PSPRS exec: Big payouts for retirees isn’t problem
Jared Smout, administrator of the financially troubled Arizona Public Safety Personnel Retirement System, on Thursday defended a pension benefit that has provided six-figure, lump-sum payouts to many retired police officers and firefighters.
Smout told a special legislative panel there was a perception problem with the Deferred Retirement Option Plan — or DROP — and that it was a “myth” that the program has cost the pension trust a “huge” amount of money.
PSPRS records compiled by The Arizona Republic show DROP has paid out at least $1.2 billion to retirees since fiscal 2002, and it recently provided a record $944,287 payout to Kevin Robinson, a former Phoenix assistant police chief who retired July 1.
DROP allows retirees to receive one-time, lump-sum payments on top of their annual pensions when they retire.
The retention program was designed to keep public-safety officers working longer by making it lucrative to stay beyond when they are eligible to retire. Here’s how it works: » When public-safety officers enter the program, they theoretically “retire” but keep working and drawing their regular salaries for up to five years.
» The pension money the retirees would have been paid goes into a fund where the retirees receive a guaranteed rate of return from the PSPRS, regardless of the trust’s financial performance. Current members of DROP are guaranteed to make a compounded 6.6 to 7.4 percent on their DROP accounts.
» Employer contributions are not made to the retirement system during that time. Depending on the retiree’s date of hire, he or she might have to continue making pension contributions, but they are later returned, with interest, as part of the retiree’s DROP payment.
» When the retiree decides to finally leave the job, the salary stops, the pension begins, and money accrued in the retiree’s DROP account is paid out as a lump sum.
PSPRS records obtained under the state’s public-records law show that at least 316 PSPRS retirees have received DROP payments in excess of $500,000. Of those, 38 are retirees from the Phoenix police and fire departments, and each received a DROP payment in excess of $700,000.
The average DROP payment for retired police officers is $249,932, while the average DROP payment for retired firefighters is $330,282.
Smout gave a presentation called “Debunking the Myths” to a state House ad hoc study committee on PSPRS at the Capitol.
Legislators did not ask questions, and they plan to have another Capitol meeting after Labor Day, with similar hearings scheduled for Yuma, Tucson and the Miami-Globe area.
The group, which has met three times, plans in January to formally recommend to the Legislature how to fix the PSPRS. While lawmakers in the past have tried to improve the pension system, it still is in a financial hole because of court decisions rolling back reforms, poor investment performance in the past and lucrative benefits.
That has necessitated a hike in contributions from state and municipal employers, making it difficult for some communities to meet their pension obligations.
Smout and PSPRS officials were given the floor for much of the roughly twohour hearing to explain the trust’s financial problems. Smout defended the system against recent criticism from elected officials.
Committee Chairman Rep. Noel Campbell, R-Prescott, said in an interview after the hearing that Smout and other PSPRS officials spent too much time focusing on past problems and didn’t offer solutions to fix a system that has less than half of the money it needs to pay its current and future retirement obligations.
Campbell also said he didn’t believe Smout’s assertion about DROP’s cost. The lawmaker said his examination of PSPRS records suggested DROP is “a very expensive drain on the fund” and that he believes the benefit should be terminated for all current employees.
Campbell also characterized DROP’s guaranteed rate of return as too generous, noting it would be nearly impossible to find in the private sector. He said DROP prevents local governments from hiring new, less costly employees to replace “retired” officers in DROP for five years.
Unlike many officers in DROP, those new employees also would be making individual contributions to the retirement system.
PSPRS Chairman Brian Tobin is a DROP enrollee. The Phoenix deputy fire chief has served 34 years. He is projected to receive an $817,398 lump-sum payment in addition to a projected retirement check of $133,968 a year, according to PSPRS records.
Smout told lawmakers that members who enter DROP are swapping future pension growth for a lump-sum payment upon retirement. He said the five years a person is in DROP is not included in the pension formula, creating a lower actuarial expense during a member’s retirement.
His presentation showed that 4,850 public-safety officers have exited DROP since 2002.
Tobin also addressed the legislative panel.
He said the dot-com crash in 2000-01 and the real-estate crash in 2008 severely affected the PSPRS trust. He also explained that a now-eliminated program called a permanent benefit increase also hurt the system.
In defending DROP, Smout said his organization concluded it was largely costneutral. But the Arizona State Retirement System, which is in better financial health, ended DROP because of major cost concerns.
Paul Matson, chief executive of the ASRS since 2003, said in an earlier interview that the ASRS, the much larger pension system, never implemented DROP because it would have significantly increased trust payments for members and their government employers.
Matson had lawmakers revoke DROP for ASRS members in 2006.
“We didn’t implement it because we didn’t want contribution rates to increase,” Matson said.
The ASRS trust is in better financial health than the PSPRS.
The pension system for teachers and state and local government employees has a funded ratio of 76 percent, meaning it has about three-fourths of the money it needs to pay all current and future liabilities.
A public pension plan is considered healthy when the funded-ratio is at about 80 percent, because it requires lower payments from employees and employers.
The PSPRS runs three separate pension plans. The funded ratio is 47 percent for police officers and firefighters, 39 percent for elected officials and 59 percent for correctional officers. The poor financial health of the PSPRS has required government employers to make ever-larger contributions to the system on behalf of employees.
Some communities, such as Prescott and Bisbee have considered filing for bankruptcy protection because their PSPRS payments for police officers and firefighters consume significant chunks of their general-fund budgets.
“The whole purpose of this is to find solutions to benefit law enforcement and firefighters,” Campbell said to close the meeting.
Smout and PSPRS officials were given the floor for much of the roughly two-hour hearing to explain the trust’s financial problems. Smout defended the system against recent criticism from elected officials.