Traditionally, public-employee pension systems were recognized as a way to overcome inequities between lower public-sector salaries and higher pay in the private sector. However, that inequity is no longer the case in Arizona, according to the U.S. Bureau of Labor Statistics.

The average state-employee salary in 2009 was $46,841, and the average municipal-employee salary was $42,668. In the private industry, the average pay was $42,090.

Search for elected officials' pensions

Arizona Retirement Systems Article - Part 0 of 8

Source

Craig Harris

The Arizona Republic

For this series, The Arizona Republic filed 67 public-records requests between August and October. The requests went to Arizona's four statewide public-pension systems, the Phoenix and Tucson pension programs, and all 57 public-school districts in Maricopa County.

The Republic, under the Arizona Public Records Law, obtained the annual pension payments for more than 111,000 retirees in the six pension systems and the salaries of retirees, mostly educators, who still hold government jobs.

Only the Arizona State Retirement System balked at the request. ASRS on Aug. 31 provided a database of retiree names, their date of retirement, their total credited years of service and their final employer. Citing privacy concerns, the current benefit amount paid to each retiree was not provided.

The newspaper on Sept. 3 demanded through legal counsel that ASRS produce the exact pension benefit for each retiree. A week later, the newspaper requested amounts paid for service credit, a factor in determining a person's pension, by retirees with the highest pensions.

ASRS sued the newspaper Sept. 15 in Maricopa County Superior Court, asking a judge to uphold its denial of the records. The newspaper threatened to countersue and seek attorney's fees.

The ASRS board met Sept. 29. Following advice from the Arizona Attorney General's Office, it turned over to The Republic all previously denied records and withdrew its lawsuit.

Director Paul Matson said ASRS was not trying to thwart the Public Records Law but was acting as a fiduciary by guarding members' data.

Randy Lovely, editor and vice president/news of The Republic, said the paper's intent in gathering the data was to show how Arizona, like other states, is struggling to fund its public pensions.

"The Republic, as part of our detailed coverage of all aspects of the state's fiscal situation, set out to give readers a full view of the state's pension situation. Our intention was not to reveal the specific pension information for every individual in the system but rather to analyze the full data to give legislators insights into possible areas of reform and savings," Lovely said.

Arizona Retirement Systems Article - Part 1 of 8

Public pensions a soaring burden

Part 1 of 8

Source

Craig Harris

The Arizona Republic

Even as local governments and the state are slashing budgets, Arizonans are propping up public-pension systems that allow civil servants to retire in their 50s, receive annuities that can exceed $100,000 a year, and collect pensions while staying on the same job, The Arizona Republic has found.

Over the past decade, government agencies have been forced to pour billions of dollars into the state's six pension systems to keep pace with continual benefit enhancements. The added cost of these enhancements has been largely borne by taxpayers as pension investments eroded amid stock-market declines.

Even some of the pension funds' managers agree that these enhancements over the past decade have grown so expensive they are unsustainable without sharp increases in public funding and cuts to critical public services.

Legislators and other policy makers, meanwhile, have done little to overhaul the systems. In fact, pension reform is rarely, if ever, mentioned by Gov. Jan Brewer or the Legislature as they grapple with ways to bridge a two-year budget deficit estimated at $2.25 billion. A key lawmaker said that needs to change.

"It's a ticking time bomb," Arizona House Speaker Kirk Adams said of the state's pension systems. "A lot of people for too long have tried to ignore it and set it aside. The Legislature needs to seriously look at what the options are."

The tab for local governments and the state to run these systems grew 448 percent over the past 10 years to $1.39 billion annually, according to a Republic analysis of the benefits paid to more than 111,000 retired public employees. In many cases, taxpayer contributions to the pension funds far exceed workers' contributions. In fact, most employees earn all their contributions back within three to four years of retiring.

Today, more money is spent on Arizona's public-pension systems than on the individual state budgets for higher education, corrections, economic security or health insurance for the poor.

Even as governments cut budgets, public-pension costs will keep growing. The state Constitution forbids the government from decreasing a payout for any retiree now in the system. And a coming wave of Baby Boomer employees will soon retire, further increasing the costs.

Byron Schlomach, an economist who studies pensions for the Phoenix-based Goldwater Institute, said there is little political will to change public-employee retirements because they affect about 363,000 state and local public employees who wield clout and because lawmakers benefit from the best of the publicly funded systems.

"Some of the resistance is coming from people who you would think were conservatives, but they may have retired from another pension system," Schlomach said. "They like the systems the way they are. They have their benefit, and they are resistant to change." Well paid

For this series, The Republic filed 67 public-records requests. They were sent to the state's four public-pension systems, the Phoenix and Tucson municipal pension systems and all 57 public-school districts in Maricopa County. The newspaper, through the Arizona Public Records Law, obtained the amount of pensions paid to retirees in the six systems and the salaries of hundreds of retirees who still hold government jobs, with most being educators.

The Republic's analysis shows a system that pays some retirees well, including:

Elected officials. Among those who retired in the past decade, dozens now are paid more in annual retirement benefits than they were paid while in office.

Public-safety officers. An incentive program to keep officers working longer allows them to stop contributing to their pension funds five years early, keep working, then receive large lump-sum payouts - an average of $247,422 for police officers and $314,338 for firefighters. Those officers also then draw regular annual pensions.

City officials. The Phoenix retirement system allows employees to boost their public pay as they near retirement age, triggering increases in the annual amount of their pensions.

Educators. Employees in many school districts find ways to retire and then return to government jobs while also drawing a pension. Some in the public-education system have created a cottage industry to make so-called "double-dipping" easier. More than 900 teachers and administrators in Maricopa County school districts legally collect state pension checks while being paid to keep working for the schools. Some teachers make more than $100,000 a year in combined pension and salary, while administrators' combined pay and pension can exceed $200,000 annually.

Criminals: Six elected officials and a former county manager now receive state pensions despite being convicted of crimes involving misconduct while in office.

The bottom line: While most private employers have scaled back retirement programs and put more or all of the financial responsibility for their funding onto employees, Arizona civil-servant retirement systems have not made major changes.

Calls for reform

California, New Jersey and Illinois are among many states now struggling with the costs of public-pension systems. Reform movements in some states have cut benefits and raised the age at which workers can start drawing pensions.

Internationally, there have been moves by financially strapped governments across Europe to raise the retirement age. In Greece, generous early-retirement practices led to a debt crisis that prompted unpopular changes earlier this year. Last month, amid mounting protests that hampered France's economy, the French parliament bumped the retirement age from 60 to 62 to preserve its pension system.

Arizona anti-tax groups and business leaders are calling for changes to ease Arizona's ever-growing pension costs.

Kevin McCarthy, president of the Arizona Tax Research Association and a recent board appointee to the Arizona State Retirement System, said ongoing enhancements to the retirement systems are unsustainable.

"I don't know how some of this stuff is rationalized," McCarthy said.

Lawmakers have taken small steps to bring costs under control.

Several modifications begin July 1, 2011, for ASRS, the state's largest system. Newly hired employees who are part of ASRS will be required to work a few years longer before they can draw a retirement check. Also changed was the formula by which retiring employees' average ending salary is calculated, slightly lowering pensions.

However, the state won't see a savings from the changes until those new hires begin to retire years from now.

Even those modest proposals took four years for the Legislature to finally pass.

Though the $23.1 billion ASRS trust is currently underfunded and payments exceed contributions, ASRS Director Paul Matson said the trust is in no danger of becoming insolvent because its size is expected to grow and its investment values will recover. How pensions work

The largest of Arizona's six public-pension systems is ASRS, which covers 708 employers of state, county and municipal workers, public-school teachers and those working for Arizona's three state universities. Created in 1953, it has 92,216 retirees and 220,323 actively contributing members.

Three other systems cover elected officials, corrections employees and police and firefighters. Tucson and Phoenix run their own systems.

Public employees contribute a portion of their pay toward their pensions. Their employers also make contributions equal to or greater than the employees' amount.

All provide defined-benefit plans, meaning the retiree's benefits are guaranteed no matter how much he or she has paid into the system while working.

Under such a plan, each trust pays a pension whose annual amount is determined through a formula taking into account the employee's highest average wage at the end of a career, years of service and a benefit "multiplier."

For example, an ASRS retiree's benefit is calculated by multiplying the years of service by his or her average salary over the last three years of employment. That figure is then multiplied by the multiplier, a percentage set by state law and tiered by years of service.

So, an employee who has worked 20 years and had an average annual salary over the last three years of $40,000 would have a multiplier of 2.15 percent. That would result in a lifetime annual pension of $16,800.

The biggest public pensions are given to those who work longer and make more money at the end of their careers. There are 392 government retirees in Arizona who receive annual pensions in excess of $100,000, and the average pension for all six systems is $23,221, according to records the paper compiled.

In the ASRS system, the average retirement age is 60, and the typical retiree works 19.26 years. The average annual lifetime ASRS pension is $19,788.

In the private sector, a 401(k) would have to accumulate $273,752 to $283,327 over a 20-year period to get the same $19,788 annual pension at retirement, according to Michael Juilfs and Jim Dew, certified financial planners who operate separate Scottsdale firms.

For the private employee, the money would last 19 to 20 years, assuming modest interest-rate gains during retirement. The calculations, however, are based upon retiring at 65 - common in the private sector but five years later than a typical ASRS retiree.

"Public employees have a better deal than they realize, and they are not that low-paid," Juilfs said. Insufficient funds

Because of the recession and years of low investment returns, Arizona's public-pension funds are now considered underfunded.

Ideally, a trust is 100 percent funded, meaning the current value of the assets in the trust is equal to the pension cost calculated for all current and future retirees. Pensions funded at 80 percent or higher are considered healthy by industry standards.

As investment values slide, extra money has to come from somewhere.

Each trust has different contribution rates for employees and employers.

In five of the six systems, the employer has a higher contribution rate than the employee. Only ASRS has matching contribution rates.

That ASRS rate in 2000 was low because the 1990s stock-market boom provided an investment surplus for its trust. Back then, the combined contribution rate, the total from employees and employers, was 4.34 percent. Today, it is 19.2 percent, with each side contributing half, or 9.6 percent. Matson projects the combined contribution rate, which includes a small amount going to retiree health-insurance cost, will steadily increase to 22.96 percent by 2018, then decline as the trust's financial health improves.

Even with far higher contribution rates, the ASRS trust's assets cover only 75 percent of its liabilities.

Matson chiefly blamed stock-market crashes in 2001 and 2008 for the ASRS trust's underfunding, and he said earnings in three other years did not meet projections of 8 percent growth.

Most of Arizona's other public-pension funds are in worse shape. The Public Safety Personnel Retirement System has the worst funding ratio, at about 66 percent.

During the past 30 years, many private businesses have dumped similar defined-benefit pension plans for defined-contribution plans such as 401(k)s. Employers make set contributions to employees' individual retirement accounts but are not responsible for guaranteeing their retirement income or earnings growth.

In 1980, 84 percent of private-sector employees had defined-benefit plans, according to the U.S. Bureau of Labor Statistics. By March 2009, the most recent records available show, that number dropped to 21 percent.

Recent federal records show 84 percent of state and local government workers still have defined-benefit plans.

"Pension benefits have been cut so much that it appears firemen and teachers have a golden parachute when they really don't," said Elizabeth Ashack, a Bureau of Labor Statistics economist. "For them, it's just the way it used to be."

The Arizona National Federation of Independent Business said none of its 7,500 members offers a defined-benefit plan.

"It's becoming extinct in the private sector, especially for small businesses," said Farrell Quinlan, the federation's Arizona director.

Matson, the ASRS director, defends defined-benefit plans, saying retirees with pensions are less likely to be dependent on government services when they retire. He added that defined-benefit plans provide better long-term security for retirees and they typically are better managed than defined-contribution plans. Big payouts

The system is providing many employees a comfortable retirement. Meanwhile, taxpayer costs are rising, with the system paying out more than it is taking in. In fiscal 2009, for example, ASRS contributions from employers and employees totaled $1.6 billion. Its benefit payouts: $2 billion, further depleting the trust.

Public-sector retirees' pensions benefits are guaranteed for as long as they live, and surviving spouses collect some benefits even after the retiree dies.

The largest annual pension in ASRS goes to Carol Peck, who retired as superintendent of the Phoenix-area Alhambra Elementary School District in July 2002 with 35 years of service. According to ASRS records, she had an ending salary of $275,022.

Now chief executive of the Rodel Charitable Foundation of Arizona, she receives a $226,422 annual pension.

Peck, who received numerous professional accolades, including national superintendent of the year, said in an e-mail response that her salary was above average compared with other superintendents but was "determined to be commensurate with my performance." She also wrote that teacher and staff salaries, as well as student performance, were above average at Alhambra. Peck declined further comment.

Traditionally, public-employee pension systems were recognized as a way to overcome inequities between lower public-sector salaries and higher pay in the private sector. However, that inequity is no longer the case in Arizona, according to the U.S. Bureau of Labor Statistics.

The average state-employee salary in 2009 was $46,841, and the average municipal-employee salary was $42,668. In the private industry, the average pay was $42,090. Public costs

As governments juggle their budgets to keep their employees' pensions intact, they have simultaneously found themselves cutting public services because of shrinking revenue and a lingering economic downturn.

At the local level, cities have cut library hours, closed recreation facilities, curtailed public-transit spending and furloughed or laid off employees.

The state has cut health care for needy families, shuttered some state parks and motor-vehicle registration branches, trimmed law-enforcement and prison budgets, and laid off hundreds of workers.

Arizona still faces a combined budget deficit estimated at $2.25 billion this year and next. Gov. Brewer has said public education, health and welfare programs all are likely to see significant reductions in 2011.

As state officials slashed budgets in recent years, they repeatedly argued that they had to cut public services because huge portions of their budgets were off-limits. Spending approved by voters or otherwise guaranteed cannot be cut.

A large portion of that off-limits spending goes to pensions. But cutting that spending is difficult because pension costs are layered throughout dozens of government-agency budgets rather than being lumped together as a single expenditure. Solutions

Along with a weak economy, Arizona lawmakers shoulder some of the blame for the pension imbalance. In 2001, they permanently increased the largest system's multiplier, which increased retiree payouts. Three years earlier, they successfully asked voters to approve a constitutional amendment that does not allow public-employee pension benefits to be diminished.

Since then, they have done little to soften the financial impact on taxpayers.

Adams, the House speaker, said that while lawmakers can tweak the pension systems, they likely will need to ask voters to change the state Constitution.

"If we are going to have any fundamental reform, the voters will have to get involved," Adams said. "They need to remove the roadblock so the Legislature can do something different like have a defined-contribution plan."

