Pension Crisis

Pension Reform Efforts Succeed in Arizona—With the Help of the Reason Foundation

All sides get on board for changes to keep the system financially viable.

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"Surely they don't have stock art of a piggy bank in the desert … OMG!"
Credit: Stuartbur | Dreamstime.com

Some rare good news about the state of public employee pensions is coming out of Arizona this week. Republican Gov. Doug Ducey has just signed legislation to help fix the state's underfunded pension system for public safety employees. It's legislation that has support from all sides—a difficult challenge given how implacably public sector unions have fought any changes to pension systems.

The Reason Foundation (the non-profit that publishes Reason.com) played a big role in making it all happen. Leonard Gilroy (director of government reform), Pete Constant (director of the Reason Foundation's Pension Integrity Project) and Anthony Randazzo (director of economic research) explained how the process all came together:

Reason Foundation was a key player from the beginning of the process, with its Pension Integrity Project team providing education, policy options, and actuarial analysis for all stakeholders. We also facilitated the development of consensus among stakeholders on the conceptual design and framework of the reform. Further, more than once we resorted to shuttle diplomacy to keep stakeholder parties at the table when negotiations became difficult or threatened to break down.

Arizona's public safety associations—led by the Professional Fire Fighters of Arizona, the state lodge of the Fraternal Order of Police, and the Phoenix Law Enforcement Association—also deserve major credit for recognizing the need for reform early on and proactively bringing reform ideas to the table that ultimately led to the launch of the stakeholder collaboration process.

The result was three bills sponsored by Republican State Sen. Debbie Lesko that passed with bipartisan support. Right now Arizona has more than $6 billion in unfunded pension liabilities. Here are some of the ways the new laws attempt to help fix the problems:

  • Cost of living increases (COLA) will be based on the consumer price index for Phoenix and capped at 2 percent and will be pre-funded (which is currently not happening).
  • New hires will be able to choose between defined contribution plan (like a 401(k)-style savings plan) or a hybrid defined benefit plan rather than the traditional pension system.
  • New hires will have the salary cap for pension calculations reduced from $265,000 to 110,000 per year, seriously limiting incentives for finding ways to "spike" pensions with bonuses or unused vacation time to jack up what retiring employees will be receiving.
  • The eligibility age for new hires will be increased from 52.5 to 55.
  • New employees will have to pay 50 percent of plan costs if the plan doesn't meet return assumptions.
  • Employers (that is to say, the government) will be forbidden from having "pension holidays," where they stop paying into pension funds when they are overperforming (which then turns into a crisis when pensions later underperform).

The Reason Foundation predicts that the changes will save taxpayers $1.5 billion over the next 30 years and reduce retirement costs per new employees by 20 to 43 percent. More importantly, the shifts reduce risks borne by taxpayers by 50 percent and the accrual of pension liabilities by 36 percent.

Note the heavy references to "new hires." That was clearly the compromise to get the unions on board. Current employees will not see the kinds of massive changes in store for newer hires, so the savings will not be immediate.

The one bill that does change existing pensions, the cap on COLAs, is going to have to go before a public vote in May for additional approval. According to the Arizona Republic, the public safety unions are on board and will be encouraging voters to come out to the polls and approve the changes.

Read more details about Arizona's pending changes directly from the Reason Foundation here

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  1. Haven’t we seen some successful pension reforms take hold, only to be quietly overturned years later after litigation? You know, kind of like a cop who very publicly gets fired after poor behavior, then quietly gets reinstated after arbitration, with back pay.

  2. Arizona’s public safety associations?led by the Professional Fire Fighters of Arizona, the state lodge of the Fraternal Order of Police, and the Phoenix Law Enforcement Association?also deserve major credit for recognizing the need for reform early on and proactively bringing reform ideas to the table that ultimately led to the launch of the stakeholder collaboration process.

    I AM NOW SUSPICIOUS.

    1. “At Gerber, we recognize the importance of breast feeding, therefore we wholeheartedly support the ban on formula advertising as a way to encourage better practices for rearing our nation’s children.”

      *mad flashbulbs, ribbon cutting and press-conference applause*

    2. I believe the police ideas were things like: making up funding with civil asset forfeiture.

    3. It’s possible – possible mind you – that the police and firemen weren’t total retards and realized the options were screw the new guys or all get royally fucked down the road.

  3. I’m okay with the “new hire” stuff. People made decisions to take jobs based in part on retirement funding. Sometimes, contract renegotiations have to happen, but avoiding them as much as possible is good management.

    1. Cutting existing benefits is a nominal non-starter. In today’s climate, you have to build your plan around people not yet in the system, but will be.

      1. aka: fucking the new guy

        1. It’s essentially a new contract. It’s either that or fail utterly and end up worse than you are now.

          1. Oh I understand what’s going on. The old time unionists are fucking their “brothers” to keep the outrageous bennies they think they’ve “earned”. If they believed their own bs they’d have ALL the brothers and sisters pitching in their fair share of the cash for their fair share of the benefits. No, they’d rather fuck the new guys.

            1. Whoa, whoa, slow down. I think you’ve misunderstood the modern meaning of “fair share”. That always applies to other people.

            2. its called terms and condition of your employment.what the fouch is is when you put in 30+ yrs and then your employer says my bad.you know those contributions i was suppose to make??? well i didnt so screw you

            3. New guys will know exactly what they’re getting when they hire on. If they don’t like the terms they can look for employment elsewhere.

        2. American Airlines did that back in the 80’s under Bob Crandall. They called it “B-scale” and it got the full support from the unions because it only dealt with new hires. Then when the union became overwhelmingly populated by “B-scale” employees, magically the unions wanted the wages to go back up to a single “A-scale” rate (and they did). I expect the “projected savings over 30 years” will disappear well before 30 years is up. It’s nice to dream though.

      2. Try cutting existing benefits in a private company and see what haapens. Switching from defined benefit to defined contribution is best done like this.

  4. Public employee should get 401k contributions like the rest of us.

    1. They will. Although it is 403b for public employees.

    2. and pay scale???

  5. Weak.

    Why no reasonable “expected return” percentage? Say, whatever the 30-year T-Bill yield is minus 1 percent?

  6. lol, just what we need, new reform lol.

    http://www.Anon-Net.tk

  7. You mean they have a political agenda aside from complaining about the two major parties and promoting immigration?

  8. The only thing that will ever work is when public employees are responsible for themselves, period. They should get a pay check and then have to buy healthcare and save for retirement on their own. But, hey! This looks good, huh? If politicians can find a way to screw the taxpayers, they’ll find it ?. late at night in the dark when nobody’s looking.

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