Retired Arizona Public Officials Sue to Keep "Hundreds of Millions" in Pension Payouts Being Denied Because of New Law

Retired judges are fighting a new law that reduces their pension payout in a class action lawsuit filed this week in federal court.

If they win, it'll cost the state "hundreds of millions" of dollars over the next few years and threaten the overall viability of the retirement system for state workers, says Jim Hacking, administrator of Arizona's Public Safety Personnel Retirement System.

Hacking was among those pushing lawmakers to pass the law, SB1609, which was signed by Governor Jan Brewer in April and took effect in July. As he did then, Hacking points to statistics showing that the retirement system is in trouble even despite the legislature's reforms.

But that's not the main concern of the former elected public officials suing -- they're worried about the money that'll be missing from their monthly checks.

Retired former Maricopa County Superior Court Judge Kenneth Fields and former Arizona Appeals Court Judge Jefferson Lankford, plus the class of "similarly situated" pensioners hope to reverse the part of the law that cuts down their cost-of-living benefits.

The complaint targets the board of directors for the Public Safety Personnel Retirement System, which oversees the Elected Officials' Retirement Plan.

Fields, a key character in the saga of former County Attorney Andrew Thomas, was just awarded $100,000 in a settlement with Maricopa County, so he'd obviously not hurting for cash. But he and other pensioners stand to lose thousands of dollars each due to the changes.

They're being represented by former Maricopa County Presiding Judge Colin Campbell, who apparently will also cash in if the lawsuit succeeds.

"Under the new plan, it's going to be much more difficult to get a (cost-of-living adjustment)," Campbell says. "With respect to retired members, we think they have to use the old statute, which they've kept on the books. They can use the new statute on new members going forward."

In other words, Campbell and the other retired public officials want to be grandfathered in under the old system.

It sounds reasonable -- until you realize that what these retirees want to do, metaphorically, is help cut down the last trees on Easter Island.

You see, as the Arizona Republic's Craig Harris pointed out in his excellent series last year on the state's public pension plans, retired state and city workers are being paid more in pension benefits than the government's taking in for the retirement plans.

The scenario gets far worse when projected out to the future, with experts determining that the plans under Hacking's purview are "simply not sustainable."

These days, the trusts that are supposed to be able to cover the costs of retiree payouts are all underfunded due to bad returns on investments in the past decade. The Elected Officials' Retirement Plan, one of three divisions under the Public Safety Personnel Retirement System, has one of worst-funded trusts, at just under 68 percent.

Overall, according to Harris' series, the PSPRS trust was funded at 65.8 percent last year. As Harris wrote: That means its assets cover only 65.8 percent of payment obligations to current and future retirees within that system. Currently, the public is putting nearly $3 into the trust for every $1 invested by police and firefighters.

Another way to look at the problem is in how much money the government employers pay out to the pensioners compared to how much employees contributed. The employees contribute about 7 percent. Projections show that, if nothing had been changed, a strong likelihood existed that by 2025, more than 50 percent of the payroll of government employers would go to pensioners, rather than working employees.

To help reduce the load on taxpayers and reach a goal of funding the trusts at more than 80 percent, which would shrink the amount that government employers -- and, thus, the taxpayers -- had to pay into the system, lawmakers passed a package of reforms that made major changes to the way of cost-of-living adjustments are calculated and paid to pensioners. (The reform law did other things we won't get into here.)

Good investment returns were previously rolled into "excess earnings" fund that paid for the cost-of-living adjustment. While good for the pensioners, that rollover denied the pension-plan trusts the money needed to become more fully funded, which in turn meant higher contributions to the retirements system by taxpayers.

The new law killed the rollover and -- in two years -- changes the formula for determining when the pensioners get the cost-of-living payout.

When the formula changes in 2013, public safety pensioners (a group that includes the elected officials) can only get the extra dough if the pension trust is funded at more than 60 percent and the annual returns on the trust's investment exceeds 10.5 percent.

If the fund is funded at 60 percent, that will trigger a 1 percent cost-of-living payout, according to Campbell. The payout's now capped at 4 percent, which could be achieved if the plan trust attains a funding level of higher than 80 percent.

Under the past system, retirees typically received a cost-of-living adjustment ranging from a few hundred to a few thousand dollars. With a total of 14,000 retirees in the Public Safety Personnel Retirement System, the payouts add up to big bucks.

The law nearly ended up harsher for the pensioners: An earlier version would have essentially ended the cost-of-living adjustments for the next 15 years.

Unfortunately, the reform doesn't solve the over-arching problem, Hacking says, but only "moves things in the right direction."

Instead of employer contributions to the retirement plan exceeding 50 percent of payroll by 2025, projections show a likelihood that the contributions will still reach nearly to 46 percent of payroll.

Contributions by municipal employers is about 33 percent now, and about 18 percent for state and county agencies.

"Even without the senate bill, the employer contributions are still going up," Hacking says.

More alarmingly, the trusts' investment returns are on course to perform horribly this year.

"This picture is going to become precarious," he says.

The newly filed class-action complaint, meanwhile, threatens to make things even worse, in Hacking's view. His agency is preparing to defend itself from the suit.

Voters, of course, can't do much more than grumble at the actions of elected officials who are no longer in office.

UPDATE: We later found out that this is actually the third lawsuit that's been filed over this issue.

Click here to view the complaint.

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Ray Stern has worked as a newspaper reporter in Arizona for more than two decades. He's won numerous awards for his reporting, including the Arizona Press Club's Don Bolles Award for Investigative Journalism.