During the August meeting of the Arizona Police Association, held on the 26th, the APA Board voted to focus efforts on “fixing” two very key issues of SB1609 (pension reform bill) through the legislative process. While the thought of filing a lawsuit as a result of the pension system changes has been discussed heavily over the past several months, preliminary advice indicates the likelihood of success is very low.
The issue surrounds ARS 38-844.01, which 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.”
This statute, enacted in 1983, means those of us in PSPRS (and hired after 1983) are not vested in the system until we apply for benefits, NOT when we are initially hired by our employer. This makes the legal challenge to the changes made by SB1609 very difficult, at best.
Those employees/retirees who were hired by their employer prior to 1983 have a legitimate claim against the changes made by SB1609, particularly with changes made regarding how the post-retirement benefit increases are given.
Another careful consideration is the very strong possibility that a lawsuit could generate even more, and even drastic, changes to our retirement system. We already know there has been the idea bantered about of “closing” the defined benefit retirement system and moving us into a defined contribution system. There have even been ideas floating about to combine the four different retirement systems into one giant system.
The best and safest option at this point, is to continue to move forward with legislation to address the following issues:
1. The new, contributory DROP:
As we all know by now, a new Deferred Retirement Option Plan (DROP) was created this past session. This new DROP will be for PSPRS members that have less than 20 years of credited service on or after January 1, 2012. In this DROP, employees would continue paying the current employee contribution rate, which will increase to 11.65% over the next 4 years. (The current DROP will still be available for members that have over 20 years of credited service on or after January 1.) During many meetings/negotiations regarding the pension bills last legislative session, those of us representing public safety groups were opposed to this new DROP program. We had offered an alternative, which was to keep the new program contributory, but when the member terminated their DROP participation, they received their contributions made, in addition to a small amount of interest. As we now know, our suggested provision was not included in the final bill that passed.
The following draft language will be proposed to be added to ARS 38-844.06B:
“Contributions made by the employee shall be returned to the employee when the employee ceases to be in the program. An annual interest rate of no more than 2% will be added to the yearly contribution made by the employee during their participation in the program. Investment income received by the fund above 2% shall be retained by the fund to cover administrative costs associated with the program. If the investment income is less than 2% in any one year, the amount of interest added to the employee contribution shall be determined by the board.”
2. Employee contribution rates:
The PSPRS employee contribution rates were modified in ARS 38-843 as a result of SB1609. The new rates are as follows:
E. The amount contributed by a member pursuant to subsection C is:
1. Through June 30, 2011, 7.65 per cent of the member’s compensation.
2. For fiscal year 2011-2012, 8.65 per cent of the member’s compensation.
3. For fiscal year 2012-2013, 9.55 per cent of the member’s compensation.
4. For fiscal year 2013-2014, 10.35 per cent of the member’s compensation.
5. For fiscal year 2014-2015, 11.05 per cent of the member’s compensation.
6. For fiscal year 2015-2016 and each fiscal year thereafter, 11.65 per cent of the member’s compensation or 33.3 per cent of the sum of the member’s contribution rate from the preceding fiscal year and the aggregate computed employer contribution rate that is calculated pursuant to subsection B, whichever is lower, except that the member contribution rate shall not be less than 7.65 per cent of the member’s compensation and the employer contribution rate shall not be less than the rate prescribed in subsection B.
If you notice in in the final paragraph above, the employee contribution rate crests at 11.65% starting on July 1, 2015. Again, during our negotiations, we asked for a mechanism by which the employee contribution rate could and would be reduced, based on the health of the fund. This was another proposal that was not considered for the final bill.
The following proposal addresses correcting the issue:
Employee contributions into the retirement fund shall be maintained at their current rate once the fund balance reaches an actuarial balance of 85%. Once the fund reaches a 90% actuarial balance, the employee contribution rate shall be reduced to 9.65%. When the fund balance reached 95% actuarial balance, the employee rate shall reduce to 7.65%. Under no conditions shall the employee contribution rate go below 7.65%. If the fund balance reaches a level below an actuarial balance of 8%, an increase in employee and employer contributions shall be mandatory, following existing contribution models and standards, with the amount of the increase to be determined by the board. Contribution rates will decrease as noted above when the aforementioned actuarial funding levels are achieved.
The one point that needs to be remembered, particularly by the legislature, is that the platform for “pension reform” was based on the need to increase the long-term health of the pension fund. While some of the changes brought about by SB1609 do just that, there are those, as mentioned here, that go beyond what was asked.
I can tell you that AHPA, along with other public safety groups, was heavily involved in many of the discussions regarding the pension legislation. AHPA will continue to work diligently with our partner groups in the APA to address these issues. The APA has made it clear that its legislative agenda will focus only on the aforementioned proposals; proposals that affect all of the public safety personnel that put their lives on the line every day.