Costly Pension Ruling

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Payson may have to come up with hundreds of thousands of dollars as a result of a recent state Supreme Court ruling overturning the Legislature’s vote to decrease the inflation adjustment on retirement payments to judges, police officers, prison guards and firefighters, said Payson Mayor Kenny Evans.

Town officials don’t know how quickly the effects of the court ruling will hit them, but it could throw even the current year’s budget seriously out of balance. The police and fire departments account for about two-thirds of town spending — with most of that cost going to salaries.

The Arizona Supreme Court ruled unanimously last month that the state Legislature had illegally reduced retirement contributions by $375 million when it adopted rules that for three years cut the inflation adjustments in pension benefits.

Evans said the town hasn’t yet calculated the likely cost of the court’s ruling. However, Payson must pay a percentage of the salaries of police officers and firefighters into the state’s pension system for public safety employees — which also includes judges and prison guards. The extra money won’t go directly to the retiring officers and firefighters, but will bolster the financing of their retirement system.

Payson Town Manager Debra Galbraith commented, “The town does not currently pay the 40-50 percent (of salary) being discussed and we have no definitive estimate about how much it will be in the future or how the state will propose to cover the $40 million (immediate) shortfall created by the court ruling — but it will be significant.”

Payson recently added four or five police officers and enough firefighters to man a third fire station, significantly increasing its budget and pension costs.

The Supreme Court ruled that the Legislature’s action violated a voter-approved constitutional amendment that said, “public retirement benefits shall not be diminished or impaired.”

The ruling will require the state to assess cities, towns and counties an extra $40 million this year and an additional $336 million going forward.

Moreover, other changes in state law will require cities, towns and counties to show unfunded worker retirement and benefit costs as a liability on their balance sheets. That could make it harder and more expensive for local governments to borrow money.

Many public safety workers can retire after 20 years and receive payments up to 80 percent of their salaries for the rest of their lives, with annual increases to account for inflation. Officers or firefighters who worked 20 years for the military and another 20 years for a city can sometimes collect multiple pensions even before they turn 65.

One of the state judges who sued after the Legislature cut the inflation adjustment from about 4 percent to 2.5 percent one year and then eliminated adjustments for the next two years is receiving a retirement salary of about $125,000 a year for life. The victory could increase his payments by about $8,000 annually.

However, only 151 current retirees receive pension payments in excess of $100,000.

The plunge in the stock market, various pension enhancements approved by the state and the steadily increasing number of years people collect benefits after they retire has undercut the financing of the $7.2 billion pension plan, which provides coverage for 53,000 retirees and active members. Judges are part of the Elected Officials Retirement Plan with about 2,000 members.

Payson altered the pension system for new town workers several years ago, but could not change the system for public safety workers, who remain in the state-controlled system. The town also could not change the retirement plan for any other existing workers. As a result, a large share of the $1 million a year the town spends on medical and insurance costs goes to retirees — even if they’re eligible for less-generous Medicare benefits.

However, the state did close the Elected Officials Retirement Plan to new members last year, which means future retirees may get much less generous benefits.

The state has required cities and towns and counties to dramatically increase payments into the public safety and judge retirement system as the balance sheet of the pension plan has deteriorated. Contributions by employers have increased more than four-fold in recent years.

Despite that dramatic increase in contributions — almost all of it from taxpayers — the balance sheet has steadily deteriorated. In 2000, the funding ratio stood at a healthy 142 percent. By 2010, it had plunged to an alarming 67 percent.

The justices acknowledged that asking them to rule on their own future pensions posed something of a conflict of interest — but said the courts nonetheless had the responsibility to make a ruling on the Legislature’s violation of the Constitution.

State lawmakers reacted to the ruling with dismay — and threats to ask the voters to approve another constitutional amendment giving them the power to change things like the inflation adjustment on benefits.

Public employees remain one of the few groups left entitled to defined benefit pensions, which generally pay a percentage of salary for life.

By contrast, the bulk of private employers have shifted to things like 401K pension plans. In that case, workers contribute 5 or 10 percent of their salary to a retirement account they control and the employer matches that amount — often with a relatively low cap. If the value of the retirement account drops, the employer has no obligation to increase contributions.

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