The governor said Arizona's pension systems are in better shape than other states', but "that doesn't mean we don't need to go in there and look at this and get the discussion on the table and fix it."

The Arizona Chamber of Commerce has openly encouraged lawmakers to consider new public retirement plans that combine a defined benefit and a defined contribution.

Suzanne Taylor, senior vice president of public policy for the chamber, said the current system is "not a sustainable path" for taxpayers.

Retirement system board member McCarthy, a limited-government activist, said lawmakers must act quickly when the session begins in January.

"We are not talking about small parts of state and local governments," he said. "We are talking about extraordinary costs, and people are finding out these things are choking state and local budgets. The person taking it is the taxpayer."

Reach the reporter at craig.harris@arizonarepublic.com or 602-444-8478.

Arizona Retirement Systems Article - Part 2 of 8

The average annual pension for a former elected official is $40,069. The highest is $216,424.

Source

Craig Harris

The Arizona Republic

There was a move in 2002 when Jane Dee Hull was Arizona's governor to raise her $95,000 salary because it was among the lowest of the nation's governors.

The raise never materialized. But thanks to a generous pension system for Arizona's elected officials, Hull now makes more in her golden years than when she served in office.

The generosity of that system is evident from a snapshot of its cost. Since 2000, the amount of public funding needed to maintain the elected officials' retirement system has increased by 325 percent, from $4.1 million to $17.5 million a year, according to records obtained by The Arizona Republic.

Contributing factors: regular cost-of-living increases that outpaced inflation and the pension's investment losses.

The average annual pension for a former elected official is $40,069. The highest is $216,424.

The Republic, as part of an investigation into the state's public-pension systems, found at least 43 elected officials of the 500 who retired since 2000 earn more from their state pensions than when they served in office.

Three-fourths of those 43 officials are judges who, depending on the Arizona county, run for election or are retained by voters. They are enticed to leave the bench after 20 years because they, and other elected officials, are able to retire on a pension that pays them 80 percent of their final annual salary in the first year alone, before any cost-of-living adjustments kick in.

"That's pretty good to get 80 percent," said Anthony Webb, an economist at the Center for Retirement Research at Boston College. "That kind of pension is almost unheard of in the private sector, and it certainly is not available to regular government employees."

Politicians do well after leaving office because the Arizona Elected Officials' Retirement Plan has the richest payout formula of the six public-pension programs in the state. During the past decade, retirees also have benefited from 4 percent annual cost-of-living increases that outpaced inflation.

The plan covers elected officials in 21 cities and towns, all 15 counties and state government.

The Republic, through a public-records request, found 131 former elected officials receiving lifetime pensions in excess of $100,000 a year. That's roughly one out of every seven retirees in that system. Most of the higher pensions go to judges.

Hull served nearly 23 years in elective office as legislator, secretary of state and governor from 1997 to early 2003. She said she never ran for office to obtain a pension.

"I wanted to do those jobs, and the pension came with it," said Hull, whose current annual pension is $100,011.

Rich pension formula

Elected officials receive their lifetime pensions from a trust that is funded through contributions from their employers (taxpayers), deductions from their own salaries and a portion of state court fees. Another key funding mechanism is the interest earned by investing the trust funds.

The pension is a defined-benefit plan; it guarantees a level of payment upon retirement. The pension amount is calculated using a formula based on the retiree's average salary during the last three consecutive years in office, the number of years of service and a multiplier.

The initial pension cannot exceed 80 percent of the maximum average salary but can grow over time with cost-of-living raises.

The formula's emphasis on the average of the last three years of salary often prompts legislators, who earn $24,000 a year, to seek new elective positions that pay more toward the end of their careers, said incoming Senate President Russell Pearce, R-Mesa.

"Every time someone is term-limited, they scurry to run for another office for a higher pension," Pearce said.

While the pension formula is similar to Arizona's other public-pension systems, a key difference is the formula's multiplier.

The multiplier for elected officials, set by the Legislature, is 4 percent, roughly twice as high as those in other systems. When calculating the pension, that factor is multiplied by years of service and the average ending salary. For example, a person with 20 years' service and an average ending salary of $100,000 would earn an $80,000 pension.

By comparison, an Arizona State Retirement System retiree earning the same pay and with the same experience would retire with a $43,000 pension because the multiplier is 2.15 percent.

Maricopa County Presiding Judge Norm Davis believes the system is fair for judges, who could earn far more in the private sector as lawyers.

"Most people come to the bench after 20 years of practicing law," Davis said. "If you changed the system, you would discourage a lot of high-quality applicants. It's a reasonable system given the nature of the job."

Ken Fields, a Maricopa County Superior Court judge who retired in 2007, said some judges are earning more in their retirement because their wages were frozen for long stretches while in office and since retiring their pensions have been given cost-of-living increases. Fields' pension is slightly lower than the $135,444 he made the final year on the bench.

Low contributions

Elected officials contribute the smallest percentage of their income to their own retirement when compared with the other state-pension systems.

The 7 percent contribution rate for elected officials is lower than what employees pay in the Arizona State Retirement System (9.6 percent), Corrections Officer Retirement Plan (8.41 and 7.96 percent, depending on position), and Public Safety Personnel Retirement System (7.65 percent).

Only the municipal pension plans are more generous. All Phoenix employees and most in Tucson give 5 percent of their salaries to their pension.

In order to keep elected officials' pension-contribution rates low, the governments employing them have had to increase their - the public's - subsidy of the system. That has been particularly true over the past several years, as the sour economy cut into investment earnings of the pension trust.

Cities and towns are now paying into the trust an amount equal to 29.79 percent of each elected official's salary, while state and county governments are paying 17.42 percent. In combination, their rate in the past 10 years has nearly tripled, from 10.2 percent to 28 percent.

In Phoenix, for example, the city is paying $26,215 this year toward Mayor Phil Gordon's eventual pension. His annual salary is $88,000. Maricopa County pays $13,344 annually for each member of the Board of Supervisors. Each is paid a $76,600 annual salary.

The rise in cost has Jack Cross, former administrator for the pension plan, rethinking the merits.

Cross, who retired in 2002 and now runs an investment firm, has the distinction of taking home the largest pension from the system he once administered. Although not elected, Cross was part of the plan because of his position as its administrator.

When he retired, his pension was $164,464, but seven cost-of-living raises of 4 percent each have boosted that to $216,424.

Cross concedes it is probably time to change the system.

"When things get rough like this, it sure points out that there may need to be a different mechanism," he said.

Arizona Retirement Systems Article - Part 3 of 8

Source

Arizona pension plan for police, fire adds to cost

Craig Harris

The Arizona Republic

Fearing a potential exodus of police officers and firefighters eligible to retire, the Arizona Legislature a decade ago created the Deferred Retirement Option Plan as a way to keep experienced public safety officers on the job.

The deal seemed simple: If officers agreed to work up to five extra years before retiring, the DROP program would pay them a lump sum in addition to their annual pension when they finally retired.

The program remains enticing. Today, participants' lump-sum payments at retirement average $268,938 for all public-safety officers. The average payment for police officers is $247,422, and $314,338 for retiring firefighters.

Officers enrolled in DROP also draw their annual pensions once they step off the job.

The lump-sum payouts, combined with cost-of-living increases that have outpaced inflation and multiple years of investment losses, caused taxpayers' costs for the program to soar.

As a result, the Public Safety Personnel Retirement System is so underfunded that even its top administrator says the overall pension program needs to be changed, perhaps drastically, to stem the expanding public subsidy.

"The plan is upside down," said Jim Hacking, its director. "It's not reasonable or realistic for our constituent groups or anybody to say, 'We will not do anything.' It's not a rational response."

As DROP was rolled out during the past decade, public-safety retirees received cost-of-living adjustments to their primary plan, and average annual pension benefits grew to $44,025 - the highest among all Arizona public pension systems.

The public's tab through employer contributions for the combined pensions, cost-of-living increases and DROP payouts in the past decade has grown from $46.8 million to $316.2 million a year - a spike of nearly 576 percent, or 22 times more the rate of inflation during the same period. Those increasing costs mirror the growth in Arizona's five other public-pension systems. An Arizona Republic investigation has found the pension systems are costing taxpayers at least $1.39 billion a year - more than the current state budgets for higher education, corrections or a health-insurance program for the poor.

Byron Schlomach, an economist with the Goldwater Institute and a critic of the state's pension systems, said the public-safety benefits are overly generous and the burden for taxpayers was unreal.

"It's nice they have figured out a way to rob us," said Schlomach. "This is ridiculous. How can anybody justify this?"

Hacking said there was "no question DROP added some liabilities" to the public-safety pension trust, but he believes the system has been hurt more by investment losses at the beginning and end of the last decade due to stock market conditions, and by guaranteed cost-of-living increases to retirees.

Supporters of DROP say it has helped police and fire departments retain experienced talent while allowing municipalities to better plan when to add staff.

"Police officers were leaving as soon as they were eligible to retire," said Jim Mann, executive director of the 6,500-member Fraternal Order of Police. "There's a real need to keep experienced officers on the job because it costs so much to train new officers."

Tim Hill, president of the Professional Fire Fighters of Arizona, which also has 6,500 members, said the lump-sum payments were misleading. While they sound high, he contends the program saves the pension system money in the long run. He said once public safety officers opt into DROP, they no longer continue to accrue credits for their years of service. By comparison, he said, officers who remain a full 25 years or more and do not take part in DROP have their pensions calculated based on total years of service, giving them larger pensions that, over time, may eclipse DROP's upfront cost.

Neither employee organizations nor the pension system could provide precise estimates of whether DROP has been a net expense or savings for the pension system. However, around the same time the public-safety system instituted DROP, the Arizona State Retirement System, the largest public pension program, rejected the same program because its director said it was too costly.

While the payouts are rich, participation in DROP in recent years has fallen after steadily growing from 2002 to 2006, when a record-high 1,746 members were enrolled. Last year, participation fell to 1,044, or roughly 5 percent of the total active membership in the pension program.

Hacking said enrollment fell because in the past few years there have been fewer employees with the required 20 years of service to enter the program.

How it works

The Public Safety Personnel Retirement System allows its members to enter DROP after 20 years of service. They then must remain with their employer for up to five more years, and during that time neither the employee nor employer contributes to the retirement system.

Upon entering DROP, the employee's pension is calculated based on years of service up to that point and the highest consecutive three years of compensation. The amount the employee would have received in a pension is essentially set aside by the public-safety pension system, and the money is guaranteed to increase at the trust's assumed rate of growth, currently 8.25 percent.

The DROP payments are higher for those who come into the program with a larger salary and more years of service.

By law, the interest is paid even if the assumed rate doesn't materialize. That means there's no risk to the employee, but it's a big problem for taxpayers when the stock market drops, which caused negative returns for the trust in 2001, 2002, 2008 and 2009. When the system loses money, employers using tax dollars have to pay more to make up the losses.

Anthony Webb, an economist at the Center for Retirement Research at Boston College, said the guaranteed growth rate for DROP participants is unheard-of in the private sector unless money is placed in high-risk investments, but even then, there are no guarantees.

Hacking said the interest rate is set by state law, and he said the pension system is well diversified and not dependent on high-risk investments.

Along with the DROP benefit, participants have other benefits unique to public-safety personnel. Because of the recognized physical stresses of police and firefighting jobs, and the dangers of being killed on the job, public-safety pension systems generally have allowed participants to retire earlier than those in the private sector.

The average age for public safety retirees is 50.8 years, and the pension continues until a person dies. At that point, a spouse receives 80 percent of the pension until that person dies and the pension payments stop.

Benefits for DROP participants skyrocketed in 2007, when some of the first participants left the program and collected payouts after participating for the maximum five years.

That year, DROP benefits totaled $151.9 million, a 566 percent increase from the previous year when $22.8 million was paid. In 2007, DROP accounted for one-third of all pension benefits paid to police and firefighters. The previous year, it accounted for just 8 percent of all benefits.

DROP payments declined to $98 million and $91 million, respectively, in the past two years. But they still accounted for roughly 21 percent of all pension benefits for 2008 and 2009.

'Unsustainable'

A consequence of the large payouts and diminished investment earnings is that the pension trust currently is funded at just 65.8 percent, the lowest among the six public pension systems in Arizona.

That means the money now in the trust would pay for only 65.8 percent of the system's current liabilities if they all came due at the same time.

The goal is to be 100 percent funded; 80 percent is considered healthy by industry standards.

The closer a pension is to being fully funded, the lower the contribution rates for members and their employers.

Arizona law sets trust contributions by police and firefighters at 7.65 percent of their wages. If investment returns are poor and the trust is underfunded, the employee contribution is not raised.

Instead, any shortfall is generally made up by employers through tax dollars, though the trust also is partly funded through taxes on homeowner-insurance policies.

Employers currently contribute an amount equivalent to nearly 21 percent of an employee's gross wages. That's roughly four times the rate 10 years ago.

But Mann, of the Fraternal Order of Police, countered that while employer contribution rates may be high now, there were times when police officers and firefighters paid higher rates than their employers. When employers had lower rates, he noted, they were not asking to pay more to make it equitable.

Employer rates are projected to rise to 37.5 percent by 2024 in order to make up for the system's current indebtedness.

One reason for the increase: cost-of-living raises have been given to public-safety pensioners for 24 consecutive years.

In 2009, each retiree received an additional $1,761, a flat amount calculated on the average pension.

Hacking said the current overall program was "unsustainable," and he said he would work with employees and employers to propose changes to the Legislature next year.

He declined to disclose specific reforms, but he said it was possible DROP "will not look like the one we have now."

Reach the reporter at craig.harris@arizonarepublic.com or 602-444-8478.

Source

Arizona pension funds: 8 officers got pension, paycheck

by Craig Harris - Nov. 16, 2010 12:00 AM

The Arizona Republic

At least eight high-ranking Arizona police officials received large deferred-pension payments when they retired, then went back to work for the same employer, allowing them to collect a paycheck and a retirement payout, The Arizona Republic has found.

Jack Harris, Phoenix's public-safety manager, is the most scrutinized in that group. He is being sued by Judicial Watch, a Washington, D.C.-based anti-corruption group. The suit claims he is violating an Arizona law that prevents public employees from drawing pension benefits while working in the same position from which they retired.

Tom Fitton, Judicial Watch president, said he was unaware if the others were in the same situation as Harris, who in January 2007 retired as the city's police chief and shortly thereafter became public-safety manager overseeing the Police Department.

Harris declined to talk about the suit, but said his current position was created by the then-city manager, legally vetted by attorneys and approved by the mayor and City Council.

