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The truth about pension reform for Phoenix

Phoenix’s public employee pension system is currently $1.5 billion in debt and on Nov. 4, voters will decide whether to make significant reforms to erase the debt or stick with the status quo. Opponents of the Phoenix Pension Reform Act claim it will cost taxpayers hundreds of millions of dollars and that similar reforms in other states have been failures. But they’ve got the facts all wrong.

The ballot initiative is modeled on successful pension reforms in San Diego and other cities that ensure government responsibly funds worker benefits and have dramatically lowered risks to taxpayers. The initiative would shift new employees to a sustainable, well-designed 401(k)-type of pension plan (similar to how most Phoenix taxpayers save for retirement) that would save taxpayers money by permanently ending “pension spiking” by which government workers can artificially boost their annual pension payments to be higher than their final salaries. It would also eliminate a secondary retirement system that has cost an average of $16.5 million annually the last three years.

Critics of reform are touting the fallacious price tag of switching to a 401(k)-style plan. Cathy Gleason and Tom Simplot, co-chairs of Phoenix Citizens for Pension Responsibility, claim the “new pension initiative is a bad deal the city and its residents can’t afford…” and point to a recent study by Phoenix actuaries that “shows this pension initiative could cost taxpayers a minimum of $358 million over the next 20 years.”

But as those same actuaries confessed to the City Council in June, they were directed by the city of Phoenix Employees’ Retirement System to measure only the costs of creating the new pension system and to ignore the money-saving features!
Our actuarial analysis of the reform accounts for all elements of the November ballot initiative and finds taxpayers are likely to save as much as $1.6 billion over the next 25 years. In fact, the raw savings could be used to pay down the current pension debt faster and save Phoenix money in the long run, a move the city’s actuaries actually recommended in their analysis.

Similar reforms in other states have been successful, but opponents of the initiative are telling half-truths to make you believe otherwise.

They say that Michigan had its unfunded liabilities increase after making a similar switch in 1997. It is true that Michigan saw its pension debt increase dramatically, but it is purposefully misleading to claim that it had anything to do with the adoption of a 401(k)-style pension plan.

The increase in Michigan’s pension debt occurred in the 2000s, well after the reforms, and is entirely attributable to the legacy defined benefit system. Michigan officials chose to underfund their old-style system and to assume massive returns from Wall Street would cover the underpayment. As was the case in many states, this big gamble did not pay off and Michigan wound up with a much larger pension debt. Meanwhile, the reformed pension system has been financially stable and debt free since 1997, and there has even been talk of moving teachers into a similar system. The story is almost identical for the pension reform efforts in Alaska and West Virginia.

Finally, critics of the reform initiative point out that Phoenix residents already voted on pension reform last year. While well intended, those changes require new city workers to pay half of the city’s annual pension debt payment, meaning new workers must pay for retirement benefits for older workers — something no other city in America asks of its employees. New workers will soon be paying 25 percent of their salary back to the city for pension costs. How many new workers will the city be able to hire with that bad deal? How much more will Phoenix have to pay just to attract people to work for the city?

Don’t be fooled by the disinformation disseminated by critics. The Phoenix pension system is still broken and needs reforms to become a more sustainable pension system for government workers that allows the debt to be paid off and protects other municipal services.

— Adrian Moore is vice president of policy at Reason Foundation. He can be reached at adrian.moore@reason.org. Anthony Randazzo is director of economic research at Reason Foundation. He can be reached at anthony.randazzo@reason.org.

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