HB 2608, Laws 2013, Chap. 217, § 6 (January 2014)
Type of reform:
HB 2608 provided that effective Jan. 1, 2014, newly elected public officials would not be part of the Elected Officials Retirement Plan (“EORP”). Instead, the law established a defined contribution plan for all newly elected public officials who were not entitled to remain members of the Arizona State Retirement System. Additionally, HB 2608 required that each EORP employer make level contributions to the retirement fund that are equal to 23.5% of the compensation of all its employees in order to meet the normal cost of the pension obligations plus an amount to amortize the unfunded accrued liability. The legislature appropriated an additional $5 million each year until 2042-43 to supplement the normal cost and amortize the unfunded liability.
Fields v. Elected Official Retirement Plan of the State of Arizona, No. CV-2017-001200 (Superior Court of Arizona, Maricopa Court, Judge Timothy Thomason)(filed Jan. 31, 2017)
Status of litigation:
Prior to the enactment of HB 2608, the EORP had determined annual contribution rates using actuarial methods and assumptions consistent with generally accepted accounting standards. Following the enactment of HB 2608, in 2016, the EORP retained an accounting firm. The firm determined that—after taking into account judicial fees and the annual $5 million payment by the state— at the very minimum, the employer contribution should be equal to 53% of employee compensation. Absent this contribution, the accounting firm believed the EORP would deplete its funds within 10 to 15 years.
The plaintiffs brought suit alleging that the statutory cap on the employer contribution rate violates the Arizona State Constitution and breaches the state’s contracts with the EORP.
Maricopa County Judge Timothy Thomason found in favor of the plaintiffs in a decision issued July 24, 2017.
Judge Thomason held that under the Arizona Constitution, the plaintiffs’ benefits under the EORP are contractually protected. “‘[M]embership in a public retirement system is a contractual relationship subject to Article II, § 25,’ [no law impairing the obligation of contract shall ever be enacted].” Further, the plaintiffs’ retirement benefits are “‘public retirement system benefits [that] shall not be diminished or impaired.’ Ariz. Const. Art. XXIX, § 1(C)-(D).” Decision, at ¶9.
The Arizona Constitution provides that public retirement systems should be funded using actuarial methods and assumptions consistent with generally accepted accounting standards. Ariz. Const. Art. XXIX, § 1(A). Relying upon on the recent Arizona Supreme Court decision Hall v. Elected Officials Retirement Plan, the Court held that public retirement plans are protected and the “State may not unilaterally change the contract terms unless the change benefits the employee.” Decision, at ¶12 (citing Hall v. Elected Officials’ Retirement Plan, 241 Ariz. 33, 40 ¶ 20, 383 P.3d 1107, 1114 (2016)). The Court noted that the Hall court had held that the economic soundness of the retirement plan depends on the contributions of the employers and when investment returns are decreased, the employer contributions must make up for the loss. Decision, at ¶13.
Accordingly, Judge Thomason found that by placing a statutory cap on the employer contributions, the “State is evading its constitutional obligations to fund the EORP and to actuarially set the employer contribution rate.” Decision, at ¶14. Further, there is no offsetting benefit to employees. Id. at ¶18.
The Court held that the statutory cap is at risk of causing irreparable injury to the state employees and that the legislature either needs to find another method for fixing the shortfall or needs to eliminate the cap. Further, the Court awarded the plaintiffs reasonable costs and attorneys’ fees, subject to the submission of an affidavit. On Aug. 7, 2017, the plaintiffs filed an application for attorneys’ fees.