Lately there has been a lot of rumors and false information being spread about our pension system, PSPRS. Some people would rather be “first” than accurate, but we believe in bringing you the correct information rather than rumors.
PSPRS continues to be systemically underfunded. There are many reasons for this (under hiring, under paying police and fire employees, a downturn in the market, etc) but the end result is staggering increases in both employee (us) and employer (the City’s) contributions to our pensions.
Added to this is the Hall State Supreme Court Case, which should be heard in February, that has the possibility to lower the majority of our pension contributions from 11 percent back down to the original 7.65 percent. This will not affect anyone hired after roughly July of 2011; your pension contribution will remain the same. This will again cost PSPRS million of dollars.
As such, the Legislature has introduced new pension reform, focused largely on new hires, or what is being referred to as Tier 3. For the purposes of this discussion, employees are broken in three Tiers:
Tier One: Active Employees, working today, who were hired before 2011
Tier Two: Active Employees, working today, hired between 2011 and January 1st, 2017
Tier Three: Police and Fire Employees hired after January 1st, 2017
There is essentially only one change for Tier One employees, the retiree COLA (Cost of Living Adjustment). Currently, our retirees receive COLA’s from a separate PSPRS account. This account is funded whenever PSPRS performs above 9 percent in a given year, half of the excess returns are sent to the COLA account. Simply put, this COLA, which can reach as high as 4 percent, has significantly hurt the fund overall. Even as the fund’s performance declined, PSPRS continued to pay out COLAS because they were stuck with this mechanism. The new COLA will be tied to Phoenix / Mesa CPI and will be a maximum of 2%. So if CPI is 2.25% the COLA is 2%. If the CPI is 1.75% the COLA will be 1.75%. This will occur regardless of what happens to the earnings of the fund for that year. Also, since this COLA will be tied directly to YOUR pension it will be a true 2%.
This is the only change to Tier one employees, those hired before 2011.
Tier Two employees have the same COLA change as described above, as well as a proposed 401k style plan, to be added to their existing pensions, in exchange for the loss of the DROP benefit. it will be a 3% / 3% split where the City contributes 3% and the employee contributions 3%. For the first couple of years of the plan the City will contribute more and the employee will contribute less since they are not getting the full 25 years in the plan as the new hires will be.
These are the only two changes currently being considered for Tier 2 employees.
Tier Three: Our future employees will have the choice between two plans listed below. They will have 90 days from the date of hire to make a decision.
Optional 401K plan: There is an option (the employee makes the choice) for a 401K style of plan where the City puts in 9% and the employee puts 9%. Again this is purely optional and a choice for the employee. There are two reasons this is beneficial. First, if you come onto the job later in life and only plan on working 10 years (employees will vest in 10 years in this plan), you will never receive a pension and all you receive back is your contributions that you put in, plus 2%. A person in this situation would be better off in a 401K style of plan.
Hybrid Plan: The employee must work 25 years (already in place since 2012). The 5 year final average salary calculation remains the same as it is for all employees hired in 2012 or later. The pension multiplier remains the same as long as you work 25 years which is 2.5% X years of service or 62.5% at 25 years and 80% at 30 years, which is the same it is today. However, as long as you have at least 15 years of service and meet the 55 age requirement you can collect a reduce pension with a reduced multiplier. This is an improvement from today as those hired since 2012 and leave before 25 years of service are not eligible for any pension. These new hires will also have their pension calculated on a max of $110,000 in salary, although the legislation provides that the salary cap will be adjusted and increased over time, with inflation.
We are currently working to add into the legislation an option for Tier Two employees (hired between 2011 and January 1st, 2017) to have the option of switching to one of the Tier Three plans. Quite frankly, this is because Tier 2 employees are “locked in” to working 25 years before they are eligible for any kind of pension. Take note that both options under Tier Three provide for “early out” options, as soon as 15 or even 10 years of service, which may be attractive to our employees who started later in life.
We know you will have questions about this, and to that end we are scheduling a Pension Open House on Monday, February 8th at 1800 hours. We will announce the location as soon as we reserve a room.
Questions about this in the meantime may be directed to Jason Winsky at 360-1681.