Police and firefighters to seek pension-reform session

Arizona Republic
Monday, June 2, 2014
Craig Harris


Police and firefighters who largely have opposed changes to their pension benefits now are urging Gov. Jan Brewer to call a special legislative session this summer to reform the financially troubled Public Safety Personnel Retirement System.

Andrew Wilder, a spokesman for Brewer, said the governor is open to having a special session on pension reform.

"We are in the earliest stage of this dialogue," Wilder said. "We are not averse to having additional discussions and at some point support some sort of action."

The PSPRS board discussed the issue at its meeting Wednesday and heard a presentation from Tim Hill, president of the Professional Fire Fighters of Arizona, on potential proposals for legislators.

The board did not take a position, but it could at a special meeting scheduled for 11:30 a.m. Thursday.

The public-safety organizations are proposing reforms similar to those they fought in 2011.

That's when the Legislature made sweeping changes to PSPRS, reducing retirement benefits and requiring police and firefighters to pay more for their pensions.

Those reforms have been challenged in court, and some key provisions have been overturned, including the suspension and limitation of cost-of-living adjustments for retirees.

Courts have cited Arizona's Constitution, which does not allow publicpension benefits to be diminished, as a key reason for overturning the reforms.

Lawmakers, concerned that other reform provisions could be tossed, have threatened to ask voters to change the Constitution to remove language that guarantees public pensions cannot be cut.

Meanwhile, Phoenix voters this fall will decide whether to end the city's pension system and replace it with a less generous 401(k)-type retirement savings plan for municipal employees.

Amid this backdrop of voter angst over public-pension costs and six-figure annual lifetime benefits for a handful of retirees, public-safety unions are concerned a statewide measure could be placed on the ballot that would end their defined-benefit retirement plan that provides guaranteed pension payments.

Groups such as the 14,000-member Arizona Police Association and the 6,500-member Professional Fire Fighters of Arizona are working on a proposal to ask the voters this fall to forestall a more draconian measure.

David Leibowitz, a spokesman for the Professional Fire Fighters of Arizona, said a constitutional amendment may be difficult to legally challenge. It would:

• Require public-safety employees to pay 11.65 percent of their pay toward their pension benefits. The 2011 reform required annual contributions to gradually increase from 7.65 percent to 11.65 percent of an employee's pay, but that has been challenged in court and could be overturned. Employees now pay 10.35 percent of their pay.

• Require public-safety officers hired after Jan. 1, 2012, to work 25 years to obtain a pension. Currently, public-safety employees can retire after 20 years of service.

• Suspend cost-of-living adjustments for retirees for three years, then cap COLA raises at 2 percent a year. The Arizona Supreme Court this year overturned a suspension and reduction of COLAs for judges, and that ruling is expected to restore COLAs for retired public-safety officers.

• Create a two-tiered system for the Deferred Retirement Option Plan, or DROP, that would be less generous for employees hired after Jan. 1, 2012. That plan has allowed some retirees to receive lump-sum DROP payments of $500,000 or more, plus their annual pensions.

The new system would be called the "employee self-funded inflation protection program," and it would require employees to contribute to their deferred-retirement account and would have a lower assumed earnings rate.

"They (public-safety officers) want to present a proactive solution," Leibowitz said. "If you wait around for people to oppose you, they are not going to craft a good solution, and it could be a lot worse. ... Firefighters and police officers are responding to an emergency; we have to fix the system now."

The reforms would not apply to the Elected Officials' Retirement Plan or the Corrections Officer Retirement Plan, which are managed by PSPRS. The three pension plans are part of a $7.9 billion trust.

Leibowitz said public-safety officers are aware that employer pension costs have increased and that some cities have pension contribution rates that exceed 50 percent of an employee's wages.

The Arizona Republic in 2010 published a weeklong series detailing the burdens that state governments faced because of generous pension benefits and rising costs. The Legislature responded in 2011 by passing reforms.

The Republic last year reported that many Arizona cities were unable to fill public-safety positions because of rising pension costs, while a few public-safety employees were retiring as millionaires.

Phoenix, the largest PSPRS member, is cutting the compensation of its police and firefighters, and it has not filled numerous public-safety positions in part because of rising pension costs.

Members within police and fire unions have criticized The Republic's reporting on pension issues, saying that rising government contribution rates were attributable to poor investment returns and that most retirees continue to receive modest pension benefits.

Hill, of the firefighters union, wrote in a 2011 guest opinion in The Republic that lawmakers who enacted reforms had fixed a pension plan that wasn't broken and that the changes punished every firefighter and police officer in Arizona.

Hill also wrote that "the Legislature's so-called pension reform is bad news for more than 20,000 public-safety workers in Arizona" and that the pension system "has never been at a 'financial precipice,' nor on the verge of bankruptcy."

Hill could not be reached for this story.

Since 2011, the health of the PSPRS has deteriorated, and the funded ratio — the percentage of pension-fund liabilities that could be paid with current assets — has dropped from nearly 62 percent to about 57 percent. As funded ratios drop, more money is needed from taxpayers to shore up the trust.

Leibowitz said the public-safety reform proposal would bring the funded level in 13 years to 80 percent, a figure that pension experts consider a "healthy" fund, and in 18 years to 100 percent funded. At that point, the average employer contribution rate would be 10 percent, he said.

Kevin McCarthy, president of the Arizona Tax Research Association, said groups that once panned pension reform are now behind it.

"One of the things that is going on is, the numbers are causing them to be very nervous," said McCarthy, who also sits on the board of the Arizona State Retirement System. "The (financial) numbers were every bit as bad back then as they are now."

McCarthy said the public has grown weary of hearing about some public-safety officers gaming the system to increase their pensions.

Leibowitz said the only way to keep the pension system sustainable is to make tough decisions. He said that includes changing cost-of-living adjustments for retirees.

"Our guys get the math," Leibowitz said. "If employer contributions are 55 percent or more, there is no room to hire more police officers and firefighters, and there is no room for raises. ... We want to solve this."

Lawmakers who have pushed for pension reform said that they are happy to work with public-safety officers but that more actions may be needed.

Arizona House Appropriations Chairman John Kavanagh, R-Fountain Hills, said he wants legislation that would prevent pension spiking, which artificially increases retirement benefits.

"I have mixed feelings," said Rep. Phil Lovas, R-Peoria. "I appreciate they want to try and solve the problem and bring down employer (contribution) rates.

"But if we are going to send something to the ballot, we may serve the public by doing something a little more grandiose — that is broad-based and real pension reform."