When Harris retired, he received a lump sum of $562,964 from the Deferred Retirement Option Plan. He now receives a $193,378 annual salary in addition to his $95,716 annual pension from the Public Safety Personnel Retirement System.

"It's an outrageous misuse of tax dollars," Fitton said.

Other law-enforcement retirees who participated in DROP and continue working:

- Richard Miranda. The ex-Tucson police chief is now the city's deputy city manager, whose responsibilities include overseeing the police department. He got $511,570 from DROP in June 2008. Salary: $166,941. Pension: $134,054.

- Jesse Locksa. The ex-Maricopa County Sheriff's Office deputy chief is now a dispatch commander. He received $576,463 from DROP in January 2007. Salary: $70,969. Pension: $97,890.

- Timothy Overton. The ex-Maricopa County Sheriff's Office deputy chief is now a forensics commander. He got $445,518 from DROP in August 2007. Salary: $70,969. Pension: $75,186.

- Gerard Sheridan. The ex-Maricopa County Sheriff's Office executive chief is now acting chief deputy. He got $440,441 from DROP in November 2008. Salary: $143,000. Pension: $77,239.

- Lawrence Black. The ex-Maricopa County Sheriff's Office deputy chief is now an administrator on paid leave amid an internal investigation. He received $386,955 from DROP in July 2007. Salary: $79,996. Pension: $64,089.

- Steven Werner. The ex-Maricopa County Sheriff's Office deputy chief is now an intelligence analyst. He received $365,272 from DROP in January 2008. Salary: $62,940. Pension: $62,261.

- Rollie Seebert. The ex-Maricopa County Sheriff's Office deputy chief is now a detention academy commander. He received $270,405 from DROP in November 2006. Salary: $82,894. Pension: $61,983.

Arizona Retirement Systems Article - Part 4 of 8

Arizona pension payouts bolstered by Phoenix

Craig Harris

The Arizona Republic

Phoenix officials repeatedly said former City Manager Frank Fairbanks turned down raises because of tough times during the last few years of his tenure even though he was underpaid compared with counterparts across the country.

But records obtained by The Arizona Republic while researching public-pension practices show Fairbanks actually accepted raises and bonuses, and received pay for unused vacation and sick leave, to earn $1.3 million during his final three years before retiring Nov. 5, 2009. His reported annual salary was $236,998, but that was only his base pay.

By significantly boosting his pay toward the end of his career, Fairbanks spiked his annual pension from the City of Phoenix Employees' Retirement Plan to $246,813 a year - the largest pension among all six public-pension systems in Arizona. That pension amount is roughly $47,000 more than the pension provided to every living former U.S. president.

Fairbanks' pension is one high-profile example of the rising costs to taxpayers of Arizona's six public-pension systems. An Arizona Republic investigation has found that increased benefits combined with declining pension-system investments over the past decade has led to soaring costs for taxpayers to keep the public-pension systems afloat. Last year's tab: $1.39 billion.

In Phoenix, the municipal pension program allows employees to add deferred compensation, fringe and travel allowances, and sick leave into their benefit calculations to boost their pensions.

This practice helps explain why Phoenix retirees receive on average about $10,000 more a year than retirees in the Arizona State Retirement System, the state's largest, covering state workers, public-school teachers and employees in most other Arizona cities.

Fairbanks insisted he never took a raise, that the increased money was "retention pay." City records call the pay hikes "performance enhancement."

"I made a fair amount of money, but the last time I checked there were 40 or 50 at the state who made more than me. I don't know if I made 10 percent of what the football coaches at ASU and UofA made. What I did impacted the community a little more than what the football coaches did," Fairbanks said. "Any evaluation done by the city, we came out the best in the country or the best in the world. The point is things weren't all that bad. The city was doing good work."

Along with Fairbanks, 27 other Phoenix retirees receive six-figure retirement checks.

Taxpayers pay more

The city's pension trust is underfunded and has been battered by lower-than-projected investments, causing city taxpayers to pay more into the system.

In the past 10 years, the city's (taxpayers') cost to fund pensions for Phoenix employees increased 277 percent to $88.1 million a year. This fiscal year, which ends June 30, 2011, the cost is projected to hit $93.7 million or close to what the city spends to fund all of its parks programs.

While pension costs keep rising, the city this year increased rates and fees, imposed a 2 percent tax on food in April, and reduced library hours and parks and transit services to balance its budget. City employees, who have seen no reductions in their pension benefits, took compensation reductions of about 3 percent.

Councilman Sal DiCiccio, a critic of the city's spending practices, said the public should be outraged.

"They will demand change when they see retirees are making $100,000 in pension benefits," DiCiccio said. "The city is out of touch with the pain the public is going through."

In response to The Republic's examination of the city's pension system, Mayor Phil Gordon said he would form a blue-ribbon pension task force to examine the rising costs for Phoenix. [Mayor Phil Gordon starts to shovel the BS - Yea sure we will form a blue=ribbon task force that will do nothing! Yea sure!!!!]

"It's something we have to address," Gordon said. "You brought it to light."

City Manager David Cavazos said he received approval from council members Sept. 22 to hire a consultant to review pay and benefits, including pension payouts, for Phoenix employees and to compare compensation costs with national standards. That approval came more than a month after The Republic filed a public-records request seeking information on pension benefits paid to Phoenix retirees.

Add-ons raise pay

While Fairbanks was in office, only his base salary was publicly disclosed.

Through public-records requests, The Republic discovered recently that Fairbanks' average annual total compensation during his final three years as a city employee was $434,828, well beyond his reported base pay. The final three-year average is a key factor, because it is that number that is plugged into a formula to determine a retiree's annual pension.

The amount of Fairbanks' final paycheck: $351,345, which included a payment of $237,654 for sick leave he never used.

During those last three years, he accepted four raises totaling $17,321 and two bonuses worth $40,000 each, records show.

The sick-leave payout, cashing in of unused vacation time, his car and phone allowances, and his raises and bonuses all were added to his base salary to calculate Fairbanks' final three-year average pay on which his pension benefit is based.

During his final year, meanwhile, Fairbanks froze all pay raises for those in city management, citing severe budget problems.

The city for more than a month refused to release Fairbanks' compensation records, despite two public-records requests. After the newspaper threatened the city with legal action for not complying with the Arizona Public Records Law, Mayor Gordon ordered release of the records.

The mayor said he was unaware Fairbanks had received such a large final check, though he was aware that the final payment included a $40,000 bonus the City Council had approved. [Yea Mayor Phil Gordon was unaware off it! Yea sure! Mayor Phil Gordon shovels the BS again!] All other additional pay beyond his base pay was based on Fairbanks' employment contract with the city, records show.

The mayor said the practice of cashing out unused sick leave and vacation should end because the city cannot afford it. He also said changes should occur to the pension system, because "it can't sustain itself." [Mayor Phil Gordon shovels the BS again! Yea sure we are going to end it!]

Toni Maccarone, a city spokeswoman, defended Fairbanks' compensation, saying he was city manager for 19 of his nearly 38 years with the city, managing a $3 billion budget and more than 14,000 employees.

"His compensation was a fraction of the amount paid to CEOs with similar levels of responsibility, and his pension was part of that compensation," Maccarone said.

Fairbanks, 64, said his pension was large, but not out of the ordinary for someone with his length of service. "I had been discussing retirement for at least five years before I left, and the City Council asked me to stay on. I passed up job offers to go elsewhere," said Fairbanks. "I was paid less than city managers in similar sized cities."

Fairbanks, however, was referring to his annual base pay.

Bob Murray, a consultant who recruits city managers and helped negotiate the contract for Cavazos, the current Phoenix city manager, said most city managers earn about $220,000 a year. He said those at the top of the scale earn about $350,000, and in a few rare cases total compensation exceeds $400,000 a year.

Murray said it is common in California for city managers to cash in sick leave and vacation to spike pensions, but that it is rare in other parts of the country.

Rising pension cost

Phoenix's pension program was created in 1953 by a vote of city residents. It is a defined-benefit plan similar to Arizona's five other public-retirement systems. It pays retirees lifetime annuities based on a formula that includes each retiree's final average compensation, years of service and a multiplier.

There are 4,931 retirees now drawing pensions, and the system is funded at 69.3 percent. That means if everyone in the Phoenix system cashed in their pension, the plan has enough money to pay just more than 69 cents on the dollar.

A fully funded system is at 100 percent. When that ratio falls, then contributions must increase either from employees or their employer. Retirement experts say a system is considered healthy if funded at 80 percent or better.

In the past 10 years, the cost for Phoenix residents to fund the city's pension system has increased because the amount the city contributes to the pension fund for each employee has more than doubled, primarily because of investment loses during the market downturn. The contribution now stands at an amount equal to 16 percent of each eligible employee's wages. That will increase to 18 percent next fiscal year.

The amount each employee contributes to that fund, meanwhile, remains at 5 percent of his or her wages. That rate is among the lowest in the state.

In addition to funding its own municipal pension fund, the city has been hit with rapidly rising costs in other Arizona pension systems to which it contributes on behalf of its police, firefighters and elected officials.

During the past decade, a period marked by rapid growth in the city, Phoenix's contributions to the public-safety pension system increased nearly 13 fold to $93.2 million, while contributions to the state pension system for elected officials nearly quadrupled to $136,142.

DiCiccio said he is fed up with what he called a greedy pension system taking advantage of taxpayers.

Gordon disagrees.

"We have 14,000 employees, and we have a pension system and salary system where many employees are underpaid, both in comparison to the public sector and private sector," Gordon said. "We have employees who work much harder than any other organization."

Yet records obtained by The Republic tell a different story.

They show the average salary in 2009 for a Phoenix worker, not including police and fire, was $53,906. The average pension was $29,880 a year. The average retirement age: 58.9.

The average salary in 2009 for a state employee was $46,841. The average pension in the Arizona State Retirement System, which covers state employees, was $19,788. The average retirement age: 60.4.

In private industry, the average salary in Arizona was $42,090, and only one in five employees has a pension similar to the city's. The U.S. Bureau of Labor Statistics and the U.S. Social Security Administration do not keep records on the average age of retirees in the private sector. Many financial planners say it is around 65.

2nd retirement plan

Along with its pension plan, the city offers an additional plan to enhance employee retirements. There are 10,706 workers enrolled in the plan, which will cost the city up to $38.4 million this fiscal year. That equals three-fourths of the $50 million generated from the new Phoenix food tax.

The average salary of those employees is $64,137, according to records obtained by The Republic.

For each participating employee, the city contributes to a 401(a) deferred-compensation plan that is similar to a 401(k) plan in the private sector.

The percentage contributed on behalf of each employee is determined by negotiations between employee groups and city management. Generally, the higher the salary, the higher the percentage, which peaks at 9.6 percent for police, fire and general city executives. For employees at the higher end of the pay scale, that means the city puts $96 into their 401(a) for every $1,000 of pay.

The city does not, however, require a matching amount to be contributed by the employee. Instead, it is a straight payment on behalf of each employee, with managers and executives receiving the largest.

Cavazos, the city's highest-paid employee with a $236,998 base salary, has a contract calling for the city to contribute an additional amount equal to 11 percent of his annual pay, or $26,070, into a deferred-compensation account. He is the only employee at that contribution level. Cavazos also is reimbursed 3 percent, or $7,110, of his required 5 percent annual contribution to the city's main pension system, meaning he only pays in 2 percent.

Cavazos said it is normal and customary for a city manager to receive a higher compensation package, and he has taken required furlough days like all other executives and managers. He also said he would neither seek nor accept any bonus or salary increase this year.

Changing the system

DiCiccio said Phoenix's pension system needs to be fixed. But he said City Council action is unlikely. Instead, he believes it will take a citizens' initiative.

While DiCiccio is an outspoken critic, he receives a $7,477 annual state pension for elected officials from his previous tenure on the council. And since being appointed in February 2009, he has received a $61,600 council salary, making him what is commonly referred to as a double dipper.

DiCiccio provided The Republic with records showing he unsuccessfully tried to stop his state pension after he returned to office, and he has donated $3,000 of his pension to the city's general fund since taking office again.

Just as DiCiccio by law cannot stop his pension, Cathleen Gleason, Phoenix's budget and research director, said the city's charter prohibits Phoenix from raising contribution rates on employees currently in the pension system. However, the city could make new hires put a larger share of their pay into the system, and Gordon said he could support a two-tiered system in which longer-tenured employees paid one rate and newer employees another.

Tucson, the only other Arizona city with its own pension system, implemented changes for anyone hired after June 30, 2006, after watching its pension costs steadily increase.

Tucson's new employees pay a variable contribution rate that is nearly twice as high as the 5 percent rate for employees hired before the cutoff.

Michael Hermanson, administrator for the Tucson Supplemental Retirement System, said his city wanted to have all employees pay a higher rate, but that it likely would have faced a court challenge.

Still, by making the change it did, that helped Tucson's contributions decline from a high of $24.3 million in 2006 to $21.3 million in 2009.

More on this topic

Costs rise Valley-wide

Most Valley municipal employees are part of the Arizona State Retirement System, which has raised contribution rates on cities with budget shortfalls. Cities also contribute to state systems for public-safety officers, elected officials and corrections officers.

Mesa's total contributions for public employees' pensions have risen more than 400 percent in the past decade, and this year's contribution is estimated at $30.8 million. Meanwhile, Mesa has reduced its general-fund spending by $84 million since January 2009.

Chandler taxpayers paid $12.9 million this year into city pensions, up from $3.1 million 10 years ago. Meanwhile, the city this year reduced staff by more than 100, has not given cost-of-living raises for more than two years, and is gradually increasing employee contributions for health benefits, said Management Services Director Dennis Strachota.

In Peoria, pension contributions for public employees and elected officials jumped from $1.8 million in fiscal 2001 to $8.4 million in fiscal 2010. Peoria Budget Director Jeff Tyne said the contribution rates over the past several years are "taking a larger portion of the budget . . . It's a cost driver we have to work through, but we just try to manage within our means."

-Edythe Jensen, Gary Nelson and Sonu Munshi

Arizona Retirement Systems Article - Part 5 of 8

That is not a problem in it's self, but when parents are forced to pay these teachers, even the teachers can't, won't or don't educate their kids it becomes a problem.

The solution is easy. Privatize the the government schools.

Of course even after privatizing the government schools we still have the problem of the government rulers picking our pockets and putting the money into theirs but that is a 2nd problem which is just as bad as the government schools.

Source

Some retired teachers rehired while drawing pensions

Craig Harris

The Arizona Republic

Retired teachers are returning to classrooms across Maricopa County, some making $100,000 a year by collecting a pension and a paycheck at the same time, while retired administrators are doing the same thing and making more than $200,000.

