Senate panel OKs changes to public safety pension plan

PHOENIX — Ignoring arguments that the claimed savings may not be real, a Senate panel on Wednesday approved massive changes to the pension system that covers police and firefighters throughout the state.

The three-bill package, given unanimous support by the Senate Finance Committee, is designed to address the fact that the unfunded liabilities of the Public Safety Personnel Retirement System went from zero in 2003 to $6.6 billion now. What that means is that the dollars in the fund cover less than half the liabilities.

Pete Constant, director of the Pension Integrity Project, said that unless major changes are made, some cities are in danger of going broke as their pension assessments to cover the costs of their current employees are nearly equal to the salaries, making it fiscally impossible to hire new workers. He specifically said that Prescott and Bisbee are at the tipping point.

Virtually all of the changes in the package, which now goes to the full Senate, affect only those who will be hired after the legislation takes effect. These range from retirement age and contributions to the fund to the capping of benefits.

Increases capped at 2%

There’s also the option of new workers to have a defined contribution plan, similar to a 401(k), where their pensions would be based on the growth of their funds and not on some set formula as now exists.

One element, though, would affect all current and retired workers: limiting benefit increases to inflation, with a 2 percent cap. That compares with the current 4 percent annual increase.

That change, however, requires voters to approve a change in a provision in the Arizona Constitution that precludes pension benefits already earned from being reduced. That issue would go on the May 17 special-election ballot.

The long-term goal is to restore the fund to financial stability.

But it is also designed specifically to help employers. Constant estimates they will save $1.5 billion over the next 30 years.

The package drew praise from Prescott Mayor Harry Oberg, who said his city is “the main poster child of why we need to have reform of the system.”

“Prescott owes right now $71 million in unfunded pension debt,” Oberg said. “That’s a staggering sum for us with a town of 40,000.”

And he said the poor rate of return this past year for the retirement fund likely will add $4 million to that.

The result of the fund’s problem, he said, is his city’s contribution rate toward pensions went from 18 percent of payroll in 2007 to 75 percent for the 120 public safety employees. Put another way, Oberg said Prescott pays $49,000 a year in pension costs for each police officer and firefighter.

What’s spent on that, he said, means less money for everything else. “We’re going to see a slow death spiral in our ability to maintain essential services,” Oberg said.

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Kevin McCarthy, president of the Arizona Tax Research Association, said he supports pension reform. But McCarthy told lawmakers he’s not buying the contentions of how much these changes will save.

He said the savings are built on several assumptions he questions. One is how many new employees will choose that defined contribution plan that should cost employers less.

More significant, he decried the lack of what he called “material” changes in the system, particular in terms of future annual benefit increases. McCarthy particularly singled out what he said is a requirement to do cost-of-living increases “notwithstanding the health of the fund.”

He suggested the solution in the three-bill package does little to rescue the fund.

“We thought ... the overarching goal was to try to improve the health of the system that is beyond crisis levels,” McCarthy said. He said more extensive changes are needed to do that.

Michael Hunter of the Goldwater Institute cited similar problems, saying more is needed to restore the fund to fiscal health.

“It’s in crisis,” he said. And Hunter said that failure to act will leave some cities in a “world of hurt.”

Hunter acknowledged these the changes will stop the bleeding, with new employees ultimately costing less. But he said the plan does nothing to deal meaningfully with the fund’s red ink.

Up against “reality”

The criticisms drew an angry response from Sen. Debbie Lesko, R-Peoria, who crafted the plan.

She acknowledged that it will take 19 years to put the pension fund on solid ground.

“But what we’re doing with this is changing the system for the future,” Lesko said, given both legal and political constraints against taking away benefits already earned.

“We’re also going to be saving money for employers from the get-go,” she said. “For every new hire, they’re going to be able to save money on their employer contribution.”

And Lesko pointed out that the only reason she was able to bring the package forward is that it has the blessing of not only the local governments who are most at risk if the plan is not fixed but also groups representing police and firefighters.

“When you live in reality, you have to negotiate,” she said. “We don’t get everything we want.”