FIXING THE PSPRS PENSION FUND

What’s the problem with our pension system? As of June 2013, June 2014 PSPRS was only 57% funded. 49.2% funded

As the funding levels goes down, employer contribution rates go up. For , the aggregate employer contribution rate was 32.5% 41.4%

In 2011, the Arizona Legislature tackled so-called pension reform. We told them that their solution – SB1609 – was not Constitutional. They ignored us. We were right. PHOTO BY: Willem van Bergen

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 In Fields in March 2014, the Arizona Supreme Court ruled that

Forced new hires (after 1/12) to work 25 years for a pension Eliminated or changed DROP for new hires and those with less than 20 years. SB1609 also PHOTO BY: Willem van Bergen

$375 million. $40 million in back payments to retirees $335 million to re- establish the Excess Earnings Account Making these payments will push employer contribution rates to more than 55%. This ruling will cost the fund (and AZ taxpayers)

More cases to come…….. Very likely that most of not all aspects of 1609 will be reversed. Hall Case Reyes Case

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 PSPRS’ problem. Why? Because for 28 consecutive years retirees have received a 4% annual COLA. That simply isn’t sustainable. Today, if PSPRS earns over the 9% assumed earnings rate, half that money stays in the Fund. BREAK EVEN

Even worse, this leaves the our pension system with a huge problem: How can we legally restore funding levels without crippling our employers? We need a plan that secures our retirement, helps cities and taxpayers and ensures COLAs for retirees.

Fortunately, we have a solution. Why offer one, you ask? 1.It’s our retirement at stake. If the system fails, we lose most of all. 2.Higher employer contribution rates mean salary cuts, inability to hire replacements for retirees and, in extreme cases, may even lead to lay- offs.

Fortunately, we have a solution. Our answer relies on accepting most of the provisions of SB1609, which we have been living with since New employees hired after 1/2012 will have to work 25 years. Pension = 62.5% Eliminates requirement that you be age 52.2 to collect a pension. Employers will have a minimum 10% contribution rate.

Key elements ❖ Higher employee contributions ❖ Reduced and changed PBI program ❖ Eliminating excess earnings program ❖ Minimum employer contribution threshold ❖ ESFIP Program

The biggest change? Fixing the Excess Earnings Account problem, which today funds COLAs. With small modifications, we can protect our retirement system and ensure COLAs for retirees, actives and “the unborn.”

Our solution? Our contribution rate will remain at 11.65%. (3 rd highest rate in County) 7.65% to main PSPRS fund. 4% to new employee-funded “PBI fund.”

How will the new PBI fund work? Employees only pay 4% into PBI fund. 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. PBI will not provide ANY liability to employers. This new PBI approach relives employers of 20% of liabilities. Increase could be less. Cannot use more than 25% of 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 an improvement over SB1609, which practically eliminated PBI’s. This is a 50% or more reduction in benefit and we pay for 100% of it.

DROP will become the Employee Self-Funded Inflation Protection Program. Tier 1 (members with 20 or more years on the job as of 1/2015) No contributions Interest rate = assumed rate of return for PSPRS Tier 2 (everyone else) Contributions during the program period Interest rate = minimum 2% or 7-year average of PSPRS investment returns (whichever is greater) Return of member contributions

Costs of the Three Types of ESFIPP Non contributory costs=0.6% Contributory with return of contribution costs 0.4% Reverse earns fund 0.8%

Why is this so important? 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

Majority of Arizona Public Safety employers do not have retiree healthcare plan therefore State plan is only option to receive PSPRS subsidy. ❖ PSPRS subsidy is this:

CURRENT PREMIUMS

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.

What is the impact of our solution? The average employer contribution rate would fall from over 55% to mid-30%. PSPRS 80% funded in 13 years. PSPRS 100% funded in 18 years. Average employer contribution rate falls to the new 10% statutory minimum.

2 MAJOR HURDLES THAT 1609 DID NOT ADDRESS PENSION CLAUSE CONTRACT CLAUSE

Special legislative session to pass a bill and a referendum containing the changes we need and put on the November 2014 ballot. The bill will be structured to protect the constitutional language that says pensions “cannot be diminished nor impaired.” Step 1: DEALING WITH THE PENSION CLAUSE

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”. Step 1:

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?????

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. Step 2:

This proactive effort represents the best chance for public safety to protect our employers, our taxpayers, our pensions, our pension fund, our retirees, our actives and our future members.

QUESTIONS