Welcome to what is commonly known as double-dipping, education style.

With the Deer Valley Unified School District leading the way, nearly every public-school district in Maricopa County is using a legal loophole to allow senior educators to simultaneously retire and remain on the job without interruption, records obtained by The Arizona Republic show.

That means they can begin collecting their publicly funded pensions without ever missing a regular paycheck. In most cases, it works this way: When they retire, they are hired by a private firm that contracts their services back to the school district from which they retired. Instead of being paid by the district, they are being paid by a firm that is being paid by the district.

The loophole itself is not significant. State law says that retired state educators only can come back to work part time through that arrangement during the first year of retirement. After that first year, though, they can return to working full time directly for the district.

What is more significant, critics say, is the financial impact, a blow the underfunded Arizona State Retirement System can ill afford.

There are more than 900 educators benefiting from the practice, and by law they stop contributing to the retirement-system trust the minute they retire. By law, their employer also stops contributions to the trust on their behalf.

As they continue to work, they are preventing new employees from getting those jobs - employees who, along with their employer, would be contributing to the pension system.

That means the burden of keeping the pension system financially healthy is shifted to other teachers and ASRS members, such as local and state government workers, whose contributions to their pension trust continue to go up.

It also shifts costs among ASRS employers. For example, school districts that don't allow double-dipping may find themselves contributing more to the trust to keep it healthy, and so might cities and the state.

School districts that allow the practice counter that they are saving money by not having to make pension contributions. They also say the cost usually is less to bring back retired educators because they work for a smaller salary and most don't receive health-care benefits.

The practice of double-dipping is one example of problems within Arizona's six public-pension systems. An Arizona Republic investigation has found that increased benefits combined with declining returns on pension-system investments in the past decade have led to soaring costs for taxpayers to keep the public systems afloat. Last year's tab: $1.39 billion.

The newspaper estimates that the practice of double-dipping is costing the ASRS trust at least $8.6 million in employee and employer contributions this year, based on public records obtained from ASRS and all Maricopa County school districts. Officials from ASRS do not keep records on how much money the system is losing from double-dipping, and they could neither confirm nor deny the newspaper's findings. But ASRS Director Paul Matson said it was a problem, and he will ask the Arizona Legislature to help fix it next year when lawmakers convene.

"It clearly violates the spirit of the retirement system," said Rep. John Kavanagh, R-Fountain Hills, the House Appropriations chairman during the Legislature's most recent session. "We provide a retirement system so when people are too old to work, they can have money to live off of. People who retire and go back to the same job are abusing that gift."

Andrew Morrill, president of the 31,000-member Arizona Education Association, agrees.

"We can't afford to do this," Morrill said. "You are putting greater pressure on the retirement system, and it will drive up contributions."

Policies vary

Teachers and other employees for public-school districts in Arizona are part of ASRS, which has 220,323 members including municipal, county and state employees. For the past five years, as the practice of educators double-dipping has gone on, ASRS retirees have not seen an increase in pension benefits because the trust is underfunded.

The other five public pension systems in Arizona also are underfunded, but policies on cost-of-living adjustments vary. For example, municipal retirees in the Phoenix and Tucson systems are not receiving pension increases, but retired public-safety, elected officials and correctional officers in three other state systems received increases July 1, their managers say.

In ASRS, workers and employers each contribute an equal amount to the pension trust. That amount is determined as a percentage of an employee's wages, and the eventual pension payouts come from a defined-benefit plan in which annuities never decrease.

The overall rate, which includes retiree health-insurance costs, has significantly risen during the past decade because of poor market conditions. The rate is expected to steadily increase to 22.96 percent by 2018 before declining as the trust's financial health improves, ASRS says.

The pension is a defined-benefit plan; it guarantees a level of payment upon retirement.

Some educators defend the practice of retiring and then returning to work.

" 'Double-dip' is a negative comment for the people who are now taking the opportunity for phased retirement and have qualified for their pensions," said Sandra McClelland, founder of Smartschoolsplus Inc., which helps retired educators return to school districts. "They could leave the district and go to a private enterprise. This is a way for the district to get a return on their investment."

Officials at ASRS, the state's largest pension system, said double-dipping reduces contributions, but they believe the amount is insignificant to the $23.1 billion trust. Officials have not calculated precisely how much money is foregone, however.

The Republic determined the loss among Maricopa County educators by filing public-records requests with the county's 57 school districts and obtaining the salaries of retirees still working. Those salaries totaled at least $44.8 million. By multiplying that figure by 19.2 percent - the current total contribution rate by both employee and employer to fund the pension - the missing payments would be $8.6 million.

Stretching the system

The Republic also found:

- There are at least 920 teachers, administrators and office personnel in 50 Maricopa County districts who are double-dipping. Seven districts had no employees double-dipping.

- The average salary for all school employees was $48,748.

- The average retirement benefit for those employees was $30,741. That's 55 percent more than the average $19,788 ASRS pension.

- The Deer Valley Unified School District had the most double-dippers with 140. Paradise Valley Unified School District was next at 137.

- Twenty-five districts employed more than 10 retirees.

Kevin McCarthy, an ASRS board member and president of the Arizona Tax Research Association, believes double-dipping hurts the pension system.

"You can argue whether or not double-dipping is fair, but that misses the point," McCarthy said. "The most important point is that it undermines the sustainability of the system. You can't dress it up as a positive, no matter how you look at it."

Matson said he would ask lawmakers to impose an "alternate contribution rate" that employers must pay if they hire ASRS retirees. He said the rate would help pay off the trust's deficit, and it would be roughly two-thirds of the contribution that the employer normally would make toward that employee's pension and long-term disability.

But that is also likely to drive up taxpayers' costs because employers will now be making new contributions for the double-dippers. The double-dippers still will not be making payments on their own behalf because they already receive pensions and cannot accrue any additional work credits to enhance those pensions, Matson said.

Matson said he would ask lawmakers to have the new rate take effect in a few years so it wouldn't hurt school districts that currently are struggling because of the economic downturn.

If the law were in place today, Matson said school districts would pay an amount equal to roughly 6.5 percent of a double-dipping employee's salary to the trust. For a teacher making $40,000, that would be a $2,600 contribution.

Matson said that for the past four years, ASRS has tried to get lawmakers to impose an alternative rate, but it was opposed by Smartschoolsplus, one of the main contractors that hires retirees and puts them back to work in school districts. The company now supports the plan.

Saving money?

In addition to Tempe-based Smartschoolsplus, the other main contractor that hires retirees and puts them back to work in their districts is Cottonwood-based Educational Services Inc. Both are run by former educators.

Each charges the school district a 4 percent service fee based on an employee's gross income.

John Tavasci is co-owner of Educational Services Inc. He started his business in 1999 and has worked with about 140 school districts in Arizona. Smartschoolsplus was founded in 2002, and it works with 80 districts around the state.

Both businesses began around the time Arizona was facing a teacher shortage, and they were instrumental in keeping educators in classrooms.

Tavasci said most districts hire retired educators at about 80 percent of what they were making prior to retirement, and many districts no longer pay health-insurance costs of the rehires, which results in more savings.

However, The Republic found some districts giving educators their full pay after retirement and returning to the same jobs.

Tavasci said the educators are "talented people the districts want to keep." He also said they paid into the retirement system, and it was their choice what to do after qualifying for a pension.

While school districts and the contractors say the districts are saving money because retired teachers are returning for reduced pay, Morrill said it would be less costly to hire a first-year teacher with benefits. And, Morrill said, that first-year teacher would be contributing to the retirement system.

'A bit of a hardship'

At the Deer Valley Unified School in north Phoenix, Superintendent Virginia McElyea said the deferred-retirement program saves the district money, and it retains valuable, experienced educators who return for less than what they were making.

"It's a way to make sure we leverage our investment in employees who have been with us for a while," she said.

The district's 75 retired teachers who returned to work average $45,378 in salary and $26,765 in pension, for a combined income of $72,143, records show.

The average Arizona teaching wage is $47,277, according to the Digest of Education Statistics. That average teacher, however, would be contributing $4,539 to ASRS, making their take-home pay less than the salary for teachers who double-dip in Deer Valley.

Maria Leyva, president of the Deer Valley teachers union, said the practice puts burdens on other teachers who have to contribute more to the retirement system.

"I don't resent them for doing it," Leyva said. "They are seen as mentors, and they help other teachers. But financially, it's a bit of a hardship."

In Deer Valley, the biggest combined annual income of nearly $300,000 goes to McElyea, who retired Oct. 28, 2006, but has remained in the top job.

McElyea receives a salary of $182,150 from the district and a pension of $112,355 from ASRS, according to records. As a working retiree, she also saves $17,486 by not contributing to ASRS.

McElyea said it was unfair to lump her retirement pay with her salary because the pension was earned from her years of service.

According to ASRS records, the average retiree gets back every dollar he or she contributed to the system within three to four years of retirement.

"What a person makes in retirement is irrelevant," McElyea said. "They would make that whether they are at home watching TV or doing something else. I really think if this is an issue that someone is concerned about at the state level, then the Legislature or state retirement system should look at it."

Reach the reporter at craig.harris@arizonarepublic .com. Data reporter Matt Dempsey contributed.

Arizona Retirement Systems Article - Part 6 of 8

Arizona's convicted officials still get pension from state

Craig Harris

The Arizona Republic Former Pinal County Manager Stanley Griffis stole from his employer, didn't pay income taxes and spent nearly three years in prison.

Griffis pleaded guilty in 2007 to six felonies, including theft and fraud from the county while he was working on behalf of taxpayers.

Today he's collecting a publicly financed pension of $110,857 a year from the Arizona State Retirement System.

The pension is guaranteed for as long as he lives.

"There's no provision in Arizona law that prohibits him from getting the money. I find it outrageous," said outgoing Maricopa County Attorney Rick Romley, who prosecuted Griffis. "This shows something is wrong with our system."

The Arizona Republic, as part of an examination into Arizona's public-pension systems, found Griffis and six former elected officials are receiving public pensions after being convicted of crimes they committed while in public office.

Their pensions, critics say, are an example of problems within the six-pension systems.

Increased benefits combined with declining returns on pension-system investments in the past decade have led to soaring costs for taxpayers to keep the systems afloat. Last year's tab was $1.39 billion.

Griffis collects the largest pension among those in the pension systems who were convicted of crimes. The average pension for that group is $54,777.

Unlike Arizona, 22 states deny a state pension to public officials who are convicted of crimes while in office or are removed from office for criminal activity, according to the National Conference of State Legislatures.

These "bad boy" laws appeal to the public, but there's an argument against such legislation, said Ron Snell, director of state services for the conference. Snell said someone in the private sector committing the same crime is not expected to forfeit a pension earned on the job.

"There's a question of justice and whether this is a form of vengeance rather than equal punishment," Snell said.

Griffis, who was released from state prison Feb. 22, could not be reached.

Romley has for the past few years called on the Arizona Legislature to change the law so public officials who have abused the public trust while working for the government cannot draw a state pension.

Arizona Senate President-elect Russell Pearce, R-Mesa, a former deputy sheriff, said in response to the Republic's investigation that he would work to do that, calling the pension paid to Griffis "insulting."

"You have honest people out there struggling, and you have a crook taking advantage of the system," Pearce said. "These abuses have to stop."

Paul Matson, the ASRS director, takes no position on the matter, saying it is up to lawmakers and the courts to determine whether a retiree should forfeit a pension.

Five convicted retirees are receiving pensions from the Elected Officials' Retirement Plan, while another, a former Apache County sheriff, is receiving a pension from the Public Safety Personnel Retirement System.

Tracey Peterson, chief operating officer for those two systems, said her organization does not take a position on whether a convicted public servant should forfeit a pension.

Griffis, 68, retired as Pinal County manager on Jan. 12, 2006, the same day an investigation was opened into allegations he may have put public funds to personal use. Though he went to prison in 2007, he continued to draw his pension while incarcerated. He was county manager from October 1989 until he retired.

The probe that led to his conviction found that between December 2000 and February 2004, Griffis stole $426,800 from the Superstition Valley Transportation Project, which was designed to assist the growing county with road improvements.

Griffis also was accused of using a Pinal County credit card for personal use, including a $600 National Rifle Association Lifetime Membership for himself.

As part of his plea agreement, Griffis agreed to pay $639,035 in restitution, including $37,044 to the Arizona Department of Revenue for taxes owed.

Nearly $602,000 was to reimburse Pinal County for stolen money and investigative costs. Griffis has paid $275,000, with $237,956 going to the county and the rest going to the state, according to Pinal County records. Romley, who was the special prosecutor in the case, said Griffis cited false wages to increase his pension, but ASRS was notified of the "pension padding" and his pension was reduced. However, his pension remains one of the highest among state retirees and is five times the average ASRS pension.

Public pensions in Arizona are based on a formula that typically includes a person's ending salary, years of service and a multiplier. The more an employee makes and the longer a person works, the larger the pension. Pensions also can be acquired earlier by purchasing extra years of service credits. Employees invest more money into the trust while they are working so they reach the retirement threshold for full pension benefits earlier than normal.

Griffis' pension was based on an ending salary of $152,747 and 38.57 years of service, according to ASRS. He purchased slightly more than 22 years of service for $284,373. The purchases were made from Feb. 2, 2002, to March 28, 2007, and it pushed his annual pension to $110,857. Griffis wrote two personal checks (totaling $28,654), deducted money from his salary ($44,028), and rolled over another retirement account ($97,537) to purchase credits, according to ASRS records. He also took two partial lump-sum payments ($114,154) against his retirement to buy credits, a common practice among ASRS retirees.

Source

Convictions don't halt officials' pension benefits

Craig Harris

The Arizona Republic A number of Arizona elected officials have been convicted of crimes while in office, but they still receive publicly funded pensions. Five belong to the Elected Officials' Retirement Plan, another to the Public Safety Personnel Retirement System. Details about them and their current annual pensions come from the Arizona Attorney General's Office, the pension systems and previously published reports. They are:

Philip Marquardt: This 20-year veteran of the judiciary resigned in 1991 after pleading guilty to conspiracy to possess marijuana, a felony. He was sentenced to three years' probation and fined $27,400. The former Maricopa County Superior Court judge began collecting pension benefits in July 1991, less than a month after he quit. Pension: $70,212.

Sandra Dowling: The former Maricopa County schools superintendent was sentenced in August 2008 to four months and one week of probation for a minor misdemeanor - hiring her daughter. She was indicted in November 2006 on 25 felony counts related to the operation of the Thomas J. Pappas Maricopa County Regional Education Center serving homeless children. In the end, all felonies were dismissed. Dowling disputes there was any wrongdoing, and is suing the county, alleging negligence, malicious prosecution, abuse of process and several constitutional violations. She retired Jan. 1, 2009. Pension: $54,240.

