FIXING THE PSPRS PENSION FUND
PSPRS
CORP
EORP
110%
83%
55%
28%
0%
05
06
07
08
9
10
11
12
13
What’s the problem with our pension system?
As of June 2013,
PSPRS was only
57% funded.
PSPRS
CORP
40%
30%
20%
10%
0%
2003- 04
2004- 05
2005- 06
2006- 07
2007- 08
2008- 09
2009- 10
2010- 11
2011- 12
2012- 13
2013- 14
2014- 15
As the funding levels goes down, employer contribution rates go up.
For 2014, the aggregate
employer contribution rate was
32.5%.
PHOTO BY: Willem van Bergen
In 2011, the Arizona Legislature tackled pension reform.
•
Changed the retiree COLA formula
SB1609 (retirement systems; • Increased employee contribution rate
• New hires to work 25 years
plans; plan design)
•
Eliminated or changed DROP
In Fields in March 2014, the Arizona
Supreme Court ruled that
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
Result of Fields
• Average Contribution Rates will increase and then exceed 55% in 2033
• It will take years longer to achieve safe funding status
This ruling will cost the fund (and AZ taxpayers)
$375 million
•
$40 million in back payments to retirees
•
$335 million to re-establish the Excess Earnings Account
What needs to change?
We must eliminate the Excess Earnings Account,
which is currently used to funds COLAs
SB1609 eliminated the Excess Earnings Account.
decisions re-establishes it.
The Fields
Excess Earning Account - COLA
❖
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.
PSPRS Earnings
BREAK EVEN
EEA Contribution
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 layoffs.
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
• Tier 2: Contributory with return of contributions
• Reverse ESFIPP (DROP): earns fund
-0.6%
-0.4%
+0.8%
Our Solution
Reversal of SB 1609
60%
45%
30%
What is the impact
of our solution?
•
•
•
The
average
employer
contribution rate would fall
from over 55% to mid-30%.
15%
0%
2013
2018
2023
2028
2033
2038
2043
PSPRS % Funded
125%
PSPRS 80% funded in 13 years.
100%
PSPRS 100% funded in 18
years.
Average
employer
contribution rate falls to the
new 10% statutory minimum.
75%
50%
25%
0%
2013
2028
2033
2048
Step 1:
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 2:
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.
Waiting is not an option:
This proactive effort represents the best method for
protecting our employers, the taxpayers and the PSPRS
fund.
QUESTIONS