AZ Reps Urge Voters to Change State Constitution for Pension Reforms

Finds issues with PSPRS’ DROP system, looming statewide crisis.

Arizona House Republicans David Livingston and Noel Campbell are asking voters to amend the state constitution to loosen retirement laws and change benefits for those enrolled in the Public Safety Personnel Retirement System (PSPRS).

The $9 billion fund—currently 46% funded—has been in dire straits since the financial crisis. While relaxed laws could help increase funding, they could also allow lawmakers to reduce the pensions of retirees as well, according to Azcentral—which also says that this measure would likely “face stiff opposition from the politically powerful police and fire unions.”

The representatives plan to appeal directly to voters to make the changes to PSPRS, with Livingston hoping for a plan on the ballot in November 2018 or Spring 2019. Livingston wants to protect rank-and-file, public safety officers and reduce the benefits of pensioners he believes are abusing the system, according to Azcentral. Livingston cited PSPRS’s Deferred Retirement Option Plan (DROP), which cost the system more than $1 billion over the past decade and almost $220 million in the past fiscal year.

Under DROP, a lump-sum payout is given to employees who defer retirement for several years in addition to their monthly benefit payments and cost-of-living adjustment (COLA). According to PSPRS records obtained by the Arizona Republic, at least 32 retired Phoenix fire and police department employees received $700,000 or more each under the DROP system—with the largest payout of $911,567 presented to former Phoenix Fire Department executive assistant chief Stephen Kreis.

“Because of the constitutional clause,  the courts cannot look to modify the contracts in any way. It’s a huge impediment for changing circumstances. The DROP program really eats into the pension fund, and it allows a person who’s retired on paper to work for another five years at his highest salary,” Campbell said.

In 2011 and 2013, Arizona courts overturned prior legislative changes for PSPRS in regards to public-safety officers, judges, and elected officials due to conflicts in the constitution and state law that deemed these changes illegal. Court rulings that have restored permanent benefit increases, and reimbursed and rolled back higher pension contributions, have cost PSPRS about $600 million in savings. In lieu of these rulings and constitutional clauses, PSPRS does not see how the representatives can realistically do anything.

“It’s not even a serious or even legitimate or policy goal. That’s pretty well known in Arizona,” said Christian Palmer, PSPRS spokesman, told CIO. “We’ve had courts rule again and again and again that promised benefits to public safety servants are totally protected.” Palmer said the fund is in the process of refunding  “about a quarter-billion dollars of contribution increases, and that was just legislative increases in contributions towards members pensions, not even the benefits side of things of when people retire. That’s how pinned down and legally secure the benefit structures are.”

In 2016, state legislature passed Proposition 124, which was projected to save $1.5 billion over the following 30 years for the retirement trust for initial responders. It also links retirees’ COLAs to the regional Consumer Price Index with a 2% annual cap. Proposition 124 also allowed for the creation of a third-tier of hires in a defined contribution plan, with 50% liability to the taxpayer and 50% to the employee. However, there has not yet been one hire under the tier-three classification. Representative Campbell has been given an ad-hoc committee to study the issue and propose possible solutions.

“We’re dealing with these legacy retirees and we’re dealing with the problems and benefits that they were granted, such as the DROP program,” Campbell said. “If we could change anything, I would certainly like to [change the DROP system],. Many of the cities and counties are their own worst enemy.”

Campbell also warned that if the issue is not taken care of as soon as possible, cities—most notably Bisbee, which he says is 5% funded—could soon file for Chapter 9 bankruptcy.

“They have 30% of their retirees on disability. There’s something wrong here. The system is not sustainable,” he said.

According to Palmer, none of the stakeholders have been consulted on the issue, making it a “dead-on-arrival” case. “The whole reason we had pension reforms in 2016 that created a whole new employee tier is only perspective, meaning they’re only for future members,” he said. “There’s no legislating or cancelling out previously promised benefits or even as we’ve learned from the courts, even previously promised contribution rates to members. There’s really not much the system and the local employers can do right now. Money and time is what’s going to fix our aggregate funding levels.”

Campbell is hopeful the situation will change, but is unsure if the reform will happen due to the constitutional clauses.

“I’m a retired firefighter and a federal officer. I sympathize with these guys,” Campbell said. “I want them to have their retirements, but it seems to be that the upper echelon gets the most benefits. We have guys that retire as chief of police, they become public safety director. We have people drawing pensions of $395,000 because of the job levels that they’re at, then they go on the DROP. It’s not the average firefighter, he doesn’t get to do that. But if you’re in that position to be in leadership, you can take advantage of the system, and the cities and counties have allowed it to happen.”

Representative Livingston was unavailable for comment.

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