PHOENIX - The head of the Senate Finance Committee is unveiling a bold plan this week to keep one of the state's pension funds from going broke.
The proposal by Sen. Debbie Lesko, R-Peoria, would require newly hired police and firefighters to work for 25 years before they're entitled to a full pension - a provision that already is in effect for employees hired after Jan. 1, 2012, based on changes the legislature made in 2011.
Changes that would affect new hires after July 1, 2017 include:
A requirement to be at least 55 years old before getting full benefits;
Splitting the cost of funding the pensions on a 50-50 basis;
Allowing workers to choose a "defined contribution' plan, similar to a 401-k.
Prescott Mayor Harry Oberg voiced support for Lesko's proposal. "Basically, I think it got further than I thought it would," Oberg said Monday, Feb. 1. "It would help us in the future."
Deputy City Manager Alison Zelms pointed out that the city has been working with Lesko on her efforts to reform the Public Safety Personnel Retirement System (PSPRS).
"Her proposal will make prospective changes to alleviate future problems and allow the city to address retrospective concerns effectively," Zelms said. "The city is confident that the legislature will act to move these reforms forward."
The legislation, set for a hearing before the Senate Finance Committee at 9 a.m. Wednesday, Feb. 3, also would cap the amount of any worker's salary that would be used to calculate the pension at no more than $110,000 a year. That is designed to prevent pension "spiking,' where employees save up unused bonus or sick time for a last-minute cash payout that can make the retirement benefits higher than the salary.
Potentially the most far-reaching provision, though, would scrap existing requirements for both new and existing workers as well as retirees that they be guaranteed a 4 percent benefit increase each year.
Lesko said that has been paid out for at least 20 years despite the fiscal condition of the PSPRS. The change would peg annual increases to the Consumer Price Index, with a cap of 2 percent.
But that last provision can take effect only if the Arizona Constitution, stating "public retirement system benefits shall not be diminished or impaired," is amended by voters.
Lesko said she hopes to put that change on the ballot in the special education funding election already scheduled for May 17, 2016. But time is running short: Lesko said the Secretary of State's Office says the final measure must clear both the House and Senate by Feb. 15.
Zelms said the change in the 4 percent benefit increases could have an impact on Prescott's unfunded liabilities with PSPRS - currently estimated at about $72 million. "It would increase the value of the investment for paying down the debt, versus adding more benefits," Zelms said. "It would have a positive effect."
Lesko acknowledged there's another potential detour to the change in the 4 percent increases. She said it is possible that existing employees and retirees will claim that the 4 percent year-over-year increases are part of their contract with the state, a contract that cannot be altered.
There is precedent for such a lawsuit. In fact, the Arizona Supreme Court two years ago voided a similar change lawmakers had tried to make in the pension benefit increases for judges' retirement.
But Lesko said even if that provision falters, either at the ballot box or in court, the other changes will go through if she can get the votes at the Legislature.
Lesko said doing nothing is not an option. She said PSPRS is funded only at the 49 percent level.
Lesko said, at this point, she has the support of not only Gov. Doug Ducey and the League of Arizona Cities and Towns but also some major unions including the Professional Fire Fighters of Arizona, the Fraternal Order of Police State Lodge, and the Phoenix Law Enforcement Association.
Much of the key to getting that labor support is linked to the fact that, with the exception of smaller future benefit increases, those already on the job would not be affected.
But for those hired after the new law takes effect, the changes would be profound.
Take the question of who contributes. At this point, employees pay a maximum of 11.65 percent of their salary into the pension fund. But there is no cap on the employer side of the equation.
She cites the example of Prescott where the city's pension costs equal about 80 percent of what they actually pay their officers.
Put differently, it means that if the city is paying an officer $50,000 a year, the actual price tag for just the salary and pension is $90,000. And that doesn't count other benefits and costs.
Under the proposal, contributions will be equalized for newly hired officers and firefighters.
While most of these changes will mean new hires don't get the same benefits as those already on board, they might actually welcome one provision. Right now PSPRS is a "defined benefit' system, with those retiring entitled to set pensions based on a formula taking into account their salary and years of service.
New hires will still be able to get into that system, albeit under the new conditions. But they also will have the option of a "defined contribution' plan.
That would be funded equally by the employer and the worker. But the account would be managed professionally, with the pension at retirement based on the earnings.
Lesko said this kind of system might be preferable to someone who is an experienced worker and would be unlikely to stay long enough to get full benefits from a defined benefit plan into which she or he would otherwise be required to pay.
Lesko said she has built the package so the changes in benefits for new hires will take place even if voters reject the constitutional amendment. The net effect, though, would be to blunt the savings to the fund.
Arizona actually operates several other funds, including one for corrections officers and another for most other public employees, including teachers. Lesko said while these also have their own financial challenges they are in better shape than the one for police and firefighters.
The Senate Finance Committee hearing will deal with three bills relating to PSPRS - SB1428, SB1429, and SCR1019. The reason for the three bills is that one will contain statutory changes, while another will direct the Arizona Secretary of State to put the constitutional change on the May 17 ballot. The third - a Senate Concurrent Resolution - contains the language to be referred.
The details of SB1428 will be unveiled during a meeting at noon, Tuesday, Feb. 2, at the Rose Garden at the Arizona State Capitol, 1700 West Washington, Phoenix. According to a news release from the Senate Republican Caucus, the announcement will feature Lesko, Senate President Andy Biggs, Mesa Mayor John Giles, President of the Professional Fire Fighters of Arizona Bryan Jeffries, and Treasure of the Phoenix Law Enforcement Association Will Buividas.
The bill states that because of the complexity of the legislation and previous court cases, SB1428 would have "numerous requirements for differing sets of participants who join PSPRS on differing dates. The three tiers include: tier 1 - before Jan. 1, 2012; tier 2(a) - members with less than 20 years of credited service before Jan. 1, 2012; tier 2(b) - employees between Jan. 1, 2012 and June 30, 2017; and tier 3 - employees hired July 1, 2017 and thereafter.
On Wednesday, Feb. 3, the Senate Finance Committee's hearing is scheduled for 9 a.m., at the Arizona Senate Room 3, 1700 West Washington, Phoenix.
Zelms and Oberg plan to attend the hearing, and Oberg said he has been asked by the League of Arizona Cities and Towns to sign in to speak in favor of the bill. "I think it is a good move in the right direction," Oberg said of the bill.
Daily Courier reporter Cindy Barks contributed the local quotes to this story.