Pension Crisis

Keep an Eye on Phoenix's Pension Reform Initiative


Consider this a "Create Your Own Alt-Text" challenge.
Credit: Dave Bredeson |

Phoenix voters tomorrow will get a chance to push through some more reforms for its public employee pension program, which is currently underfunded to the tune of $1.5 billion. Proposition 487 (pdf) aims to shift new city employees to a defined contribution (401k-style) plan rather than a defined benefit (pension) plan in order to get rid of these liabilities. Slowly. Eventually. Current employees won't be affected by the changes, so the city will still be obligated to pay these pension debts.

The debate in Phoenix has centered on whether it affects police and firefighter pensions (it's not supposed to because they have their own pension funds) and whether it would save money or cost more money. That second battle seems the odd one. Anybody who grasps how pensions work would understand that this will save money in the long run by essentially eliminating future debt for retirements. The fiscal argument against the change appears to be something along the line that making this change would require the city to actually pay its debts more quickly instead of dragging it out, and more importantly, they wouldn't be able to take from Peter (new employees) to pay Paul (current and retired employees), which seems kind of like admitting that public pensions as they stand right now are a big pyramid scheme.

Our co-workers at the Reason Foundation (the non-profit that publishes this web site and Reason magazine) have been heavily involved in analyzing the finances of the reform initiative, and they're actually quoted on the page for Proposition 487 at the ever-useful Ballotpedia site. In August, Reason Foundation's Adrian Moore and Anthony Randazzo attempted to dispel some of the arguments that this particular pension reform would cost more than it saved:

Our actuarial analysis of the reform accounts for all elements of the November ballot initiative and finds taxpayers are likely to save as much as $1.6 billion over the next 25 years. In fact, the raw savings could be used to pay down the current pension debt faster and save Phoenix money in the long run, a move the city's actuaries actually recommended in their analysis.

Similar reforms in other states have been successful, but opponents of the initiative are telling half-truths to make you believe otherwise.

They say that Michigan had its unfunded liabilities increase after making a similar switch in 1997. It is true that Michigan saw its pension debt increase dramatically, but it is purposefully misleading to claim that it had anything to do with the adoption of a 401(k)-style pension plan.

The increase in Michigan's pension debt occurred in the 2000s, well after the reforms, and is entirely attributable to the legacy defined benefit system. Michigan officials chose to underfund their old-style system and to assume massive returns from Wall Street would cover the underpayment. As was the case in many states, this big gamble did not pay off and Michigan wound up with a much larger pension debt. Meanwhile, the reformed pension system has been financially stable and debt free since 1997, and there has even been talk of moving teachers into a similar system. The story is almost identical for the pension reform efforts in Alaska and West Virginia.

Read more from the Reason Foundation about Phoenix's pension situation here.

If Phoenix's initiative passes tomorrow, don't rush to celebrate too quickly. Just as with nearly every effort by cities and states to reduce the dangers of pension debts by shifting out of these easily abused (by all sides) system, lawsuits are sure to follow.