Issue: PSPRS

A Maricopa County Superior Court judge has ruled that a state law capping employer contributions rates to retirement funds for judges and elected officials is unconstitutional, and that it’s up to Arizona lawmakers to find a solution.

The law in question, adopted and signed in 2013, caps the contribution rate the state provides to the pension at 23.5 percent. It has not been, as the Legislature argued, a “benefit” to state employees, Judge Timothy Thomason wrote on July 20.

Instead, the size of the state’s contribution for pensions has left the retirement fund, better known as EORP, or Elected Officials Retirement Plan, in an unsustainable position, and it could cost roughly $43 million annually to get the fund back on track.

“The new statute… by setting employer contributions at a set level, does not ensure that the cost and unfunded liability will be paid. In fact, it is undisputed that the current levels of funding are insufficient to meet the actual cost and unfunded liability,” the judge wrote.

Essentially, the cap of the employer contribution rate has contributed to a shortfall in the pension funds for EORP beneficiaries. Colin Campbell, an attorney for the two retired judges who filed the lawsuit, said the rates set by the Legislature in 2013 were “bleeding the fund dry.”

Campbell said officials estimate the fund will run out in about 10 years without a change in the state’s contribution.

By capping employer contribution rates, the statute violates the Arizona Constitution, which requires that rates be set by “generally accepted actuarial standards” to ensure the fund is able to meet the needs of its beneficiaries, the judge found.

In his ruling, Thomason noted that the Legislature has said as much.

Attorneys for the state “explicitly stated that the legislature is prepared to address this problem at the earliest feasible time. As such, the State conceded, as it must, that the current state of EORP is not actuarially sound,” the judge wrote.

Rather than do nothing and let the Legislature act, as lawyers for the state requested, the judge ruled that the statute is unconstitutional and must be changed “promptly,” while deferring to the Legislature to decide what the best way to make that change is.

Thomason declined to stay his ruling, even pending appeal.

With the statute ruled unconstitutional, Campbell said officials at EORP are free to adjust the employer contribution as needed. According to a recent actuarial report, it would take a 53.7 percent contribution rate from the state to keep the fund afloat, Campbell said, nearly double the current contribution.

Jared Smout, administrator for the Public Safety Personnel Retirement System, said the latest estimates of the cost of raising employer contribution rates for EORP is about $21 million for cities, counties, and state employers combined. That’s assuming a 53.7 percent contribution rate, which amounts to an estimated contribution of $37.6 million annually, compared to the $16.4 million employers currently kick in for pensions at the capped rate of 23.5 percent.

It’s unclear if PSPRS can act unilaterally and adjust the employer contribution rate, as Campbell suggested.

Officials at PSPRS had no comment on whether they’re considering changing the contribution rate administratively, and Smout noted that there’s been no discussion of the matter with attorneys for PSPRS.

However, the estimates cited in the ruling were calculated in January based on June 30, 2016, payroll figures, and would need updating to account for another fiscal year, Smout said. It would likely take an even higher contribution rate than 53.7 percent to make the EORP fund sustainable again, he said.

If the Legislature takes no action, be it in special session or during the 2018 legislative session, there would be another year of insufficient funding to EORP to take into account.

Adjusting the rate is but one option – the Legislature could also provide a $43 million annual appropriation to the EORP fund, a figure that includes a standard $5 million appropriation lawmakers already provide and $10 million in judicial fees that go toward the fund, Smout said. Or the Legislature could choose a combination of the two, both raising the contribution rate of employers – cities, counties, and state entities – while also increasing the appropriation to EORP from state coffers.

Spokesman Christian Palmer said the PSPRS Board of Trustees isn’t waiting for answers.

The board’s chairman, Brian Tobin, on July 10 called for the formation of a subcommittee to study the issues facing EORP and propose legislative fixes. County, city and state officials will be consulted in the process, Palmer said, as will judges and elected officials, whose pensions are affected by any changes.

Mia Garcia, a spokeswoman for the Attorney General’s Office, said no decision has been made yet on whether the state will appeal the case, though House Speaker J.D. Mesnard, R-Chandler, said on July 24 he expects an appeal of the Superior Court judge’s decision.

“Then at some point, we’re going to have to tackle all the pension related issues,” Mesnard said.

Mesnard said EORP and PSPRS are both problems.

A legislative fix likely won’t be so simple, Mesnard said, even if that is the ultimate ruling of the courts. State lawmakers have two options, he said: Either divert money from other public needs, like health, public safety or education, or send a constitutional amendment to the voters.

It’s not the statute that’s the problem, he said, it’s the system by which pensions are protected in the Constitution — a protection the voters provided. In a multitude of cases, judges have ruled that, due to Arizona’s Constitution, significant changes to pension contributions can only be applied to new employees. The rules stay the same for existing and retired employees.

“That’s what we keep running into whenever we try to reform the pension system,” Mesnard said. “We are always limited to new employees.”

Mesnard said the answer may be to ask the voters to undo those protections to avoid crippling pension bills in the future.

“You have no choice but to alter the benefit in the state Constitution,” he said.