In the May 17 special election, voters are being asked to sign off on a major part of a police and firefighter pension system overhaul that was enacted by the Arizona Legislature earlier this year.
The changes contained in Proposition 124 lower cost of living increases for current and future retirees. That change is designed to help the retirement system for public safety officers recover from a major drop in the plan’s funded status. The funding level has sunk to just 50 percent of its expected liabilities, with about $6.5 billion in assets and $12.7 billion in liabilities as of last June.
Employers have seen their contribution rates soar to an average of more than 42 percent of their salary, with some cities, such as Prescott and Bisbee, paying much higher rates. That cost keeps police and fire agencies from hiring more employees and crimps city service budgets.
The Legislature passed a major overhaul of the system in February. It creates a new tier for newly hired police and firefighters, limits maximum pension payments and requires employers and employees to share equally in payments to retirement accounts. Current employees pay about 11 percent of their pay into the retirement plan, but employer contributions aren’t capped.
The changes won’t fix the problem overnight. Backers acknowledge that it will take nearly 20 years for the plan to return to fully funded status, but they say it puts it on a path to stability while making only minor changes to the contract existing employees and retirees operate under.
“It fixes it every time you hire someone new — because when you hire new people they’re coming in at a much lower costs,” said Bryan Jeffries, president of the Professional Fire Fighters of Arizona, who was involved in negotiating the changes. “And why that’s important is you cannot erase the credit card debt that is currently on the books.
“But it means you start working on a path where you’re going to have extra money in the budget to pay off your credit card debt and you’ve also set up a structure to hopefully never go into credit card debt again,” Jeffries said. “It will save cities and towns 3 to 4 percent per year off the top right away, and that’s just about every year. And that number starts to really drop off once they paid off their credit card debt.”
New hires also would be given a choice of opting for a 401(k)-style retirement plan rather than a plan with a guaranteed pension.
The 90-member Legislature approved the package with just 10 no votes. Opponents worried the overhaul didn’t fix the issues with the Public Safety Personnel Retirement System, just covered them with Band-Aids.
The part voters need to approve changes the way yearly benefit increases that are sapping the trust fund are calculated. The way the plan is now set up, excess earnings from the pension trust are put into a fund that doles out automatic increases of up to 4 percent in most years. The problem is that when the fund sees losses, as it did during the Great Recession, excess cash in flush years can’t make up the difference because it is sent to the cost-of-living-adjustment fund.
The new proposal would change the payout to just actual cost-of-living increases, up to 2 percent a year. The state Constitution guarantees pensions, so a change is needed.
There is no organized opposition to the proposal. Jeffries, the firefighter association leader, said that’s because cities and towns, the Legislature and police and fire organizations worked together to come up with a plan.
“We worked for a solid year together in forming the solution that is Prop. 124, along with some other pension reforms that were passed by the Arizona Legislature this year,” Jeffries said. “So disparate groups that typically fight and contend on these issues got together and formed a solution.
“That’s why you don’t see any organized opposition, because everybody’s in agreement,” he said.