By Tom Patterson
Arizona’s cities and towns are choking on the cost of pensions, especially for public safety workers. Nothing unique about that. Governments around the world, from Greece to Puerto Rico, Illinois to Detroit and places in between are capsizing due to unmanageable debt loads caused mostly by retiree benefit expenses.
Prop. 124 is a serious attempt to address the excessive costs of the Public Safety Personnel Retirement System (PSPRS). It’s a step in the right direction. It just doesn’t go far enough.
The municipalities in Arizona contribute an average of 27% of salary into the PSPRS for firefighters and policemen, in addition to the fixed employee contribution of 11.65%. But for some places is even worse than that sky high amount. Since employer contributions are uncapped, Flagstaff, for example, has a contribution rate of 45% for policemen and an astounding 70% for firemen, due partially to the fact that so many firefighters have retired that there are more retirees than active firefighters making contributions.
The Town of Paradise Valley a couple of years ago was one of several that had to stop hiring additional policeman because of a 650% increase in pension costs since 2002.
Yet even this amount of total funding, far exceeding private-sector norms, is not enough.
PSPRS is only 48% funded, meaning they have less than half of the financial capability required to meet their present obligations.
Prop. 124 addresses the looming crisis by reducing the cost-of-living increases (COLAs) in PSPRS. Under current law, PSPRS pensioners have received 4% annual increases over the last two decades. If Prop. 124 passes, COLAs would be based on a local inflation adjustment and capped at 2% per year.
To give credit where due, Prop. 124 is the result of negotiations between union members, reform minded legislators and the libertarian Reason Foundation. To get even more credit, the union negotiators realized that refusing the reform would result in more cuts to their own services and very possibly threaten their future financial security.
Yet no matter how much the negotiators want to believe they “met the crisis…head on and solved” it, Prop. 124 isn’t enough. The projected savings are just $1.6 billion – over 30 years – not that much for a plan with a $6.6 billion deficit in unfunded liabilities. The legislature’s budget analysts aren’t even certain the contribution rates for the municipalities would fall at all.
The solution isn’t the same size as the problem.
How did we get here?. In the last half of the last century, government employee unions, previously unheard-of and regarded as unthinkable, begin to grow and mature. They learned to flex their political muscle to win increasingly lucrative contracts. Negotiating with politicians they helped put in office, they were able to gain pay and benefit packages that in many cases far exceeded the private sector’s.
Governments, including Arizona’s, are faced with funding benefit packages that are simply too expensive, with retirements coming too early, too much pension spiking and payout amounts not supported by the funds available to pay for them.
The defined benefit plan itself is at the heart of the problem. Fast becoming an anachronism in the private sector, the defined-benefit structure allows politicians to raise benefits levels, and do something nice for their workers, without having to spend general fund money.
When Arizona’s pension plans were fully funded in the 90s, union lobbyists actively urged legislators, like me, to just take the money for increases out of the fund balances. When the enhanced benefit levels levels later turned out to be unaffordable, the decision was made, once again, to force future taxpayers to deal with it.
As millions of pensioners are now discovering, underfunded defined benefit plans aren’t as secure as they seem. A promise to pay may not be worth much if the money simply isn’t there.
Defined contribution plans, on the other hand, provide security (and portability) for workers, predictable financial liability for governments and provide workers with assets that can be passed on in their estate.
Prop. 124 is worth voting for. Just don’t confuse it with a lasting solution to our government pension problem.