PHOENIX β The head of the Senate Finance Committee is unveiling a bold plan this week to keep one of the stateβs pension funds from going broke.
The proposal by Sen. Debbie Lesko, R-Peoria, would require newly hired police and firefighters to work for 25 years before theyβre entitled to a full pension. Now members of either group can get pensions equal to 80 percent of their pay after just 20 years.
Other changes that would affect new hires include:
- A requirement to be at least 55 years old before getting full benefits.
- Splitting the cost of funding the pensions on a 50-50 basis.
- Allowing workers to choose a βdefined contributionβ plan, similar to a 401(k).
The legislation, set for a hearing Wednesday, also would cap the amount of any workerβs salary that would be used to calculate the pension at no more than $110,000 a year. That is designed to prevent pension βspiking,β where employees save up unused bonus or sick time for a last-minute cash payout that can make the retirement benefits higher than the salary.
Potentially the most far-reaching provision, though, would scrap existing requirements for both new and existing workers as well as retirees that they be guaranteed a 4 percent benefit increase each year.
Lesko said that has been paid out for at least 20 years despite the fiscal condition of the Public Safety Personnel Retirement System. The change would peg annual increases to the Consumer Price Index, with a cap of 2 percent.
But that last provision can take effect only if the Arizona Constitution is to amend a provision that says that βpublic retirement system benefits shall not be diminished or impaired.β And that requires approval of voters.
Lesko said she hopes to put that change on the ballot in the special education funding election already scheduled for May 17. But time is running short: Lesko said the Secretary of Stateβs Office says the final measure must clear the House and Senate by Feb. 15.
She acknowledged thereβs another potential detour.
Lesko said it is possible that existing employees and retirees will claim that the 4 percent year-over-year increases are part of their contract with the state, a contract that cannot be altered.
There is precedent for such a lawsuit. In fact, the Arizona Supreme Court two years ago voided a similar change lawmakers had tried to make in the pension benefit increases for retired judges.
But Lesko said even if that provision falters, either at the ballot box or in court, the other changes will go through if she can get the votes at the Legislature.
Lesko said doing nothing is not an option. She said public safety retirement system is funded only at the 49 percent level.
At this point, Lesko said she has the support of not only Gov. Doug Ducey and the League of Arizona Cities and Towns but also some major unions including the Professional Fire Fighters of Arizona, the Fraternal Order of Police State Lodge, and the Phoenix Law Enforcement Association.
Much of the key to getting that labor support is linked to the fact that, with the exception of smaller future benefit increases, those already on the job would not be affected.
But for those hired after the new law takes effect, the changes would be profound.
Take the question of who contributes.
At this point, employees pay a maximum of 11.65 percent of their salary into the pension fund. But there is no cap on the employer side of the equation.
She cites the example of Prescott where the cityβs pension costs equal about 80 percent of what the actually pay their officers.
Put differently, it means if the city is paying an officer $50,000 a year, the actual price tag for just the salary and pension is $90,000. And that doesnβt count other benefits and costs.
Under the proposal, contributions will be equalized for newly hired officers and firefighters.
While most of these changes will mean new hires donβt get the same benefits as those already on board, they might actually welcome one provision.
Right now public safety retirement system is a βdefined benefitβ system, with those retiring entitled to set pensions based on a formula taking into account their salary and years of service.
New hires will still be able to get into that system, albeit under the new conditions. But they also will have the option of a βdefined contributionβ plan.
That would be funded equally by the employer and the worker. But the account would be managed professionally, with the pension at retirement based on the earnings.
Lesko said this kind of system might be preferable to someone who is an experienced worker and would be unlikely to stay long enough to get full benefits from a defined benefit plan into which she or he would otherwise be required to pay.
Lesko said she has built the package so the changes in benefits for new hires will take place even if voters reject the constitutional amendment. The net effect, though, would be to blunt the savings to the fund.
Arizona actually operates several other funds, including one for corrections officers and another for most other public employees, including teachers. Lesko said while these also have their own financial challenges they are in better shape than the one for police and firefighters.