Brian Hounshell: The ex-Apache County sheriff in 2005 was indicted on charges of fraud, theft and misuse of county funds. He pleaded guilty in September 2007 to felonious misuse of public money, and agreed never to hold public office again. He was sentenced to probation, and the felony later was reduced to a misdemeanor. He retired Oct. 1, 2007. Pension: $50,792.

Douglas Martin: One month after he retired, the former Arizona State Mine Inspector in March 2007 pleaded guilty to conflict of interest, a low-level felony related to the way he obtained vehicles for his office. He was sentenced to probation and a deferred jail sentence. Martin, who served 18 years as mine inspector, originally was charged with nine counts of fraud and theft for bypassing state procurement procedures in leasing four vehicles used by mine inspectors and trainers. Pension: $40,497.

David Petersen: The former state treasurer in October 2006 pleaded guilty to knowingly filing a false or incomplete financial-disclosure statement, a misdemeanor, and resigned. The plea came after an investigation of allegations of theft and fraud, mostly involving Petersen's connections with the non-profit Character Training Institute in Oklahoma City. Petersen, who also served in the Arizona Legislature, retired Dec. 1, 2006. Pension: $30,937.

Robert Canchola: The former Santa Cruz County schools superintendent pleaded guilty to conflict of interest, a low-level felony, in April 2006, and resigned. Canchola admitted that while superintendent, he failed to notify county officials that his wife had a substantial interest in a consulting firm that was awarded a schools contract. He retired Oct. 1, 2006. Pension: $25,903.

Arizona Retirement Systems Article - Part 7 of 8

Government of the people, by the elected officials and appointed bureaucrats for the elected officials, appointed bureaucrats and special intrest groups that helped get them into power. - Michael Kaery

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Big pension costs also a burden for other states

Craig Harris

The Arizona Republic

Arizona has problems with its public-pension systems, but some states have more dire concerns as their pension trusts teeter on the brink of insolvency.

Three states have taken the unusual step of stopping cost-of-living raises for public employees already in retirement, while a few others have required employees to work longer to claim their benefits.

One of the reasons Arizona's pension trusts are in better shape than those in some other states is because their protection was mandated in a public vote 12 years ago. That vote may be coming back to haunt Arizona taxpayers, as it forces them to pay a growing share of the cost for those guaranteed benefits.

Arizona's six publicly funded pension systems are in no danger of going broke anytime soon, pension managers say. Yet, the four statewide systems and municipal plans in Phoenix and Tucson are underfunded, causing increases in publicly financed contributions from government employers during the past 10 years to help cover benefits.

Arizonans are paying roughly $1.39 billion from public treasuries this fiscal year to resuscitate the ailing systems that provide lifetime annuities for more than 111,000 retirees. The public's tax-paid contributions outpace what the state spends on prisons, higher education or health insurance for the poor.

Other states, which also are cutting public services amid a stubbornly weak economy, face similar funding shortfalls in their pension systems.

The Pew Center on the States, a Washington, D.C., non-profit organization that focuses on public policy, released a study earlier this year saying there was a $1 trillion gap between what states have been setting aside to pay for employees' retirement benefits and how much will actually be needed to pay for those benefits in their entirety in the future.

The shortfall amounts to more than $8,800 for every U.S. household, and is expected to be made up during the next 30 years by state and local governments through a combination of careful management, productive investments and larger contributions from members and their employers.

In addition to the Pew study, Northwestern University professor Joshua Rauh, who studies public pensions, released a report this year that predicts pension funds in at least seven states could face difficulties meeting their liabilities by the end of 2020 because contributions to the trusts were insufficient in recent years and investment income plunged during the market downturn.

None of Arizona's is among them.

Rauh predicts that taxpayers will bear a larger share of the financial burden to make pension trusts whole again, and he believes the federal government could be called upon to bail out financially insolvent states.

Some action, however, must come from states themselves.

Keith Brainard, research director for the National Association of State Retirement Administrators, said some states are dealing with pension liabilities that they can't afford by raising retirement ages, increasing employee and employer contributions into their pension trusts, and scaling back benefits.

Brainard said Colorado, Minnesota and South Dakota have rolled back automatic cost-of-living adjustments for current retirees, though lawsuits have been filed objecting to those moves.

May be even bleaker

While the Pew study paints a bleak picture for the future of public-pension financing, one of its key researchers said the situation likely is worse than portrayed.

Kil Huh, director of research for Pew, said the study was based on fiscal 2008 data that did not capture potentially crippling financial losses that public-pension systems absorbed during the stock market slide at the end of 2008 and into 2009.

"Our numbers were very conservative," Huh said. "We missed the Wall Street crisis that really hammered assets for major investment and pension plans. We know the picture has deteriorated and gotten worse."

In 2000, Huh said, more than half of the states had fully funded public pensions. When the report came out last February, there were only four: New York, Washington, Florida and Wisconsin.

Today, he said, it is down to Wisconsin.

Pew's report called Arizona a national leader in managing its long-term liabilities for pensions and retiree health-care benefits, saying it funded 80 percent of its total pension bill, the minimum benchmark that the U.S. Government Accountability Office says is preferred by experts. At 100 percent funded, a pension would have enough money to meet all current and future pension payments.

More recent data, however, shows the Arizona State Retirement System, the state's largest, is only 75 percent funded, while pension plans for Arizona's public-safety officers, elected officials and Phoenix municipal employees are below 70 percent.

While Arizona's funding ratios have dropped, Huh said, the state is in better shape than some of its peers because it has a constitutional mandate to fund pension plans.

Pensions protected

The Grand Canyon State has iron-clad protections for public pensions, despite its reputation for fiscal conservatism and a penchant for lagging in funding of public services and education.

In 1998, the Republican-controlled Arizona Legislature asked voters to approve Proposition 100, a constitutional amendment that prohibited lawmakers from raiding any of the public-employee pension trusts for extra cash to balance the state budget.

At the time, all four of the statewide public-employee trusts were overfunded, with surpluses ranging from 14 to 21 percent, because of the huge stock-market growth during the 1990s.

Those surpluses meant that the trusts had far more assets than needed to meet then-current and projected retirement payments. Overfunding also meant governmental agencies could reduce the amount of cash they paid into the trusts, saving money for taxpayers.

Proposition 100 not only kept lawmakers' hands off the trust funds, but mandated that public-employee pension benefits "shall not be diminished or impaired." The ballot measure passed with a 61 percent approval rating.

Arizona is now one of nine states where participants in public pensions have a guaranteed right to a benefit that cannot be eliminated or diminished, according to the GAO.

Marc Spitzer, now a commissioner with the Federal Energy Regulatory Commission, was then an Arizona lawmaker championing the legislation.

Spitzer said all of Arizona's pension systems were funded at more than 100 percent in the late 1990s, and he was concerned then that the Legislature would raid the funds to pay for state programs.

"There is an insatiable appetite to spend money whether times are good or not. There were people going to members of the House and Senate who wanted their programs funded, and I didn't want it at the expense of the retirement systems," Spitzer said. "I didn't want the retirement systems punished for being properly managed."

Spitzer, a Republican, said the measure had bipartisan support. And, he added, the Legislature established cost-of-living increases for the pension systems.

Today, Spitzer still thinks those protections and increases were a good idea, despite the fact that the trusts are now underfunded.

He said the state has a responsibility to protect pension funds.

"It was a contract, and I didn't want the contract overridden by some other legislation," Spitzer said.

Reach the reporter at craig.harris@arizonarepublic.com or 602-444-8478.

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Tennessee's fund is healthy; Oklahoma system is ailing

Craig Harris

The Arizona Republic

Tennessee and Oklahoma are polar opposites when it comes to their major public-pension systems. The Volunteer State has one of the healthiest pension trusts in the country, while the Sooner State has one of the worst. Arizona falls in the middle.

Here's a snapshot of those states' plans:

The Tennessee Consolidated Retirement System, with 220,000 active members and 110,000 retirees, is close to fully funded at 90 percent, unheard of in most other states and better than all six public systems in Arizona.

The goal for every public pension is to be funded at 100 percent, meaning the fund has enough money to meet all current and future pension payments. But most pension experts say a healthy plan is funded at 80 percent.

Tennessee's trust is flush because retirees there receive lower benefits than other states, the state has fully funded its portion to the plan since 1975, and it doesn't invest in risky markets, said Steve Curry, assistant to the state treasurer.

The average Tennessee pension is $13,600 a year, or nearly $6,200 less than the average Arizona State Retirement System pension. Tennessee currently contributes nearly 15 percent of a state employee's salary to fund the trust, while employees pay nothing. Curry said state employees have gone four years without a pay raise, so there is little pressure to make them contribute.

For teachers, the state contributes 9 percent of an educator's wages, while they contribute 5 percent. In comparison, the Arizona State Retirement System is funded by employer and employee each contributing 9.6 percent.

The Oklahoma Teachers Retirement System released figures last month showing its unfunded liability rose by $902 million in the past year, to $10.4 billion. The plan was funded at 47.9 percent, which means if everyone cashed in their retirement, the trust would pay about 48 cents on the dollar. Arizona's pension systems are funded at 65.8 percent to 82.6 percent.

James Wilbanks, executive director of the Oklahoma teachers' system, said his state's Legislature for the first 40 to 50 years of the trust's existence did not adequately fund the plan, and lawmakers in the 1980s approved large cost-of-living raises that put the program in a deep hole.

The state, Wilbanks said, may raise contribution rates on public employees' wages. Employers now contribute 9.5 percent, while employees contribute 7 percent. While rates may go up, the pensions are not that high compared with Arizona. Oklahoma's average annual pension is $17,000 a year, or nearly $2,800 less than the average Arizona State Retirement System pension. The Oklahoma system has roughly 90,000 active members and about 50,000 retirees. Wilbanks said there is talk about reducing benefits for future employees.

Arizona Retirement Systems Article - Part 8 of 8

Pension reform a difficult task

Craig Harris

The Arizona Republic

There is no debate among high-ranking elected officials: Arizona's six public-pension systems are in trouble as they consume an ever-growing portion of public money to improve their financial health.

Yet there is little consensus about how to fix them, and there has been little political resolve to tackle such an explosive issue because it could involve tampering with pensions for hundreds of thousands of current and future retirees who feel the current benefits were earned and promised to them.

The Arizona Legislature's incoming House speaker and Senate president said lawmakers can go only so far to slow the rate of growth for the state's pension systems, which an Arizona Republic analysis found cost taxpayers $1.39 billion last year, a 448 percent increase from a decade ago.

These rising taxpayer costs, coming at a time when state and local governments have cut services to balance their budgets, have been driven in part by the pension trusts' investment losses during the market downturn but also by ongoing pension-benefit improvements and efforts to hold down costs for employees themselves.

The upward trend in taxpayer costs is expected to continue for at least the next few years.

The key to reversing it is getting voters to repeal a 1998 provision in the Arizona Constitution, lawmakers say.

The provision's language, which was overwhelmingly approved by voters, says: "Membership in a public retirement system is a contractual relationship . . . and public retirement system benefits shall not be diminished or impaired."

Trimming benefit payouts would allow lawmakers to lower publicly funded contributions to those systems. But that change may be difficult, they say, because of the strong influence on the Legislature of Arizona's 363,000 state and local public employees.

"It's time we get serious about reforming the public-pension systems," said House Speaker Kirk Adams, R-Mesa. "But if we are going to have any fundamental change, the voters will have to get involved."

Adams said he would work to get the Legislature to have voters in 2012 change the state Constitution, which prohibits benefits from being diminished for those in the public-pension systems. Adams said he has yet to get support from the Republican-controlled Senate or Gov. Jan Brewer, a fellow Republican.

In 1998, the intent of the measure was to protect public-pension trust funds, which had surpluses at the time, from being raided by lawmakers in the event of lean budget times. Since then, the pensions have not been touched by lawmakers.

Lawmakers in 2001 enhanced benefits for the Arizona State Retirement System, the largest public-pension plan in the state, by changing the formulas to allow workers larger pensions.

"When things were good, they (lawmakers) were overly generous," said incoming Senate President Russell Pearce, R-Mesa. "No one looked at the future impact. . . . We need to look at things now and decide what we can afford."

Pearce himself benefits from three Arizona public-pension systems. He has eight years of service as a state and county government administrator in the ASRS system. He has about 10 years of service and growing in the Elected Officials' Retirement Plan, and since 1991 he has received a pension from the Public Safety Personnel Retirement System for his time as a sheriff's deputy.

Currently, Pearce's annual public-safety pension is $47,957, according to records.

Pearce said he would favor eliminating the Elected Officials' Retirement Plan because he believes people should not be given the wrong reasons to run for office.

Reforms elsewhere

Governments are taking steps to rein in public-pension benefits when they have become a budget burden.

A handful of states are considering going to 401(k)-style systems in which employees simply set aside their own retirement funds over time, with those funds earning income as investments.

The issue is defined-benefit plans. Nearly all states, including Arizona, have them for public employees. Under such systems, pensions are based on an employee's ending salary, years of service and a fixed percentage rate that is multiplied by the other two factors.

Typically, those plans require employers (taxpayers) and employees to contribute to a trust fund, which can grow through investments. The trust then pays lifetime annuities, and in many of those systems, including some in Arizona, pensions have been boosted by cost-of-living increases that outpaced inflation. If the market falters, the amount of pension payments to retirees is still guaranteed, and contributions from still-working employees or from public employers, or both, are increased to cover investment losses.

In a significant indication of change, six newly elected governors in Alabama, Nevada, Pennsylvania, Tennessee, Wisconsin and Rhode Island have suggested that they want to amend their states' pension systems to 401(k) plans similar to the private sector's, said Stephen Fehr, a pension expert for the Pew Center on the States. The center is a non-profit policy-advocating group.

"They want to shift away from guaranteed pensions," Fehr said.

Even in states with strong labor unions, such as California and Illinois, action has been taken, Fehr noted.

Voters in eight of nine California cities and counties approved measures during the recent election to cut public-pension benefits. In addition, Fehr said, more than 40 suburban communities in Chicago approved a ballot question that called on the Illinois Legislature to reduce benefits for future state workers.

Earlier this year, 21 states took action to reduce their pension liabilities, Fehr said. Arizona was one of those. Lawmakers required those in ASRS hired after July 1, 2011, to work a few years longer to draw their pensions. The Arizona Legislature also modified the calculation to determine pension benefits for new hires. The changes do not affect current ASRS members or retirees.

