Pension and Budget Update 4/11/2011

President’s Message – AHPA President Jimmy Chavez

Pension Update – SB 1609

On Friday, April 8, I was invited to another meeting in the Governor’s office for further discussion on Senate Bill 1609.  A select group of representatives were in attendance, including House and Senate Staff.  The purpose of the meeting was to hear a counterproposal to the Public Safety groups had offered up a few weeks ago regarding PRPRS.  Below are the details of the counter:

Post Retirement Benefit Increase (PRBI, also referred to as the COLA):

The restructured PRBI offered by our groups was viewed as a viable alternative to the current structure.  The Governor’s staff provided additional changes.  They include, effective June 1, there will be no future disbursements into the Excess Earnings Account that currently funds the PRBI.  The funds currently in the PRBI will be used to provide a PRBI on July 1, 2011.  The new PRBI calculation plan will go into effect July 1, 2012, however, there will be no PRBI provided in that year.  There will essentially be a one-year moratorium on the PRBI.  On July 1, 2013, a PRBI may be provided if the criteria for disbursement are met under the new structure:

• The fund must have an actuarial balance of 60% or higher.
• Investment earnings for the fund must be at 10.5% or higher.
  • If the funded rate is 60%, a PRBI of up to 2% is provided.
  • If the funded rate is 65%, a PRBI of up to 2.5% is provided.
  • If the funded rate is 70%, a PRBI of up to 3% is provided.
  • If the funded rate is 75%, a PRBI of up to 3.5% is provided.
  • If the funded rate is 80%, a PRBI of up to 4% is provided.

The other caveat to the PRBI is the age restrictions.  The PRBI would not be available to anyone for two years after retirement if the employee retires before age 52.

Employee (EE) Contribution Rate Increase:

The public safety groups provided a plan to smooth out the EE contribution rate increase over a 7-year period (1% increase on July 1, 2011, then 0.5% increase every year thereafter to a ceiling of 11.65%).  The alternative also included a provision where the rates would decrease when the fund began to recover.

The counter offered by Governor’s staff called for the 4% increase in the EE rate over a total of 5 years, with the first year being the smallest increase.  The provision allowing the rates to decrease with the health of the fund would remain.

DROP:

The Governor’s counter to our DROP plan is to keep DROP for current employees, but eliminate for new hires.  Also, DROP will be restructured so that employees will continue to contribute in the system while participating in DROP.  The earnings interest rate will also be restructured and will be commensurate with the earnings of the fund.

Credit/Purchase of Military or Prior Law Enforcement Service:

The language in SB1609 would prohibit anyone from purchasing prior military or law enforcement service unless the military service was “active duty call up” or the law enforcement was within Arizona.  We had asked that this be completely struck from the bill.

The counter proposal is to not allow the purchase of prior military or law enforcement service if the employee is receiving or eligible to receive a pension from the military or LE employer.  This would not affect military reservists who have not yet reached retirement eligibility.  The restriction would only go into effect once the reservist reaches military retirement eligibility.

Pension Forfeiture:

Under SB1609, an employee who commits a class 5 felony during the course of employment would be subject to forfeiting their pension.

Our proposal was to allow a judge to have discretion to require a convicted felon to use part of their pension for restitution purposes only.

The counter to our proposal still needs more discussion.  The Governor and her staff are considering the law of unintended consequence with regards to this issue.  During the discussion in the meeting, it was suggested that this issue be addressed within the Study Committee because of the complexity.

Study Committee:

The Study Committee, as proposed by the Governor’s staff, should examine specifics dealing with the pension systems, such as the infrequent abuses, compensation as it relates to spiking an employee’s pension, etc.  The current language calls for the committee to look at general issues within the systems.  The fear of this is that having too broad of a scope will not accomplish anything.

ASRS Retirement Age Eligibility:

The Governor’s staff is open to the idea of incorporating the modified retirement eligibility as proposed by Arizona Education Association (AEA).  Eligibility would be age 55 and 30 years of service or age 60 and 25 years of service.  SB1609 eliminates the points system currently in place and would require a minimum age of 62 (no minimum years) or 65 with 10 years of service.  Again, this would apply to new hires only.

Bob Gilbert will be attending a special Arizona Police Association (APA) Board meeting on Monday, April 11 at 0900.  At that point, the counterproposal will be discussed and voted on.  Based on brief discussions with not only other groups at the meeting, as well as our lobbyist, the counterproposals offered by the Governor’s staff are reasonable and should be considered.  As of Friday afternoon, they had not been shared with either Speaker Adams or Senator Yarbrough, although their staffers were present in the meeting.  If both Adams and Yarbrough accept them, we anticipate an amendment will be constructed and introduced on the floor.  With that, these counterproposals, if acceptable to all the APA members, should be the ultimate counter we entertain.  This will be discussed on Monday, but my recommendation would be to not engage in further negotiations with the Speaker or Senator Yarbrough and the public safety groups continue with the efforts to kill the bill altogether.

Public Safety Proposal Actuarial Report:

On a related note, the accounting firm for PSPRS examined the Public Safety proposal to SB1609.  The actuarial report provided by the firm shows there is a 75% probability the fund will be at a 78.5% funded rate by 2030.  This means the plan provided by our groups is a better projection than what is provided in SB1609.  You can click on the following link to see the projections for Alternate 31, the public safety groups proposal:  PSPRS Projections

State Budget:

The budget was signed by the Governor on Thursday night and did contain a change to the ASRS employee/employer contribution split, which is currently 50/50.  The change will be 53/47%, meaning employees will begin to pay an additional 3% into ASRS.  This was scored as a $40 million savings to the state budget.  This increase is not (and cannot) go into the General Fund.  The savings is created by the decrease in the employer contribution rate.  As I outlined in a letter to the governor on April 1, we see this as a violation of the Arizona Constitution and again “balances” the state budget on the backs of state employees.  Our next step is to move towards a lawsuit against the state for changing the contribution.  We will begin communicating with other ASRS groups in an effort to combine our resources as we proceed.

As always, stay tuned to the website for developing news and information on the events that affect us.  We will keep everyone updated as the events continue to unfold.