Can the Voters Cure Phoenix's Public Pension Sickness?

A measure on the city's November ballot may not be a perfect way to fix its retirement system, but doing nothing is not an option.
by | May 6, 2014
 

Bad policy often begets imperfect solutions. There's a lot not to like about the solution that's on the table for Phoenix's out-of-control public employee retirement system. But in this case, it's a lot better than doing nothing at all.

The city's November ballot will include propositions that would replace Phoenix's traditional pension system with a defined-contribution plan for new employees and a cap on pensions for current workers.

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There's a reason our nation's founding fathers favored a republican form of government over direct democracy. Ballot initiatives are often the public policy equivalent of performing surgery with a machete. But in Phoenix's case, the patient's condition is desperate enough that a scalpel won't do the job.

The city's pension costs have risen from $28 million in 2000 to $110 million in 2013. Despite increased contributions, the fund only has enough money to cover 56 percent of its obligations, and that funding ratio is falling fast.

To make matters worse, the city charter prohibits increasing current employees' pension contributions. While their contribution remained at 5 percent of salary, by fiscal 2011 the city's contribution rose to 18 percent of employee salaries. (Last year Phoenix voters approved a change that requires employees hired after July 1, 2013, to split pension-fund contributions 50/50 with the city.)

But the imbalance in contributions is hardly the only factor that is driving up the cost of Phoenix's pension system. The average city employee retires at around age 59 and collects an annual pension that is about $10,000 larger than his or her counterparts in Arizona's state retirement system.

Opponents of the pension initiatives argue that the change to a defined-contribution system will require taxpayers to dole out millions of dollars in upfront costs and that savings wouldn't begin to accrue for two decades. The reason for the costs, which the city has previously estimated at about $23 million annually in the first years after the transition, is because new hires would no longer pay into the old system.

Not surprisingly, supporters of the propositions disagree, pointing to provisions that would halt city contributions to a second deferred compensation pension plan and end a practice known as "spiking" -- artificially inflating income toward the end of an employee's career to boost pension benefits.

Spiking isn't hard to do in Phoenix, where bonuses and fringe benefits such as car and phone allowances and unused sick time can all be used to inflate employees' incomes during the final three years of service on which pension calculations are based. One former city manager whose annual base pay was about $237,000 at retirement used all of the above to jack his pension up to nearly $247,000 per year.

Then there's the additional deferred compensation pension plan, under which the city makes 401(k)-type contributions in an amount determined by negotiations between employees and city management. There is no required employee contribution.

When you combine the $38 million the city contributed in fiscal 2011 to the accounts of the approximately 10,700 employees in the deferred compensation plan with the costs associated with pension spiking, the propositions' supporters' claims that eliminating those provisions would result in immediate savings become a lot easier to believe.

Across the country, an increasing number of public pension systems are becoming unsustainable. But there are few jurisdictions where the need for change is greater or more obvious than in Phoenix. The proposed fixes that the city's voters will decide on in November are far preferable to the status quo.

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