As talk of pension reform heats up at the Capitol, organizations representing public safety employees such as police officers and firefighters may have to choose among three unappealing options: a bill they hate, a bill they hate even more and lawsuit they might lose.
House Speaker Kirk Adams and Sen. Steve Yarbrough are pushing separate pension reform bills that aim to adequately fund public employee pensions by raising contribution rates, cutting back on cost-of-living increases, hiking the retirement age and eliminating for new employees the Deferred Retirement Option Plan, under which retired employees come back to work while receiving pension benefits.
Yarbrough’s bill would apply to only three pensions systems that cover public safety employees, judges and elected officials: the Public Safety Personnel Retirement System, the Corrections Officer Retirement Plan and the Elected Officials’ Retirement Plan, which includes judges. Public safety employee groups oppose both bills, and are hoping they can get more favorable terms through negotiations with Adams and Yarbrough.
Both bills would raise contribution rates for current employees, which many public safety employee groups said would be a deal-killer. But Adams’ bill would ultimately raise rates more, and with some pension reform bill likely to pass the Legislature this year, the employee groups may have to choose between what they consider the lesser of two evils.
The difference between the two bills is a matter of Adams’ and Yarbrough’s divergent philosophies on pension reform. Adams wants to provide immediate savings for taxpayers by lowering employer contribution rates, though his plan would take longer to fully fund the pensions. Yarbrough’s plan would fund the pensions more quickly, but would take longer to lower the employers’ rates.
At the Senate Finance Committee on Feb. 23, representatives of several employee organizations testified against Yarbrough’s bill, SB1609. Most acknowledged that some changes would be needed to preserve the underfunded pension systems.
But some argued that it would be unfair, and perhaps even a violation of the Arizona Constitution, to change benefits and contribution rates for retirees and current employees who bought into the system that is already in place. Others said employee contribution rates have to go up, but should be increased more slowly.
“We don’t want litigation,” said Brian Livingston, executive director of the Arizona Police Association. “We must move forward in a way to avoid it.”
Livingston and others said that contribution rates should be increased only for new employees, not those who are already paying the current rates.
In his opening statements at the start of the hearing, Yarbrough said he wouldn’t be deterred by the threat of a court fight.
“I realize someone will likely sue us, no matter what we do,” he said. “We must not miss the opportunity, and we must do our best to do it right.”
David Selden, a labor and employment attorney with the Cavanagh Law Firm, said the Arizona Supreme Court ruled in the 1990s that employers could not unilaterally change the terms of their contracts with employees — the likely crux of any lawsuit against the pension reform bills — but that the ruling doesn’t apply to employee benefits.
While Yarbrough said he hasn’t studied the details of Adams’ plan, he said his bill approaches pension reform from a slightly different angle. Adams’ bill is focused more on quickly providing savings to taxpayers by reducing employer contribution rates, Yarbrough said, while his bill doesn’t provide much in the way of short-term savings, but would take less time to adequately fund the pensions.
“Our view is, if we solve the problem, we solve the problem. If we don’t really solve the problem — and yeah, we may get some relief for the employers, i.e., the taxpayers, we might get more relief for them temporarily, right away. But our focus is, we want to try to get this so 25 years from now, this thing is still sound,” Yarbrough said.
Both bills would raise contribution rates for current PSPRS members to 11.65 percent from 7.65 percent over the next several years, though Yarbrough’s bill would increase that rate to 13.65 for future employees.
But under Adams’ bill, employee contributions rates would continue to increase while employer rates decrease until both are paying an equal share. For many public safety employees, Adams’ plan would lead to a major increase in contribution rates in the fifth year.
“It could ultimately lead to contribution rates as high as mid-20 percent, which means one quarter of an officer’s pay could be directed toward the pension system,” Livingston said.
Livingston said he hopes the House and Senate will craft a “hybrid bill” that would include the best elements from both proposals while eliminating some of the more disputed sections.
But at the Senate Finance Committee, Sen. John McComish warned that the employee groups may not have the option. They may have to choose between the two bills, and the Phoenix Republican said they’d probably be better off under Yarbrough’s proposal.
“I suggest you get behind what we’re doing, if it is in your best interest,” McComish said.
Livingston said the Arizona Police Association can’t support either bill at this time, but other organizations said they may be willing to compromise. John Ortolano, of the Arizona Fraternal Order of Police, said if his organization were forced to choose between the two plans, it would likely side with Yarbrough’s.
“If neither one of the plans was going to change at all, if that was the given scenario, the Fraternal Order of Police would be compelled to support the Senate plan, because there are less items in the Senate plan that would be subject to a legal challenge,” Ortolano said.
Ortolano suggested that the state find new funding sources for the pensions, such as fees on non-emergency services like responding to false alarms and providing accident reports to insurance companies.
Adams, who is widely expected to run for Congress in 2012, said he planned to meet with Yarbrough and Senate President Russell Pearce to discuss how to “synch up” the two bills. But he said it was important to keep the short-term gains in his bill, HB2726, along with provisions that would ensure long-term stability for the pension systems.
“The purpose of the House bill is not to necessarily win friends. The purpose is to do the right thing and fix the system. So to the extent that we can do that and synch up with the Senate, we’re all on board with that,” Adams said. “We’re talking about a system that, right now, isn’t fully funded, a system that, right now, is requiring a lot of money from the employers, i.e., the taxpayers, to pay those benefits. So I think it has to have a balance of short-term as well as long-term.”
Yarbrough, too, was committed to the provisions in his bill, but said he might be willing to make at least one change. Larry Gray, of the Association of Retired Phoenix Officers, testified at the Senate Finance Committee hearing that eliminating the Deferred Retirement Option Plan would give employers a financial incentive to hire people from out-of-state by making it more expensive to hire retirees from Arizona agencies.
“With this provision, it now makes the hiring of retired public safety people from Arizona a detriment to the employers,” said Gray, the husband of Sen. Linda Gray, R-Glendale.
Yarbrough said he was unaware of the effect that provision would have, and said he would consider making changes.
“That was apparently an unintended consequence,” Yarbrough said.