Pension Reform Passes Senate, House, Headed to Governor


Significant pension reform legislation, SB1428 PSPRS modificationsSB1429 public retirement systems; special election and SCR1019 public retirement system benefits, has been voted out of the Senate and House and will go to the Governor. Some sections of the proposal must be approved by voters during the May 17, 2016, special election. See Video of the Risk of Inaction

The pension reform proposal changes several sections of current law. Generally, the measure does the following:

For all active and retired officers hired before July 2017 (This is the only change that requires voter approval):

• Replace uncertain, inequitable, unsustainable PBI (the current retiree benefit increase) with a pre-funded COLA that provides more certainty and equity for retirees. See Video Explanation of PBI

• Compounding annual COLA based on regional CPI, capped at 2%. See Video of COLA Explanation

For Officers Hired Between January 1, 1012 and July 1, 2017: 

New voluntary added benefit “Catch-Up” 3% employee / 3% employer Defined-Contribution benefit for non-Social Security participants hired on or after January 1, 2012 (employers pay more for a period of time based on hire date).

For all officers hired on or after July 1, 2017: See Video Description of New Hire Benefits

Option of electing to participate in either a new:

• Defined Contribution Only 9% / 9% retirement benefit plan, or

• Defined Benefit Only retirement plan (+ 3% employee / 3% employer Defined Contribution benefit for non-Social Security participants).

Defined Benefit Retirement Plan for New Hires: It’s expected that most new hires will select the Defined Benefit Only Retirement Plan.

Stepped multiplier: Based on years of credited service:

• 1.50% for 15.00-16.99 years of credited service

• 1.75% for 17.00-18.99 years of credited service

• 2.00% for 19.00-21.99 years of credited service

• 2.25% for 22.00-24.99 years of credited service

• 2.50% for 25+ years of credited service (same as current)

50/50 Cost Sharing: Contributions are split 50/50 between employers and employees.

Places a $110,000 cap on pensionable compensation.

• Cap adjusted every three years to account for real wage growth, as determined by a weighted average of actual changes in public safety wages in Arizona.

Final average salary = highest 5-year average

Increases minimum benefit eligibility age from 52.5 years old to 55 years old, however, an actuarially equivalent benefit is available at age 52 (similar to early Social Security retirement at a lesser benefit, designed to pay out the same over time).

Hybrid Element – Members not enrolled in Social Security are provided with an additional defined-contribution retirement plan with contributions consisting of:

• A required employer contribution of 3% of the member’s regular pay; and

• A required contribution by the member of a minimum of 3% of that member’s regular pay.

• Employees may elect to increase the employee’s contribution up to the annual limits established by the IRS.

Defined Contribution Only Retirement Plan Option for New Hires

Employees provided with a professionally-managed defined contribution retirement plan, with contributions consisting of:

• A required employer contribution of 9% of the employee’s regular compensation; and

• A required contribution by the employee of a minimum of 9% of that employee’s regular compensation.

• Employees may elect to increase the employee’s contribution up to the annual limits established by the IRS.

• 10-year vesting of employer contributions.

• Immediate vesting in event of disability retirement.

Reasonable safeguards to ensure adequate long-term financial security, such as:

• Prohibitions on borrowing against assets.

• Limited pool of funds to invest in, with options available for target-date funds and index-based funds

• Annuitization options

• Member education and advice.