrator, new rules.
2003 – We worked for two years to broaden investment rules – held up by
legislature.
2007 - great recession hits
PSPRS
CORP
EORP
110%
83%
55%
28%
0%
05
06
07
08
9
10
11
12
13
What’s the problem with our pension system?
As of June 2013,
June 2014 PSPRS was
only
57% funded.
49.2%
funded
PSPRS
CORP
40%
30%
20%
10%
0%
2003- 04
2004- 05
2005- 06
2006- 07
2007- 08
2008- 09
2009- 10
2010- 11
2011- 12
As the funding levels goes down, employer contribution rates go up.
For 2013 2014, the aggregate
employer contribution rate was
2012- 13
2013- 14
2014- 15
32.5%
41.4%
THE IMPACT?
EMERGENCY SERVICES IN COMMUNITIES
THROUGHOUT THE STATE OF ARIZONA ARE
NOW BEING DIMINISHED AS A RESULT OF
THESE RISING COSTS
PHOTO BY: Willem van Bergen
In 2011, the Arizona Legislature addressed pension reform.
We agreed with most of the reforms;
however we held deep concerns that
their solution – SB1609 – was not Constitutional.
Unfortunately….
In Fields in March 2014, the Arizona
Supreme Court ruled that
SB1609 illegally
diminished benefits of
pension recipients.
SB1609 illegally changed
the retiree COLA formula.
Retired Judge Ken Fields PHOTO BY: Jack Kurtz/The Arizona Republic
PSPRS Employer Contribution Rate
60%
This ruling will cost the fund (and AZ taxpayers)
45%
$375 million.
•
$40
million
in
back
payments to retirees
•
$335
million
to
reestablish
the
Excess
Earnings Account
Making these payments will
push employer contribution
rates to more than 55%.
30%
15%
0%
2003- 2004- 2005- 2006- 2007- 2008- 2009- 2010- 2011- 2012- 2013- 201404
05
06
07
08
09
10
11
12
13
14
15
XX
More cases to
come……..
Very likely that most of not all aspects of
1609 will be reversed.
CLOSE THE PLAN???????
THE MAIN PROBLEM???
THE “COLA” STRUCTURAL METHODOLOGY –
EXCESS EARNING MECHANISM
PSPRS Earnings
Today, if PSPRS earns over the 9%
assumed earnings rate, half that money
stays in the Fund.
The other half goes
into the Excess
Earnings Account.
By draining the main fund during
profitable years, we slow its recovery
and lower the funded level.
Actuaries say the Excess Earnings
Account is 80% of the PSPRS problem.
Why? Because for 29 consecutive
years retirees have received a 4%
annual COLA. That simply isn’t
sustainable.
BREAK EVEN
EEA Contribution
Key elements of our solution
Our answer relies on accepting most of the
provisions of SB1609, which we have been
living with since 2011.

New employees will have to work 25
years.

Higher employee contributions – 11.65%


Reduced and changed PBI(“COLA”)
program
New employer minimum - 10%
contribution rate.

Eliminating excess earnings program

Self funded inflation protection
Our solution?
Our contribution rate
will remain at 11.65%. (3rd highest Public
Safety rate in Country)
•
7.65% to main PSPRS fund.
•
4% to new employee-funded “PBI fund.”
How will the new
PBI (“COLA”) fund work?
•
Employees pay 4% into PBI fund. Employers pay 1% (consideration)
•
We will contribute to the fund for 3 years before collecting any PBI.
•
PBI qualification will be retired for 7 (6 year addition) years or age 60.
•
PBI has no liability on corpus of fund.
•
This new PBI approach relives employers of 20% of liabilities quickly.
•
Cannot use more than 25% of PBI fund annually.
•
After that, all PBI eligible workers get an annual increase of up to 2%.
•
•
The mechanics: Total dollars in the fund, will not give out more than 25%
of the fund for a maximum of 2% (Based on 7.85% assumed earnings)
This is a 50% or more reduction in benefit.
Our Solution
Reversal of SB 1609
60%
45%
30%
What is the impact
of our solution?
•
•
•
The
average
employer
contribution rate would fall
from over 55% to mid-30%.
15%
0%
2013
2018
2023
2028
2033
2038
2043
PSPRS % Funded
125%
PSPRS 80% funded in 13 years.
100%
PSPRS 100% funded in 18
years.
Average
employer
contribution rate falls to the
new 10% statutory minimum.
75%
50%
25%
0%
2013
2028
2033
2048
Issues specific to us
1. Significant reduction of COLA’s in
future
2. Healthcare costs
3. Lack of Social Security and/or
Windfall provisions
4. Government pension offset
5. Survivor’s benefit reduction
This is different than ASRS
Windfall/GPO?
WEP and GPO
Windfall Elimination Provision affects workers who spent some time in jobs not covered by Social Security and also
worked other jobs where they paid Social Security taxes long enough to qualify for retirement benefits. The provision has a
disproportionate effect on first responders, who retire earlier than most other public employees and are more likely
to begin a second career after they leave PSPRS. Firefighters in this position are penalized and may have their
Social Security benefit reduced by up to sixty (60%) percent. Because of the WEP, if their second career resulted in less
than twenty (20) years of substantial earnings, upon reaching the age at which they are eligible to collect Social Security,
they will discover that they lose sixty percent (60%) of the benefit for which they were taxed
The Government Pension Offset was adopted to shore up the finances of the Social Security trust fund. This "offset" law
reduces by two-thirds the benefit received by surviving spouses who also collect a government pension.
For example, the spouse of a retired law enforcement officer who, at the time of his or her death, was collecting a
government pension of $1,200, would be ineligible to collect the surviving spousal benefit of $600 from Social
Security. Two-thirds of $1,200 is $800, which is greater than the spousal benefit of $600 and thus, under this law, the
spouse is unable to collect it. If the spouse's benefit were $900, only $100 could be collected, because $800 would
be “offset” by the officer’s government pension.
2 MAJOR HURDLES
THAT 1609 DID NOT
ADDRESS
• PENSION CLAUSE
• CONTRACT CLAUSE
Step 1:
Our referendum’s basic
language?
“The benefits of the beneficiaries shall
neither be diminished nor impaired
except for the provisions on Bill xxxx,
as passed by the Legislature in 2014”.
CONTRACT
CLAUSE
There needs to be consideration that in
the middle of a contract was
consideration given. Can you no longer
provide what was contracted for, is
there anything else you can give in
consideration to mitigate the impact.
1% ?????
Does this satisfy the federal contract
clause?????
Step 2:
Get the referendum passed
by Arizona’s voters.
This would be a statewide campaign.
We would fund it and run it.
We anticipate a full political operation,
with TV advertising, direct mail and a
statewide grassroots effort.
WHAT DO WE WANT?
❖
TO PUT THIS IN FRONT OF THE VOTERS AS SOON
AS POSSIBLE TO SAVE EMERGENCY SERVICES
AND TO SAVE TAX-PAYERS HUNDREDS OF
MILLIONS OF DOLLARS.
❖
WHY THE HURRY? WAITING UNTIL 2016 WILL
COST TAX-PAYERS AN ADDITIONAL 75 MILLION
DOLLARS. FIRE DISTRICTS, SHERIFFS AND FIRE
AND POLICE DEPARTMENTS ARE CUTTING
SERVICES RIGHT NOW.
QUESTIONS