To retire with full benefits, incoming ASRS members, state and local government workers and teachers now will have to obtain 85 points (calculated by combining age and years of service) rather than the previous 80. And the amount of their annual pensions will be based on their average annual wage during their last five years of employment rather than their last three years. That change is expected to lower starting pensions slightly.

Pearce and Adams said those changes were only modest reforms, and it took four years for Arizona lawmakers to approve them.

"Misery loves company because every state and the federal government have similar issues with their public-pension systems," Adams said. "We shouldn't have a system where taxpayers are paying into a 401(k) system and receiving Social Security, but public employees are receiving benefits that are far better than what the private sector is getting."

Even those receiving Social Security, which is a defined-benefit plan, are not guaranteed cost-of-living increases, as is the case in some of Arizona's public-pension plans.

In 2011, for the second straight year, Social Security benefits will remain flat because the inflation rate that would trigger cost-of-living raises is so low.

Calls for change

While there is talk nationally about moving public-pension systems to 401(k)-style programs, only Alaska and Michigan have adopted them as their primary plans, Fehr said.

In a 401(k) or defined-contribution plan, an individual invests money from a paycheck and may have a matching contribution from an employer going into an investment account. However, unlike in a defined-benefit plan, the employee is not guaranteed a specific annual pension at retirement. Instead, the employee gets whatever proceeds are in the investment account.

That investment account increases or decreases in value over time, depending on the financial markets.

The Arizona Chamber of Commerce and Industry, which has a strong lobby at the Legislature that focuses on government spending and accountability, wants Arizona to adopt a 401(k)-style system because proponents say it is less costly than a defined-benefit plan.

"Our focus is whether this type of pension, a defined-benefit system, is right for the future," said Suzanne Taylor, the chamber's senior vice president of public policy. "Our question is whether this system is sustainable and whether we should be moving new employees to what's in the private sector. . . . We haven't had a crisis so far, but we don't want to have one."

Taylor said it would be nearly impossible to change to such a system for current public employees and retirees because of guarantees afforded them in the state Constitution. Politically and legally, she said, it would be easier to make changes for future employees.

But if the state immediately ended defined-benefit plans and moved to 401(k) systems, a significant new problem would develop, said ASRS Director Paul Matson. Matson said ASRS and Arizona's other systems are underfunded, and additional contributions are needed from both current and new employees and their employers to cover those deficits. If future employees were to be taken out of that equation, costs for current members and their employers to erase the trust deficits would skyrocket.

Nonetheless, Adams and Pearce suggested it is time for Arizona to move to a two-tiered public-pension system in which pension benefits are scaled back for new employees.

Plans in the works

Matson strongly advocates for the current defined-benefit plan, saying it provides better financial security for its retirees, making them less dependent on other government services. Matson also believes the ASRS plan is sustainable without significant reform.

Matson, however, favors changes for those who retire from the ASRS system and then return to work for an ASRS employer. When these employees take a "double dip," neither they nor their employers contribute to the ASRS trust when they return to work. Opponents of the practice say it hurts the trust's stability and is unfair to other ASRS members whose contribution rates must go up to offset the lack of contributions from working retirees.

Matson plans to ask the Legislature to create an alternative contribution rate paid by employers of double-dippers. Employees who have retired and returned to work would not be asked to contribute under Matson's plan.

The Republic found that double-dipping by more than 900 educators in Maricopa County is costing ASRS at least $8.6 million in lost contributions this year.

Jim Hacking, director of the state's pension system for public-safety officers, said he plans to meet with members of his plan in December to make recommendations for legislative changes.

The Public Safety Personnel Retirement System is the most underfunded in the state, and taxpayer-subsidized contributions from public employers are nearly three times the contributions made by police and firefighters from their own paychecks.

Hacking said the current program providing annual cost-of-living increases and deferred-retirement incentives that include large lump-sum payouts needs to be fixed.

"It's our plan to do everything we can so the plan is restored to a state of good financial health," Hacking said.

Gov. Brewer vowed to work with pension managers and the Legislature to restore the health of the public-pension systems. "There are concerns whether the (pension) systems are sustainable and if they are fair going into the future," Brewer said. "We need to sit down and vet the systems at the Legislature."

The price of inaction could be far greater than what it already has cost Arizona taxpayers.

"Given the situation across the country, we have pension systems that are going bankrupt all over," the governor said. "We don't want to find ourselves in that situation, and we are going to have to address the issues."

Reach the reporter at craig.harris@arizonarepublic.com or 602-444-8478.

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Arizona a leader in retirement reform, eliminating abuses

by Paul Matson - Nov. 21, 2010 12:00 AM

Arizona State Retirement System executive director

Over the past week there has been significant discourse regarding the various public pension plans in Arizona. As director for the Arizona State Retirement System, the largest retirement system in the state, with more than 500,000 members, I am pleased to share the following facts about retirement plans in general and the ASRS in particular.

The ASRS and our members have been at the forefront of retirement reform with initiatives that began in 2003. These initiatives modified the plan structure to ensure the sustainability and affordability of the retirement plan for current and future generations and to eliminate abuses and loopholes.

• Public pensions special report

As a result, virtually all of the various problems discussed recently in Arizona were addressed by the ASRS years ago. Following is a list of cost-reducing steps actually implemented by the ASRS as far back as 2004:

- Eliminating deferred retirements (DROP program).

- Eliminating various forms of spiking salaries.

- Increasing the age at which employees may retire.

- Charging for early- retirement programs.

- Decreases in interest rates paid on employee cash balances.

- Decreases in refunds paid to employees.

- Increases in the costs charged to purchase pension time.

- Various other cost- saving initiatives.

A national actuarial firm determined that these ASRS-driven initiatives have reduced the cost of the ASRS retirement plan by between $4.6 billion and $7.2 billion over the life of the plan. While many other states and pension systems still debate making changes, ASRS has already done so, while maintaining retirement security for retirees. This is an enormous accomplishment and it has been done proactively. Ensuring that abuses and loopholes are eliminated has been a successful focus of the ASRS for years, and this focus will continue.

The ASRS is also unique in that our employees have always paid for 50 percent of their retirement benefit. In most other public pension plans throughout the country, however, the employee pays a much lower fixed rate, and as a result the employer, supported by the taxpayer, pays a much higher variable rate.

The ASRS is one of the few pension plans in the country that has this equal cost sharing between employee and employer, therefore reducing contributions paid by the employer and ultimately the taxpayer. This allows the ASRS to equitably fund the pension plan, while allowing retirees the security of a stable retirement.

The result is that the average retiree from the ASRS receives a secure pension of about $19,800 per year at the end of their career. This benefit is earned by the employee after paying into the retirement plan from their salaries throughout their career.

In addition to providing financial security to our retirees, these pensions add billions of dollars in direct expenditures to the Arizona economy, employing tens of thousands of Arizonans. As a result, retirement security typically benefits both the retiree, as well as the greater Arizona economy.

Arizona has been recognized by the Pew Center as a "national leader" in the areas of retirement and retiree health insurance funding, and I expect that the ASRS will continue to be a national leader in public retirement and benefit reform, ensuring that an affordable and sound retirement is available to Arizona's retirees.

A well-structured pension plan that eliminates abuses and loopholes is often the least expensive, most cost-effective and secure way for employees to properly save for their retirement. I encourage you to visit our website - www.azasrs.gov - for more information.

Paul Matson is executive director of the Arizona State Retirement System.

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Policymakers need to reform pension systems

by Kevin McCarthy - Nov. 21, 2010 12:00 AM

Arizona Tax Research Association president

The national recession has had a devastating impact on Arizona. Over 300,000 Arizonans have lost their jobs.

At the worst possible time, taxpayers have been asked to pay higher taxes to sustain state and local government budgets that have been strained by record losses in tax revenue. One major challenge facing taxpayers is $10 billion in unfunded liability in Arizona's four statewide public pensions.

In the United States, one of the major benefits for public-sector jobs has always been a defined benefit retirement. Unlike most private-sector 401(k) retirement plans that rely on contributions and investment performance, public-sector defined benefit plans guarantee a monthly pension benefit reflective of years of service and salary earned.

However, across the country these defined benefit retirement programs are under considerable scrutiny. The unfunded liabilities in some of the systems are at crisis levels.

And taxpayers' eyes are just now being opened to the fact that these public pensions are viewed as vested rights that cannot be reduced, regardless of the hardship placed on taxpayers.

The annual taxpayer contributions for Arizona's four pension systems climbed $876 million (337 percent) from 2000 to 2009 and will likely continue to climb for the foreseeable future.

While taxpayers picked up skyrocketing costs, three of the systems (Public Safety Personnel Retirement System, Elected Officials Retirement Plan, and Correctional Officer Retirement Plan) cap the contributions for the employee.

The taxpayer costs for the public-safety system approach 30 percent of payroll in some jurisdictions while employee costs are capped at 7.65 percent. At least the Arizona State Retirement System is designed to split contributions between members and taxpayers.

Clearly, there are valid arguments for defined benefit retirement programs for large groups of government employees. Properly designed and managed, they can be an effective recruitment tool for public service.

It's likely that most Arizonans would not begrudge a public employee receiving a fair retirement benefit after a long career. However, the legal veil that insulates these systems has not only created unreasonable exposure for taxpayers, it has also led to abuses.

Over the years, state policymakers have improved the benefits to the point that many public employees can now retire in their 50s and return to the public payroll - often in the same full-time position.

Regrettably, the double-dipping, salary spiking and other abuses seem to be a natural extension of a system where the members lack any collective sense of responsibility for costs. With a straight face, high-paid government administrators rationalize their double-dipping as actually a savings to taxpayers. To be sure, if the taxpayers did not have unlimited exposure to fund these systems, public employees would view these abuses in a different light.

Maybe the most problematic aspect of these systems is the political environment in which policymakers debate benefit enhancements and pay for their costs. Benefit increases are granted at no immediate costs to the politicians voting for them. The actuarial impacts are delayed a year and then spread over 30 years. In fact, early this decade major benefits were extended by lawmakers who argued they were free because the system was "overfunded."

The bottom line is that policymakers need to reform these pension systems. There is growing sentiment to move to a defined contribution system.

While arguments in favor of maintaining a defined benefit plan will continue, they are becoming lost in an avalanche of debt and abuses. Certainly, moving to a defined contribution would dramatically change the current political shell-game that so poorly serves taxpayers.

Kevin McCarthy is president of the Arizona Tax Research Association and a recent board appointee to the Arizona State Retirement System.

Jim Mann perpetuates the myth that cops risk their lives for us!

From this article it seems like there are 19,500 active cops in the state of Arizona with 9,000 retired cops! And remember cops vote! That is almost 20,000 voting cops.

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Pensions a reward for our risk

Middle-class retirement for battling flames, crashing drophouses

by Jim Mann - Nov. 21, 2010 12:00 AM

The headlines arrive all too often. Arizona law enforcement has lost five more good men in the past year. Sadly, news that our state is dangerous for police isn't surprising: Law-enforcement fatality rates nationwide have surged 43 percent in 2010.

We believe those who risk their lives to keep us safe have earned a pension equal to such grave responsibilities. Regardless, some politicians and special interests portray us as greedy. Here's some venom from the Goldwater Institute's Byron Schlomach:

"It's nice they have figured out a way to rob us," he said of Arizona's police and fire fighters. "This is ridiculous. How can anybody justify this?"

We justify our pensions through years of dedication and through taking a reasonable approach. The 19,500 actively employed members of the Public Safety Personnel Retirement System contribute each pay period to fund what will be a middle-class retirement. How do I define "middle class"? The nearly 9,000 retirees drawing a PSPRS pension got an average retirement allowance of about $44,000 last year.

While that may sound better than a 401(k) decimated by Wall Street's crimes, it's hardly robbery. First responders earned their pensions by working third shifts, kicking down drophouse doors and battling 1,400-degree flames.

The Deferred Retirement Option Program also has been demonized by those who call us greedy. These critics don't mention that DROP lowers the annual pension payout for officers who choose it. They also skip their own role in skewing stats: Because many public-safety employees fear DROP being gutted by our Legislature, they enter it early, depriving PSPRS of potential savings.

Regardless of our opponents' insults and our deep disappointment that the state-chosen experts trusted to invest PSPRS contributions in years past routinely ranked last in investment returns - and lost a billion dollars chasing dot-com investments - Arizona's police officers remain good soldiers. We've taken pay cuts and furlough days. And we stand ready to discuss any legal, ethical, fair option meant to relieve taxpayers' distress.

Still, in fiscal 2009, the combined PSPRS contribution of every city, county and state government totaled $316 million. The state's budget alone? About $9 billion.

Our few percentage points may sound like a lot, but so is our risk. What price are you willing to pay to have someone in uniform between you and danger every day?

A 27-year veteran police officer, Jim Mann is the executive director of the Fraternal Order of Police Arizona Labor Council, which represents 6,500 officers statewide.

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Current pension system like a lifeboat with slow leak

by Byron Schlomach - Nov. 21, 2010 12:00 AM

The various pensions for government employees in Arizona resemble a box of old, oily rags. Those rags could spontaneously ignite at any time and no one, not even the experts, can tell you just when the blaze will start. Just like keeping those oily rags around, we are playing with fire with Arizona's pension systems, including the one that serves firefighters and police officers.

The people who work in public safety have tough and dangerous jobs. Young recruits deserve to know their careers are stable and their retirement will be secure. But much like the danger that Social Security will be broke within our lifetime, the current approach to the Public Safety Personnel Retirement System is putting the future of new firefighters and police officers at risk.

When public-safety officers and other government workers retire, they receive guaranteed pension benefits every month for the rest of their life. Governments and their employees pay into the pension funds to help cover expenses. But they aren't paying enough.

The state's retirement systems admit they are underfunded by a combined $10 billion, with the public-safety pension fund in the worst shape of all. The crisis is deeper than the pensions admit, however, because fund managers assume they can earn high returns on stocks and other investments without taking any market risks. A March 2010 study from the Goldwater Institute noted the real underfunding for Arizona's government pension systems is five times higher.

Unless something is done, state and local governments eventually will have to find more money to pay these guaranteed pensions. Either taxes will have to be raised, or programs will have to be cut and current government employees will be fired to pay full benefits to people who have retired.

The first argument against changing pension policies has been that Arizona's pension systems are in better financial shape than virtually any other state in the nation. That's a correct comparison, but don't be fooled. A lifeboat with a slow leak will suffer the same fate as a boat with a fast leak; eventually they both sink.

With just 20 years of service, law-enforcement officers and firefighters can retire at half of the average of their highest three years of pay. So, if you start a job in public safety at age 22, you can retire at 42 and receive 50 percent of your pay for life.

