Phoenix Prop 487: City Employees Retirement Plan Reform

Proposition 487 would amend the City Charter to change the retirement plan for new city employees from the current pension (“defined benefit”) plan, to a 401k-style (“defined contribution”) plan.  The proposition also codifies the ban on pension “spiking”.

It makes the important structural reforms needed to fulfill our long-term responsibilities to both public retirees and future tax-payers and, contrary to the claims of employee unions, does not eliminate benefits for first responders.  Proposition 487 deserves your support.

Does not eliminate benefits for 1st responders

I’ll deal more with the specifics of why pension reform is needed and how this measure plans to achieve it further on, but the NO on 487 camp has centered the discussion around their claim that Proposition 487 guts benefits for emergency personnel, so I feel compelled to address that assertion first: it’s simply not true.

Section 1.7–1.9 of the proposal’s statement of intent clearly specifies, “…this Act is not intended to affect persons who are current employees [or] individuals who are members of… any other public retirement system in the State of Arizona such as the Public Safety Employees’ Retirement System.”  Courts do consider legislative intent when applying law—especially if a possible interpretation would conflict with other obligations (such as pre-existing obligations to public safety employees), and that consideration is strengthened when a statement of purpose is actually included with the legislation.  Furthermore, Section 3 gives additional weight to this declaration of intent by requiring, “This Act shall be liberally construed to accomplish its intent….”

Nevertheless, NO on 487 insists that this statement of intent has no force, and that the actual amendatory text fails to exclude first responders.  This also is not true.  Section 5 incorporates the definition of ‘employee’ found in Chapter XXIV Part II §2.5 of the current city Charter, which states, “…The term ‘employee’ shall not include … policemen and firemen who are covered by another retirement system….”

Benefits for public safety employees are clearly excluded from this change.

The need for pension reform

The problem with pensions

Pensions are notoriously unwieldy.  Even when well-managed (many aren’t), costs can balloon unpredictably and anticipated funding sources can dry up.  Because of these difficulties, the private sector began dumping pension plans decades ago, and in those few industries where they remain, pension liabilities have greatly contributed to some of the most serious bankruptcies in recent memory.

How pensions work

Pension liabilities are calculated based on a series of assumptions about how much money will be owed to retirees in the future.  Projections about age at retirement, final salary, life expectancy, and inflation rates can all be factors.  Pension assets are invested and asset value is calculated based upon the market value of the portfolio.  Market volatility and inaccurate assumptions can cause pension funds to lose asset value, but because pensions promise a ‘defined benefit,’ the shortfall has to be made up in the form of increased contributions.  Keep in mind also, pension asset/liability calculations do not account for any future employees—only those already receiving payouts and current workers.

The City of Phoenix Employees’ Retirement System

COPERS liabilities are estimated to be $3.5 billion versus assets of $2 billion, a $1.5 billion dollar gap—or only about 56% funded (see actuary’s report).  While it is not necessary for a pension plan to be 100% funded (that would mean that the projected future value of assets on hand now would be enough to pay all future benefits already earned without any additional contributions into the plan), it is important to have a high funding ratio.  Phoenix’s current funding ratio is not horrible, but it’s not good either—and recent experience had it moving in the wrong direction.

Funding comes from contributions into the plan by both the employees and the city.  Employees hired before July 1, 2013 only contribute 5% of their pay into the pension plan, but even with the increased contribution rate mandated by Phoenix Proposition 201 in 2012, pension funding continues to weigh heavily on city finances.

Many of the city’s general budget projections have been based on rosy assumptions that the population tax-base and property values would continue to increase forever at a rate exceeding projected increases in expenditures—they have not.  In fact, S&P downgraded Phoenix’s credit rating in December 2013 in part due to debt obligations, unfunded pension liabilities, and a previous over-reliance on property values.

In recent years, Phoenix has seen cuts to city services such as libraries & parks, tax and fee increases, including the addition of a tax on basic groceries, previously exempt, a new general ‘city services’ tax on our water bills, and staffing cuts—including significant understaffing of the police department in relation to population and land area.  That officials have pooh-poohed the credit downgrade or blamed circumstances outside their control does not bode well for future city budgets.  If action is not taken, we may soon be facing greater service cuts and tax increases at a time when the city could be in need of funds for other capital improvements, such as replacement of our aging water infrastructure and the possibility of increased expenses due to scarcity if long-term drought patterns hold.

What Prop. 487 would do

Proposition 487 would close the pension plan to new entrants, which would stop us from continuing to accrue additional unfunded liabilities. Instead, it would offer new workers a 401(k)-like plan, which by its nature would be fully funded as we go and is better aligned with private sector benefits. It also makes permanent the ban on pension spiking—the practice of including payouts of large amounts of unused time off to inflate the salary calculation that determines pension benefits.  While it will still take time to pay down the unfunded pension liabilities, this change will put our city’s budget on a more sustainable path.

We must not leave future residents of Phoenix to shoulder the burden of paying today’s city workers.  Risking bankruptcy as we’ve seen in other pension programs would be a disservice to both city workers and taxpayers. We have the opportunity to implement reform now from a position of relative financial strength.  Vote YES on 487.

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