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FIXING THE PSPRS PENSION FUND. As of June 2013, PSPRS was only. 57% funded. What’s the problem with our pension system?. For 2014, the aggregate employer contribution rate was. 32.5%. As the funding levels goes down, employer contribution rates go up. PHOTO BY: Willem van Bergen.

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Presentation Transcript
as of june 2013 psprs was only
As of June 2013, PSPRS was only

57% funded.

  • What’s the problem with our pension system?
for 2014 the aggregate employer contribution rate was
For 2014, the aggregate employer contribution rate was

32.5%.

  • As the funding levels goes down, employer contribution rates go up.
sb1609 retirement systems plans plan design

PHOTO BY: Willem van Bergen

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

  • In 2011, the Arizona Legislature tackled pension reform.
sb1609 diminished benefits of pension recipients

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
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

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

we must eliminate the excess earnings account which is currently used to funds colas

What needs to change?

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.

slide9
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.

Excess Earning Account - COLA

  • BREAK EVEN
s olution
Solution

Why offer one, you ask?

  • It’s our retirement at stake. If the system fails, we lose most of all.
  • Higher employer contribution rates mean salary cuts, inability to hire replacements for retirees and, in extreme cases, may even lead to lay-offs.
solution
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.
re establish employee contribution rate at 11 65

Our solution?

Re-establish employeecontribution rate at 11.65%

7.65% to main PSPRS fund.

4% to new employee-funded “COLA fund.”

how will the new cola fund work
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 workersmay receivean 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

employee self funded inflation protection program

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
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
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

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.”

the referendum s basic language

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”.

get the referendum passed by arizona s voters

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.

slide20
Waiting is not an option:
  • This proactive effort represents the best method for protecting our employers, the taxpayers and the PSPRS fund.
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