Another benefit is the ability to retire with a pension at a relatively young age and then go back to work in the same occupation for a second salary. Phoenix Police Chief Jack Harris "retired" in January 2007 and was immediately rehired by the city in essentially the same job; so now he collects both a yearly salary of $200,000 and a pension of $90,000.

The most transparent and sustainable way to fix these government pension plans would be to move to a defined contribution system, like the 401(k) plans that many private employees have today. Instead of collecting money from current workers to cover pensions of retired workers, governments would deposit tax-free money into a personal retirement account that each employee would invest and manage for the future. Taxpayers would meet their obligations every year instead of piling up hidden debt in pension funds that could explode at any time.

Byron Schlomach is an economist with the Goldwater Institute.

Arizona Retirement Systems Article - Part 9 of 8

Source

Pensions given by Central Arizona Project raise legal flags

Public water agency pays all worker contributions

by Craig Harris - Nov. 24, 2010 12:00 AM

The Arizona Republic

The roughly 475 employees of the Central Arizona Project receive all the pension benefits afforded state employees and have a unique - and possibly illegal - perk: They make no contributions to the pension trust.

The Arizona State Retirement System said the perk could trigger an audit, although it's unknown what action the pension trust will take.

Arizona law says all employees and employers in the ASRS are required to make equal contributions to the pension trust based on a worker's salary.

But the Central Arizona Project has paid its employees' contributions for them since it joined the state system in 1998, according to CAP General Manager David Modeer. According to the ASRS, it is illegal for an employer to cover all the costs.

The cost of the contributions came to light after an eight-part series in The Arizona Republic that examined the rising cost of the state's six public-pension systems. The Republic found those systems last year cost taxpayers $1.39 billion, a 448 percent increase from a decade earlier.

In most cases, employees hand over part of their paychecks to a pension fund.

By paying for its workers' contributions, CAP incurred millions of dollars in extra costs. Last year's employee contributions alone would have totaled $3.8 million. The agency then passed those costs on to customers, such as Phoenix, that buy water.

The Central Arizona Water Conservation District board runs the CAP and manages the system, which delivers Colorado River water to Maricopa, Pinal and Pima counties.

Jean McGrath, elected to the CAWCD board in 2006, said she has tried for the past few years to stop the practice but has been unsuccessful. She also said staff members have repeatedly denied her request to provide records showing how much the CAP was paying for employee-pension contributions.

"It's highly irregular," McGrath said. "I don't know of any other (public) agency that does this. I hope there is a good reason for this generosity."

The CAP's staff disclosed to The Republic on Tuesday the amount of pension contributions paid on behalf of employees.

Modeer said the CAP believes its ASRS benefits are consistent with the objectives initially created by the Legislature for the state retirement plan. The CAP has covered contributions for employees in order to make their compensation competitive with utilities and water companies, he said, adding that it is important to attract highly skilled and qualified employees during the next five years as more than half of the staff will become eligible for retirement.

CAP employees on average this year received a 2 percent pay raise, while most other ASRS members who are teachers, state, county and municipal employees received no raises because of budget problems.

By not making contributions, a CAP employee keeps about 10 percent more of his or her income. That's because all the other approximately 220,000 ASRS members this year are making a 9.85 percent contribution, with 9.6 percent going to pension and health-care costs and the other one-quarter percent going to long-term disability coverage.

For example, a public employee covered by the ASRS making $50,000 a year is contributing $4,925 to the pension trust while a CAP employee making the same amount of money contributes nothing. The money not being contributed comes from the CAP, which then passes on the cost to customers.

The amount other state employees contribute has risen steadily over the past decade. The trust that funds pension payouts suffered investment losses even as benefits paid to retirees continued to increase. Matching contributions from employers and employees rose to cover the shortfall.

Even so, the pension trust remains underfunded. Ideally, a trust holds enough money to cover 100 percent of pension liabilities for current and future retirees. The ASRS trust currently is funded at 75 percent. Contribution rates are projected to keep rising until 2018.

But CAP employees have not been subject to the steady increases in contribution rates. At the CAP, the burden to keep the fund solvent is shifted to water buyers.

Kevin McCarthy, an ASRS board member, said the CAP is engaged in a "horrible policy to insulate employees from the cost" that other public employees have.

David Cannella, an ASRS spokesman, said he knows of no other employer in the ASRS that covers all the pension costs. He said the practice at the CAP could trigger an audit from the ASRS. It's unknown what action the ASRS will take.

"This should not be happening," Cannella said of the CAP practice.

"State statute says that both sides contribute equally. We will have to look into it."

Pension series: all I see are pigs to the trough

Pension series: all I see are pigs to the trough

Pigs to the trough.

That's all I can see as I am reading Craig Harris' series on the pensions of government workers. In this morning's installment, we find that our elected officials and judges contribute the least of all government workers and take home the most in their pensions.

These people make more in retirement than they did when they were working, thanks to cost-of-living adjustments far higher than the ones given even to regular government workers.

And Maricopa County Superior Court's presiding judge, Norm Davis, actually defends this scheme, saying the system is fair for judges. "It's a reasonable system given the nature of the job," he says.

Reasonable? Hey Norm, I'm guessing to the people who pay your pension might not see it as reasonable -- you know, the people who have no pensions to look forward to because most of the private sector ended that practice years ago?

Then there is Jack Cross, the guy who used to administer the pension plan for elected officials and judges, a guy who gets more in retirement than the people whose pensions he was administering. He who takes home more than $216,000 annually from the state in his RETIREMENT, says he thinks the system needs reworking. NOW, he thinks the system needs reworking.

I always knew elected officials were getting a great deal. I didn't know, though, that they were living quite this high on the hog courtesy of, well, you and me.

It goes without saying that this needs to be fixed. But will our leaders take on the job knowing that their own piggish pensions await them?

Scottsdale sees 155% increase in pension costs in 5 years

Scottsdale sees 155% increase in pension costs in 5 years

by Beth Duckett - Nov. 16, 2010 01:18 PM

The Arizona Republic

Following a statewide trend, Scottsdale is paying a higher tab to shore up the cost of employees' pensions.

The public cost to fund retirement pay for the city's municipal workers, police and elected officials spiked 155 percent in five years, from $6.5 million in 2004 to $16.7 million in 2009.

Scottsdale officials attributed the surge to rising contribution rates that the city has no control over.

In addition, public records obtained by the Republic show nine retired city employees are receiving annual pension benefits greater than $100,000. Topping the list is former Assistant City Manager Neal Shearer, whose annual benefit of $158,294 ranks 13th on the list of about 92,000 retirees receiving pension benefits from the Arizona State Retirement System.

Scottsdale's employees contribute a portion of their pay toward their pensions. The city also makes contributions equal to or greater than the employees' amount, which is 9.6 percent for public employees in the Arizona State Retirement System.

Of Arizona's six public-pension systems, the ASRS is the largest, covering public-school teachers and employees of three state universities and workers for the state, county, and cities and towns. Scottsdale also contributes to pension systems for public-safety officers and elected officials.

"The dollar amount that comes into us is going to be a reflection of the employers' payroll, which is a reflection of how much they're paying their workers," as well as the number of employees, ASRS spokesman David Cannella said.

The city, like other public employers in the state, has experienced a marked increase in the amount it pays toward state public-pension systems.

"With the payments we make, we don't have any input as to what is paid," said Scottsdale Accounting and Tax Audit Director Jeff Nichols.

Glendale paid nearly $23 million for 1,895 employees and elected officials in state-operated pension plans this past fiscal year, compared with $3 million in 2000. Mesa's contributions skyrocketed from $5.7 million in fiscal 2001-02 to nearly $31 million in the current year for employee retirement accounts.

Cannella said contribution rates to the ASRS have gone up. State employers and employees each contribute 9.6 percent to the system's defined pension plan, with a combined rate of 19.2 percent. In 2000, the combined rate was 4.34 percent.

"The contribution rate is a reflection of global markets and what we earn on the fund," Cannella said. Six-figure pensions

City records show Scottsdale's contributions to the ASRS were slightly less in 2009 than 2008. The overall contribution to all systems was greater, however.

Scottsdale allowed 100 employees to retire early in 2009, in exchange for one week of pay for every year of service. The city also laid off 49 employees, eliminated 112 vacant positions and reduced the pay of certain employees by 2 percent, according to a 2010 audit of the program.

"If there is an employer that has a big layoff, the dollars can change," Cannella said.

Public-records requests obtained by the Republic indicate that at least nine former Scottsdale employees are receiving six-figure payouts on an annual basis. Several participated in the early retirement program, including Shearer as well as former General Manager of Community Services Debra Baird and former Assistant City Manager Roger Klingler.

Scottsdale's retirement-incentive program offered last year stirred controversy for being too generous and rewarding top-ranking employees who had a hand in developing the program. It cost Scottsdale a reported $11.5 million, leaving the city liable for a bill higher than the City Council was led to believe, according to some council members.

Reporters Craig Harris, Gary Nelson and Cecilia Chan contributed to this story.

Pension deal should outrage every Arizona taxpayer

Pension deal should outrage every Arizona taxpayer

In the next few months, everyday Joes in this state are going to suffer.

People who don't earn enough to afford such luxuries as health insurance are going to be kicked off the state's health-care plan for the poor. Disabled Arizonans, already burdened by cuts to services, will be cut some more. Your kids' classroom will likely take to a hit, too.

Thank goodness government-funded six-figure pensions — those already in place and those still to come — are safe.

Pigs to the trough. That's all I can see as I am reading Craig Harris' series this week on government pensions.

On Sunday, we learned that we are spending $1.39 billion a year on government pensions in Arizona. That's more than we spend on social services, on prisons, on universities, on AHCCCS – on anything other than K-12 education.

While rank-and-file state employees are not exactly rolling in retirement dough, their pensions are guaranteed, forcing taxpayers to pick up an ever larger chunk of the cost as investments tank. Within three to four years of retirement, they've collected every dime they put into the system.

That's unsustainable and there's evidently not a darn thing we can do about it. At the Legislature's request, we amended the state Constitution in 1998, laying a ring of barbed wire around publicly funded pensions. You can cut state services to every last disabled or sick child in the state. But you can't cut so much a penny from pensions – not even the future overstuffed pensions of the people we elect to lead us.

Speaking of our leaders, if you were angry on Sunday, you should have been livid on Monday, as you learned that elected officials and judges contribute the least of all state workers and take home the most in their pensions.

For every $1 they contribute, we kick in more than $2. (As opposed to a one-to-one match for other state employees.) I suppose we shouldn't be surprised, given that elected officials set the rules. Naturally, they long ago decided that they deserved the same smoking deal as judges, who retire with 80 percent of their pay after 20 years, plus annual cost-of-living adjustments. But isn't it Republicans who incessantly bang the drum about the need to get government out of our lives?

I, for one, would love to get government out of their lives. We're now paying some of our former leading lights more in retirement than we did when they were actually working. Jane Hull made $95,000 a year when she was governor. Today, she draws a $100,000 pension, thanks to those comfy taxpayer-funded cost-of-living adjustments that outpace inflation. While rank-and-file workers haven't had a cost-of-living adjustment in five years, elected officials and judges get a 4 percent boost every year.

If that doesn't send steam pouring out of your eyeballs, consider the retirement scored by Phoenix's former city manager. It seem this selfless leader – a guy who supposedly shunned pay raises because times were tough -- in reality took nearly $100,000 in raises and bonuses during his final three years, the years upon which his pension is based. Frank Fairbanks then employed all the standard city-employee perks – cashing in nearly $238,000 of unused sick leave and more than $87,000 in unused vacation -- to further boost his final salary and thus his pension.

In all, he managed to pull down $1.3 million during his final three years, resulting in a $246,813 pension and the distinction of sporting Arizona's biggest pork belly.

Fairbanks figures he deserves it, noting that the football coaches at ASU and UofA make more. “What I did impacted the community a little more than what the football coaches did,” he told Harris. This from a man whose pension is $47,000 more than those of former presidents … of the United States, that is -- not universities.

Fairbanks ought to send a thank-you note to every Phoenix resident. Phoenix has a separate retirement plan which requires its taxpayers to kick in $3 for every $1 employees contribute to their pensions and that's before additional city subsidies that Fairbanks collected as a former city manager. Think about that next time you go to a park or a library and find it closed.

Apologists such as Mayor Phil Gordon (read: those who shortly expect to stick their own snouts in the trough) rationalize that government workers are paid less than their counterparts in the private sector and thus deserve their pensions. Harris, however, points out that private-sector workers actually earn less than government employees. And private-sector pensions? Most of those long ago went the way of the buggy whip.

Of course, it goes without saying that this fiasco needs to be fixed. But will our leaders take on the job knowing that their own reserved seats at the trough await them?

It isn't just an Arizona Problem

Police Unions across the country get cops pensions the taxpayers can't afford

In this article Chicago area police officers screw the taxpayers

Suburbs face their own pension mess

Region's taxpayers find police and fire funds are out of sync by $5 billion

By Joe Mahr, Steve Schmadeke and Joseph Ryan, Tribune reporters

November 28, 2010

Suburbs from wealthy to working-class have combined to dig a $5 billion hole for taxpayers on the hook to pay for the pensions of police officers and firefighters.

A Tribune analysis of the Depression-era pension system found that suburban leaders' failures and missteps have collectively helped create another staggering layer of crisis beyond the better-known problems that have the state and city of Chicago in a stranglehold.

Some communities are now slashing budgets or even laying off workers as they try to reconcile the promises they made to cops and firefighters with the amount of money actually set aside for them.

Of the 300-plus pension funds across the region, only about 20 are rated by the state as fully funded.

"I feel at the moment as if I'm lying to every new hire to the police and fire departments by promising them a pension I'm not sure I can deliver," said Evanston Mayor Elizabeth Tisdahl.

Some towns did not put nearly enough into their pension funds. Some padded pensions of workers by boosting salaries just before they retired. Some boards overseeing the funds violated basic management rules.

And state regulators have little power to police excesses, allowing problems to fester from suburb to suburb.

The Tribune documented problems that alone might not seem large, but add up to a big burden for taxpayers:

In Niles, officials failed for years to pay their pension funds what actuaries said was needed, and crawling out of the hole has led to a fivefold jump in payments as police and fire jobs go unfilled.

In Barrington, officials jacked up pensions for top brass to entice retirements and agreed to a pension-inflating perk in the union contract. Then town leaders joined a PR campaign to push state lawmakers to ease the "unsustainable burden" of such pensions on towns.

And in St. Charles, the board overseeing pension cash has used some to pay the board president's wife for clerical work and to send board members, all expenses paid, to out-of-state conferences while the pension fund's health worsened.

