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.