McDaniel calls state retirement bill questionable
Posted on Friday, July 11, 2008
URL: http://www.nwanews.com/adg/News/230975/
A bill that would eliminate a state retirement system’s deferred retirement plan for certain members of the system would be constitutionally suspect, Attorney General Dustin McDaniel says.
Sen. Steve Faris, D-Central, asked for an opinion from the state’s attorney general about whether legislation that would curtail the Deferred Option Retirement Plan for some categories of employees who are entitled to select that benefit would be constitutional.
Faris said such legislation would operate only prospectively and would not affect employees who elect to participate in the existing plan before the date on which the legislation would take effect.
McDaniel said that for the purpose of Faris’ request he assumed that the bill would eliminate the existing plan for members of the Arkansas Public Employees Retirement System who had not met the eligibility requirements, as well as those who had not elected to participate as of the time the legislation was enacted.
The elimination for the nonqualified members “may well survive [judicial ] scrutiny,” McDaniel said this week. “The surrounding issues are far from clear, however, and judicial clarification may be necessary to definitely resolve the matter.”
As for the qualified members who will have met the conditions to participate but will not have elected to do so as of the time the legislation is adopted, “such members may well have a property interest in DROP that is protected under a general ‘vested rights’ analysis,” he said.
“Accordingly, a proposal to eliminate DROP as to those persons would be constitutionally suspect in my opinion,” McDaniel said.
Faris said he plans to propose legislation next year that would, among other things, give the trustees for the state retirement systems flexibility to make changes in deferred retirement programs if the systems suffer investment losses. That would mean the systems wouldn’t have to wait for the Legislature to consider these changes when it meets.
“I am not trying to completely eliminate the DROP,” he said.
Faris said he’s frustrated that lawmakers are asked to extend the periods for some retirement systems with deferred retirement plans every two years when they don’t need to be extended.
“The concept of the DROP has outlived its usefulness and it has been abused in certain circumstances,” he said.
He declined to cite specific cases, although the teacher retirement system’s program has been the most controversial among the state’s various plans.
The public employees retirement system’s program started in 1997 and includes about 1, 700 members, said Gail Stone, the system’s executive director. System members must have 28 years of service to enter for up to seven years, she said. Rather than retiring and going away, they go into deferment and continue working, she said.
Their regular retirement benefit is frozen when they enter the program and 75 percent of their calculated benefit goes into an account, which earns 6 percent a year, she said. When they retire, they receive either a lump sum payment or an annuity from their specific account, in addition to their regular monthly retirement benefit, she said.
Last year, Sen. Paul Miller, D-Melbourne, unsuccessfully pushed a bill that would have extended the maximum period for public employees retirement system members to participate from seven years to 10 years.
An actuary for the Joint Committee on Public Retirement warned lawmakers that the longer period could create “public perception problems” as a result of increased lump sum payments to some participants. An employee who was paid $ 64, 000 in his final year in the program, for example, could receive up to $ 288, 000 in a lump sum payment in addition to the regular monthly retirement benefit.
The Arkansas Teacher Retirement System, Arkansas State Police Retirement System, Arkansas State Highway Employees Retirement Systems and Arkansas Local Police and Fire Retirement System also have deferred retirement plans, officials said.
The teacher retirement system’s deferred plan has about 4, 700 members, said Paul Doane, the system’s executive director.
Two years ago, a system consultant warned the trustees that they could face “public perception problems” from the system making lump sum payments of several hundred thousand dollars to school administrators after they participate for 10 years.
Then-system executive director David Malone said the system had paid “six figure” lump sum payments to several participants, whose identities he said state law did not allow him to disclose. The largest payment was between $ 600, 000 and $ 700, 000, he said.
The Arkansas teacher system’s deferred program is unique because no other statewide retirement system for teachers has a plan lasting 10 years for its participants, according to system consultant John Garrett Jr. of Milliman Consultants and Actuaries in Vienna, Va.