The flaws and excesses were long masked by a strong economy, when big investment returns pushed average funding levels to nearly 80 percent a decade ago — which many experts consider to be healthy. The latest figures from 2009 show suburban public-safety pension funds, on average, have just 52 percent of the assets needed to be fully funded.

Though the true cost will vary from place to place, the unpaid tab averages nearly $2,700 for every suburban household. A strong economy could boost investment returns and lessen the liability, but experts say the financial sins of the past are too great for pension systems to merely invest their way out of them.

As lawmakers consider reforms, town leaders and unions point fingers. Unions complain towns haven't saved enough and lawmakers failed to force them. Suburban leaders complain lawmakers required them to offer lucrative benefits without the cash to pay for them. The one thing they agree on: The recession made the problems far worse.

The looming crisis frustrates residents such as Jim Young, who joined an Evanston panel studying that city's pension woes. He said government needs to pay for its promises, or stop promising so much.

"Don't kick the can down the road, because that's a debt you're giving my kids and my grandkids, and they're going to have to run the marathon of life with a 5-pound weight on their back," Young said. "How in the hell are they going to compete when they have all this debt?"

Passing the buck

Given their dangerous jobs, police and firefighters have long been promised more generous pensions than rank-and-file government workers. Towns are supposed to collect enough property taxes each year so that, if combined with employee contributions and prudently invested, it would over time cover the benefits already earned by current and future retirees.

But the law doesn't say how much towns must put in, often leading to fights over the math.

The Department of Insurance provides figures to each town to levy in taxes and transfer to the pension funds. But the law lets towns hire their own actuaries to come up with different figures. Pension funds can get their own actuaries, too.

There are no set standards — allowing tweaks in the formula that can sharply lower what a town has to pay, pushing more debt to the future.

And many times, the Tribune found, suburbs' payments failed to meet even the lowest amount required by law.

The state doesn't compile figures of how many towns have done that, with such findings usually buried in individual fund audits. The Tribune reviewed every audit the state would provide — 153 of them in metro Chicago — and found regulators cited a third of their taxing districts for not providing enough cash to their pension funds.

Pension boards complain and even sue the towns, as Summit's police board did last month, alleging it is owed at least $1.1 million.

Meanwhile, towns plead poverty or cut jobs to boost pension funding.

Lake Zurich administrators are trying to catch up after previous town leaders shorted the police pension fund for years. They are planning to pay $1.2 million to the fund next year, six times what they paid just two years ago.

To make budget in recent years, officials have cut 24 positions.

"I wish we could pass the buck to the next guy," Village Administrator Bob Vitas said. "But the reality is you can't."

After shorting its funds, Niles is paying more, in part, by not filling about five open slots for police and firefighters this year. Bridgeview is leaving spots unfilled, too.

Towns that shorted their funds for years get little sympathy from pension fund officials. They say they long warned that the practice would eventually lead to skyrocketing bills.

"When you have politicians with this discretionary authority, where they don't have to pay, that's a real problem," said Jim McNamee, a retired Barrington officer who runs an advocacy group for police and fire pension funds. "They gave themselves a huge tax break during the best economic times we had."

Even sweeter pensions

The skyrocketing bills haven't stopped towns from inflating pensions. A Tribune review of audits and area departments found the practice has been happening for years — even among towns that complain about high pension costs.

Because the size of workers pensions is based in part on their final salary, raises just before retirement inflate the payouts for years to come.

The spiking is written into union contracts from Wood Dale to Lansing, the Tribune found, spelled out as "longevity" pay boosts that coincidentally occur during the anniversaries when employees are likely to retire.

It was just that kind of pay hike that boosted the pension of Countryside police Chief Timothy Swanson 20 percent — to $84,555 — when he retired last year. He declined to comment.

Some pay bumps are offered to induce retirement — it's the boost in pension that is the real enticement.

That's how a retiring Franklin Park deputy chief ended up with a salary higher than her boss.

Some of the end-of-career pay raises are part of regular retirement deals to top cops.

In Justice, five police brass retired with pay bumps this decade, even as the town failed to pay the money it was supposed to into the pension fund. That included Carmine Gioiosa, a chief whose pension was bumped about $23,000 a year, to $85,995.

Gioiosa said the deal was fair — retirees gave up health insurance coverage for as long as 15 years in exchange for the pension boost. Former Mayor Melvin VanAllen agreed, saying shifting the costs to the pension fund "is what the law allows."

But current Justice Mayor Kris Wasowicz called the deals "unconscionable." He said his town is simply too broke, having cut 12 positions in recent years, to pay for pensions he describes as too lucrative.

In Barrington, one chief got a big payday and a new job — in the same town. As part of a deal to clear police payroll and avoid layoffs, Barrington Police Chief Jeff Lawler got an extra 6 percent raise to induce his retirement. The extra pay bump boosted his pension by nearly $5,500 to about $97,000 at the age of 56.

Then the town rehired him as its $128,000-a-year village manager.

One of his top priorities as village manager: get a handle on rising pension costs.

Lawler says his early-retirement bump was justified — a similar deal was offered to other brass and in the union contract. But he wonders if the system can survive without changes.

"The concern is that, over time, if these costs continue to rise, is it sustainable?" Lawler said. "And does that do anybody any good?"

A unique setup

State regulators frequently receive complaints about spiking and often issue "advisory opinions" saying it shouldn't be done. But they have little power to stop it.

What they can do is audit the funds to point out problems.

There are more than 600 separate funds across Illinois, and each has its own five-member board representing municipalities, workers and retirees. Each board hires its own lawyers and investment advisers.

Investment returns varied widely. In limited data from the state, the area's best fund last year earned 24 percent, the worst lost 12 percent.

It's unique for pension systems. Most other states — and most Illinois government workers — have pooled, statewide systems run by full-time staffs. Police and firefighter unions say local control is better, but lawmakers have limited how risky their investments can be and insist the Department of Insurance regularly audit the funds.

Those audits commonly cite boards for breaking basic management and accounting rules, often paperwork oriented, but sometimes more serious.

Pensions boards have been cited for making improper and risky investments, for repeatedly miscalculating pension checks, for spending too much on trips or personal expenses, and for failing to meet — for years.

In Des Plaines, the police board used pension money to pay for food as well as cell phone bills that averaged $450 a month. Board president Nicholas Chiaro said the expenses were fair — volunteer board members need to eat during meetings and stay in touch between them — and the fund's investments have done well.

The Department of Insurance itself struggles to comply with state law requiring that it audit each fund every three years. The Tribune asked for the most recent audits of every fund. Of audits provided, half were older than three years.

That included St. Charles, where the police fund has 51 percent of needed cash to cover earned benefits.

In 2003, its most recent audit, the board was cited for renting an office where it met just four times a year. Board president Larry Laughlin said the board no longer rents it because the city now allows it to meet at the police station.

The board, upset at the city's handling of paperwork, hired Laughlin's wife to do it after seeking bids from her and several accounting firms, Laughlin said. He said he didn't vote on the deal, and he would not disclose her pay.

Laughlin also confirmed the board regularly pays travel expenses for board members to attend pension conferences. That included two members going to New York City to learn about the stock market.

State auditors have questioned similar expenditures in audits of other towns. But with seven years since the last audit, it's unclear what they think of St. Charles' fund.

The Department of Insurance won't answer questions about why it hasn't been back to St. Charles, or comment publicly on any other aspect of the Tribune's findings.

A former state pension regulator, Tom Jones, said it's impossible for the state to keep close tabs on the funds. Even when audits find problems, there's little the state can do.

Jones, who ran the Department of Insurance's pension division from 1990 to 2004, said public pensions are mostly untouchable, barring any criminal behavior. That's different from insurance companies.

"I can go shut down an insurance company," he said. "But I can't shut down the pension fund if they don't have enough money."

Towns and unions, however, have only ratcheted up the public-relations battle over underfunded pensions. Unions want more pressure on towns to make payments. Towns want debt payments eased, current workers to shoulder more of the cost, and new hires to get fewer benefits.

"I think the state has to deal with the issue, or there will be bankrupt funds," said Tisdahl, the Evanston mayor.

A coalition of municipal leaders ran carefully worded nonbinding referendum proposals in 44 communities this month, asking something few would dispute:

Should lawmakers and the governor take immediate steps to protect taxpayers from the burden of police and fire pension costs through meaningful pension reform?

In all 44 communities, more than three-fourths of voters answered yes, as they brace for higher taxes and fewer services to pay for past pension promises.

jmahr@tribune.com

sschmadeke@tribune.com

jbryan@tribune.com

Can it be fixed? Hell no! We can't even afford it!!!

Source

Fixing public employee pensions

Public employees who are taking offense at the discussion of problems and abuses in their retirement system are missing the point. As are some of the would-be reformers.

A remarkable series by the Arizona Republic's Craig Harris documented how the system was being gamed. Salaries on which pensions are based are being artificially inflated. People are “retiring,” collecting benefits, then returning to the same or a similar public sector job.

Public employees are protesting that highlighting such abuses put all public sector workers in a false bad light. Reformers are pledging to shut down the abuses.

The abuses should be shut down. But that doesn't address the main problem. The main problem is that the current system is unaffordable even if not abused. And the system is unaffordable regardless of whether one believes that public employees are saints or sinners.

The Arizona State Retirement System, the biggest by far, only has assets sufficient to pay 75 percent of the benefits it is obligated to pay. Its deficit is $7.4 billion, or about as much as all state general fund revenues (excluding the temporary sales tax) are expected to produce next year.

ASRS is actually in better shape than other major Arizona public pension programs. The Public Safety Personnel Retirement System, for firefighters and cops, only has assets to cover 69 percent of its obligations.

The true unfunded liabilities are probably much greater. These funding ratios assume an eight percent or higher annual rate of return on investments. Not much of anyone believes that's a prudent assumption anymore.

Taxpayers are paying nearly $1.4 billion a year into the major public pension programs. And that's not nearly enough. It doesn't cover current benefits, much less future ones. The actuarial projections are that the percentage of salary taxpayers have to put into these pension programs will continue to increase through at least the remainder of this decade.

Moreover, the system is rigged so that the funding deficits are difficult to make up, even if investments perk up. The first claim on investment income in excess of the actuarial projection is benefit cost of living increases, not restoring the financial health of the system.

The basic structural flaw is that the existing systems allow public employees to retire too early with too generous of benefits.

Public safety employees can retire after 20 years with 50 percent of their most recent annual pay. Participants in ASRS can retire after 30 years with almost 70 percent of their most recent annual pay. After 40 years, an ASRS participant can get over 90 percent of recent pay as their annual retirement benefit.

Public employees don't have to wait until a customary retirement age to begin collecting these benefits. As a result, the average age at which Arizona public employees begin drawing retirement benefits is notably, and unaffordably, young. The average “retirement” age for ASRS beneficiaries is 61. For the cities of Phoenix and Tucson it is less than 60.

These practices are starkly different from those that prevail in comparable private sector defined benefit programs. Benefits in most private plans top out at 60 percent of previous pay. And they don't begin until the worker reaches a true retirement age, at least 62 and frequently 65.

The replacement income ratio isn't truly comparable, since private sector workers are also eligible for Social Security. But experts believe that 70 percent of previous pay is generally sufficient to maintain the standard of living of workers who are truly retired.

Of course, the most radical and effective reform would be to convert public retirement systems to defined contribution plans, such as 401(k)s, as has largely happened in the private sector. But that, paradoxically, would actually exacerbate the funding deficit problem, since new employees wouldn't be paying into the system.

If a defined benefit program is to be saved, and made affordable to taxpayers, benefits have to be capped at around 70 percent of previous pay, not paid until a true retirement age has been reached, and COLAs forgone until the funding deficits are eliminated.

That's not a condemnation of public employees. It's a financial reality.

Military Officers can retire in their 40s with a pension of $40,000

Military Officers can retire in their 50s with a pension of $75,000

Source

Our view on defense spending: Don't spare the Pentagon from the budgetary ax

When politicians vow to freeze federal pay, as President Obama did this week, or slash federal spending, as House Republicans did leading up to the election, they hasten to exempt the military. No one wants to look weak on defense, or unsupportive of the troops.

But with national security accounting for one-fifth of the budget, there's no good reason to take Pentagon spending off the table. In fact, any serious deficit-reduction plan, like the one released Wednesday by Obama's bipartisan commission, includes significant defense cuts.

The U.S. national security budget represents about half of the military spending in the entire world. Thanks in part to the reservoir of goodwill with the American public, the Pentagon and other agencies devoted to national security have received steadily increasing funding in recent years. The amount allocated for defense has jumped 136% in the past decade, to $719 billion this year.

Some of this is, of course, needed to fund the wars in Iraq and Afghanistan. But with the largesse comes spending that is wasteful, excessive or unnecessary. Easily some $800 billion could be saved over 10 years without jeopardizing security, or hurting combat troops and veterans. A few places to look for savings:

•The Pentagon is rife with expensive, over-budget projects that are loved by Congress, less so by military leaders. Topping the list would have to be the V-22 Osprey tilt-rotor airplane, which the Pentagon identified more than two decades ago as a low priority and fraught with technical problems. More recently, the F-35 Joint Strike Fighter program has under-delivered on capabilities while running way over budget. Billions could be saved by jettisoning weapons systems that are unneeded or wildly over-budget.

•The military was excluded from federal pension reform in 1986, making its benefits disproportional to those of other federal employees, let alone people in the private sector. Officers can retire in their early 40s with a lifetime pension of nearly $40,000 (adjusted each year for inflation) or in their early 50s with a pension of about $75,000. What's more, all military retirees — whether combat veterans or desk jockeys — can get family health coverage for $460 a year at a time when the average family plan costs $13,770 annually. That's so generous that they pass up coverage from their private employers.

•Since 9/11, an intelligence-industrial complex has mushroomed so much that no one has a firm grasp of how much it costs. A Washington Post series this year found 1,271 government agencies and 1,931 outside contractors devoted to counterterrorism. Surely that's excessive.

•The Pentagon has 5,113 active nuclear warheads, considerably more than it needs in a post-Cold War world. The same logic applies to the nation's 14 Ohio class ballistic missile submarines, making the world safe from a Soviet Union that no longer exists. Additionally, the active-duty ground forces in the Army and Marines, some 749,000 strong, could be cut by at least 50,000 as operations in Iraq wind down.

Reductions like these aren't the causes of liberals and pacifists, but of budget and military experts — including Defense Secretary Robert Gates — who've scoured military outlays.

If Congress ever gets serious about curbing runaway spending and borrowing, the Pentagon is a particularly target-rich environment.