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Pension funds in Arizona facing bleak future

by Craig Harris - Jun. 23, 2012 10:27 PM The Republic |

Taxpayers next week will start paying more to prop up four of Arizona's ailing public retirement plans, which continue to suffer such heavy market losses that their values are far below what they owe pensioners over the long term.

The pension system for Arizona's police officers and firefighters is in the worst shape and has little hope for a quick turnaround, its top administrator says.

"The picture is not good," said Jim Hacking of the Public Safety Personnel Retirement System. "And there is not much of anything we can do about it. We can only hope the financial markets start improving."

State pension administrators had forecast an increase in contributions by public employers to their trust funds during the coming fiscal year because of stock-market declines dating to 2008. But an overall market decline in the current fiscal year, which ends June 30, means even more money than anticipated likely will be needed over the next few years to help stabilize the public-safety-personnel fund as well as the Elected Officials' Retirement Plan, the Corrections Officer Retirement Plan and the Arizona State Retirement System, officials say.

The bleak outlook comes as the Pew Center on the States, a national organization that seeks ways to make government more effective, last week released a study saying Arizona's state pension systems remain underfunded. Arizona is among 34 states facing that problem.

But the Pew Center said Arizona's management of its long-term liabilities for public pensions was cause for "serious concern." The Pew Center said Arizona's four statewide systems as of fiscal 2010 faced a $12 billion funding gap. The funding gap is the difference between assets on hand and the amount needed to pay for retirement obligations of those enrolled in the system.

As funding levels drop, additional contributions are needed from public employers and employees to keep the gap from widening. The increase in public-employer contributions forces governments to cut elsewhere or raise taxes.

Ideally, a public-pension trust is 100 percent funded, meaning the current value of assets in the trust is equal to the pension cost calculated for all current and future retirees. Pensions funded at 80 percent or higher are considered healthy by industry standards.

All of Arizona's pension funds were below that benchmark in 2010, and fell further in 2011, according to records obtained by The Arizona Republic.

The largest system, the Arizona State Retirement System, whose members include teachers and government employees, had the highest funding level at nearly 76 percent as of June 30, 2011. That system is the healthiest because its members historically have paid the same amount into the trust as their employers, and it has not given cost-of-living raises to retirees since 2005 because there were not adequate funds.

Kil Huh, Pew's research director, said the Arizona Legislature in 2011 tried to tackle the funding problem by increasing employee contributions and tweaking some benefits for retirees to cut pension costs. But he noted that court decisions this year struck down changes such as having Arizona State Retirement System employees pay more for their pensions and limiting cost-of-living raises for elected officials.

Arizona has some of the strongest protections for public pensions in the country because its Constitution says public retirements cannot be diminished, which courts have interpreted as meaning that pension benefits cannot be reduced.

"Moving forward, they are going to have to think of a funding strategy," Huh said.

Public-safety fund worst off

Public agencies and their workers fund the state's four pension plans through contributions based on each worker's gross wages.

Municipal employers of public-safety officers, Corrections workers and elected officials pay into the retirement funds at higher rates than their employees, according to rates set in state law. But Arizona State Retirement System employees and employers pay the same rate.

Pension-fund managers invest those trust funds in securities, real estate or bonds. If the economy is booming and a pension fund reaps large earnings, then the funding ratio improves and fewer contributions are needed to keep the fund healthy.

In Arizona, the least-healthy system is that serving public-safety personnel.

As of June 30, the funding ratio for the public-safety officers' trust was 61.9 percent -- meaning current assets would cover less than two-thirds of liabilities. Administrator Hacking believes the ratio would drop below 60 percent by the end of this fiscal year, June 30. In fiscal 2010, the funding level was at 65.8 percent.

Records show that funding levels for pension trusts for elected officials and Corrections officers also have dropped since 2005.

The elected officials' trust had a funding ratio of 62.1 percent as of June 30, down from 66.7 percent the previous year. The pension fund for Corrections officers had a funding ratio of 73 percent as of June 30, down from 80.3 percent the prior year.

Hacking said negative earnings caused by poor stock-market performances in 2008, 2009 and likely again this year have hurt all three funds.

The public-safety-personnel fund has paid cost-of-living increases to retirees even when investment earnings were low, and a special deferred-retirement program has added liabilities. Employers in the public-safety-personnel fund pay an amount equal to 22.68 percent of each worker's salary into the trust. On July 1, the rate increases to 27.18 percent, a cost that, ultimately, will be borne by taxpayers.

While all statewide systems will increase rates for employers July 1, the increase of 4.5 percent for public-safety-personnel employers such as cities and counties is the largest hike among all four statewide systems, records show. For a police officer earning $50,000, the employer's annual contribution for the upcoming fiscal year will increase by $2,250, to $13,590.

Officers will contribute 9.55 percent of their salaries starting July 1, up from the current 8.65 percent. An officer earning $50,000 will pay $450 more per year, or $4,775 annually, toward retirement in the new fiscal year.

Facing officers' lawsuits

Along with its financing problems, Hacking said, the public-safety-personnel fund is facing lawsuits from current and retired police officers who are challenging a 2011 state pension-reform law. The law requires public-safety officers to contribute more toward their pensions and places restrictions on cost-of-living increases for pensioners.

Those suits have not gone to trial. But Hacking said that if the fund loses, then more contributions will be needed from employers.

So far, the courts have sided with public employees in related pension cases.

In May, a Maricopa County Superior Court judge ruled that the state Legislature violated the Arizona Constitution and effectively breached a contract when it passed the 2011 reform law that placed restrictions on cost-of-living raises for elected officials. Hacking said that ruling will be appealed.

David Leibowitz, a spokesman for the Professional Fire Fighters of Arizona and the Arizona Fraternal Order of Police, said public-safety officers are concerned about the cost to taxpayers to fund public pensions, and they want to work with the Legislature to find solutions.

Huh from the Pew Center said, "States can't invest their way out of the challenges they created for themselves."

In 2010, The Arizona Republic published a series that found the cost for local governments and the state to run six pension systems, including systems in Phoenix and Tucson, grew 448 percent over the past decade, to $1.39 billion.

Byron Schlomach, an economist with the conservative Phoenix-based Goldwater Institute, said the public still is absorbing a much higher cost to fund public pensions than it was 10 years ago.

"We have made unaffordable promises to government employees," Schlomach said. "We have to at least slow down the bleeding."

State Sen. Steve Yarbrough, R-Chandler, who pushed through the pension-reform bill in 2011, said lawmakers need to take another shot at making changes in 2013.

"Some of our efforts have not been fruitful, and some others are still out there looking at litigation," Yarbrough said. "I don't know what the answer is going to be. ... There are things we still need to take a hard look at, but we will have to see how the litigation shakes out."

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