Generous retirement plan for politicians and judges may soon end, setting the stage for others to follow

Almost 20 years ago the Arizona auditor general warned that the retirement plan for elected officials and judges was too generous — a member could retire with an income twice as large as an employee with the same salary and years of service in one of the state’s other plans.

The plan’s generosity is part of the reason why the Elected Officials’ Retirement Plan (EORP) is now short by more than $250 million.

HB2608, sponsored by Phil Lovas, R-Peoria, could be the solution. It passed the House on Feb. 28 by a vote of 35-22, and is ready for the Senate. It could also set the stage for dealing with the state’s other three plans, which also posted large shortfalls last year.

“If it (HB2608) really works as well as we think it will, that may set the stages for other plans in the future,” said House Speaker Andy Tobin of Paulden, a strong supporter of the bill.

HB2608 would replace the EORP, which is a defined benefit plan, with a defined contribution plan after June 30, 2013 — the Elected Officials’ Defined Contribution Retirement System.

Defined contribution plans are similar to the ones that the private sector offers its employees. The annual benefit is based on the value in the account at retirement and the retiree’s life expectancy. For a defined benefit plan, the benefit is guaranteed, no matter how long the retiree lives, and it is based on a formula that uses the employee’s years of service and average salary, not the value of the account at retirement.

The value of a defined benefit plan’s investment can decline, but the value of a member’s annual payout doesn’t. That is why EORP and public retirement plans around the country are underfunded

HB2608 won’t, however, change the terms for existing members of EORP.

Employees and retirees currently in the plan will get to stay in it.

Only elected officials and judges who begin working after June 30 will be offered the new plan in lieu of EORP.

Courts around the country have agreed to allow prospective changes to public retirement systems, said David Cannella, communications manager at the Arizona State Retirement System. Courts have not been approving retroactive changes to existing retirement plans, like the Legislature’s previous attempt to amend EORP, SB1609 in 2011.

Shortly after Gov. Jan Brewer signed SB1609 in April 2011, active and retired judges challenged it. The bill, sponsored by Sen. Steve Yarbrough, R-Chandler, reduced future benefits to both retired and actively employed members in EORP. The judges contend that the retirement plan is part of their employment contract, and any law that diminishes the value of their contract is unconstitutional. The case is now before the Arizona Supreme Court.

Although judges make up only about one-third of EORP’s membership, they have the most to lose from any changes to the existing plan. A judge’s salary starts at more than $100,000 a year, much higher than the $24,000 paid a state legislator, and so retirement benefits are also much higher.

“We (judges) benefited from it…but judges did not pass the laws creating EORP,” said Pete Dunn, spokesman for the Arizona Judges Association. “It was the Legislature that did that.”

Dunn, a former state legislator, also suggested that when it was set up in 1985,  EORP’s generous terms were most likely not intended for judges, who tend to have very long careers, but were aimed at helping legislators, whose years of service are typically much shorter. That may explain why the accrual rate in EORP is nearly twice the accrual rate of any other public retirement plan.

“The elected officials’ plan is the most generous of all the plans because the annual accrual rate is 4 percent,” said James Hacking, the administrator for EORP as well as the Public Safety Personnel Retirement System and the Corrections Officer Retirement Plan. The accrual rates for the other two plans are roughly 2.5 percent, Hacking said.

The accrual rate is the multiplier used to determine an employee’s retirement benefit. For instance, an employee with an average salary of $50,000, 15 years of service, and a 4 percent accrual rate, retires with a benefit equal to $30,000. With a 2.5 percent accrual rate, that benefit drops to $18,750.

EORP is clearly very lucrative for elected officials, said Tobin, adding, “Those days…are going away.” When taxpayers can’t be sure if you’re called to do public service, or if you’re called to be a retiree, respect vanishes, he said.

HB2608 puts new elected officials and judges into a plan similar to those of most taxpayers, but the switch doesn’t guarantee that EORP will be brought back into balance.

Investment values, expenses, and a number of other variable can change, said Hacking, causing EORP’s current $253 million liability to grow even further. In addition, Hacking noted that the figures used to project when EORP will come back into balance are based on HB1609 surviving its legal challenge. “If the Arizona Supreme Court sides with the plaintiffs (judges) … that changes everything.”

Arizona Public Retirement Plans as of June 30, 2012:

Name    Description                     Tot. Members     Ret. Members     Avg. Yearly Benefit    Shortfall (in millions)

ASRS     Public Emp & Tchrs      535,501                  112,306              $19,525                         $9,300

PSPRS   Public Safety Emps        31,104                    9,802                   $51,179                         $4,273

CORP    Correctional Emps         19,569                    3,476                    $25,293                        $  718

EORP    Elec offs & Judges           1,925                       992                        $44,264                        $ 253

*The difference between the actuarial value of the plan’s assets and its accrued liabilities including health insurance subsidy