FIXING THE PSPRS PENSION FUND

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

As the funding levels goes down, employer contribution rates go up. For 2014, the aggregate employer contribution rate was 32.5%.

In 2011, the Arizona Legislature tackled pension reform. SB1609 (retirement systems; plans; plan design) Changed the retiree COLA formula Increased employee contribution rate New hires to work 25 years Eliminated or changed DROP PHOTO BY: Willem van Bergen

SB1609 diminished benefits of pension recipients. SB1609 violates “Pension Clause” of Arizona Constitution but “Contracts Clause” remains untested. Retired Judge Ken Fields PHOTO BY: Jack Kurtz/The Arizona Republic In Fields in March 2014, the Arizona Supreme Court ruled that

Result of Fields Average Contribution Rates will increase and then exceed 55% in 2033 It will take years longer to achieve safe funding status

$375 million $40 million in back payments to retirees $335 million to re-establish the Excess Earnings Account This ruling will cost the fund (and AZ taxpayers)

We must eliminate the Excess Earnings Account, which is currently used to funds COLAs SB1609 eliminated the Excess Earnings Account. The Fields decisions re-establishes it. What needs to change?

❖ Today, if PSPRS earns over 9% (the assumed earnings rate) half of the money stays in the Fund. ❖ The other half goes into the Excess Earnings Account. ❖ This happens regardless of the health of the Fund. ❖ Even though the Fund is currently underfunded a COLA must be paid with Excess Earnings. ❖ For 28 consecutive years retirees have received a 4% annual COLA. That simply isn’t sustainable – especially while the fund status declines. ❖ Actuaries say the Excess Earnings Account is 80% of PSPRS’ problem. BREAK EVEN Excess Earning Account - COLA

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.

Solution Our answer relies on accepting most of the provisions of SB1609, which we have been living with since 2011: 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.

Our solution? Re-establish employee contribution rate at 11.65% 7.65% to main PSPRS fund. 4% to new employee-funded “COLA fund.”

How will the new COLA fund work? We will contribute to the fund for 3 years before paying any COLAs. After that, all COLA eligible workers may receive an annual increase of up to 2%. Cannot use more than 25% of fund annually to pay for COLAs Must be retired for 7 years or age 60 before eligible for COLA

Change the DROP program to: 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 Reverse ESFIPP: Allow Reverse ESFIPP (DROP) (currently in CORP system)

Costs of the Three Types of ESFIPP Tier 1: Non contributory costs-0.6% Tier 2: Contributory with return of contributions -0.4% Reverse ESFIPP (DROP): earns fund +0.8%

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.

Special session to pass a bill and a referendum and put on ballot The bill will be structured to protect the constitutional language that says pensions “cannot be diminished nor impaired.” Step 1:

The 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:

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:

Waiting is not an option: This proactive effort represents the best method for protecting our employers, the taxpayers and the PSPRS fund.

QUESTIONS