The Pew Center on the States, not known as a conservative thought leader, had some bad news for Arizona recently. Our state pension systems are seriously underwater and sinking fast.
In the public pension world, 80 percent funding is considered good enough for government work. But none of our state’s four pension systems even hit that benchmark. They ranged from 76 percent funding for the Arizona State Retirement System (teachers and government employees) to 61.9 percent for the public safety officers trust, down from 66.7 percent the previous year. The trust administrator admits the funding level will be still lower at the end of this fiscal year.
It wasn’t always this way. Not too long ago, our state pension systems were fully funded and had a reputation for excellent management. Lobbyists then urged legislators to expand benefits and lower eligibility requirements using the argument that “it wouldn’t cost anything.” That meant legislators could curry favor with an important constituent group without changing the contribution rates because the money was already in the system. Of course, they signed on.
You know what they say about things that seem too good to be true. Of course, it wasn’t true that the good times would last forever or that we could give government employees lavish retirement plans and never have to pony up. When the financial markets faltered in recent years, our pension systems couldn’t keep up with their fixed obligations.
Even though taxpayer contributions to public pensions are slated to increase again at the end of this fiscal year, the additional funds won’t come close to covering the shortfall. Yet local governments, whose employees are in the state system, have already seen their expenses go up 448 percent over the past decade. We have simply promised more than we have the capability to deliver.
The Legislature is well aware of the problem. In fact, they passed a pension reform measure in 2011. The bad news is that it was tepid at best, mostly involving minimal increases in employee contribution rates. The worse news is that employee groups have been suing to block even these modest reforms in court and have been winning.
Here’s where it gets tricky. Under the Arizona Constitution, employee pension benefits are treated as matters of contract that can’t be abrogated. The practical effect is that when times are good, benefits can be increased. But when the time for belt tightening rolls around, pension benefits can’t be dialed back.
Last year, two groups of judges sued to block the proposed changes to their pension plan. Judges contribute just 7 percent of their salary to their pensions, while taxpayers, required by formula to make up shortfalls, have seen their share go from 7 percent to 17.5 percent and rising. But the judges disagreed that they should contribute more or that their Cost of Living Adjustments should reflect investment performance, i.e. money available. The judges argue the entire burden of adjusting to more austere economic conditions should rest entirely with taxpayers, most of whom have no hope of retirement incomes comparable to what the judges enjoy.
Legislators have responded by proposing a constitutional amendment that would permit limited pension reforms. That’s probably necessary, but the first rule when you’re in a hole is to stop digging. The only reform that will stop the bleeding long-term is to phase out defined benefit retirement plans and begin moving government employees, at least new hires, into 401(k) style plans that are the norm for private sector workers.
Government employees may actually be better off in defined contribution plans rather depending on promises. Governments may not be the bottomless pits they have always seemed. By the time you read this, Stockton, California may have declared bankruptcy, largely because of overwhelming pension costs. Many other government entities, including even our federal government, are in deep trouble financially. All the pension benefits that glitter may not be so golden.
Voters around the country are waking up to the public pension crisis we’ve bumbled into. Reform measures that would have been unthinkable not long ago were passed recently in San Jose and San Diego, California.
Arizonans should wake up too. We have a huge problem that won’t go away by itself.