Phoenix skyline at dusk
(The Center Square) – In 1998, when Arizona voters helped pass a state constitutional amendment that said public retirement benefits should not be diminished or impaired, the state had plenty of funding and assets to cover expected promised benefits. The current pension funding situation is far different, policy experts say.
Jon Riches, director of national litigation at Goldwater Institute, told The Center Square that the state’s major pension funds and many municipal funds are underfunded, owing more money to present and future beneficiaries than what is currently in or expected to be available in contributions. The city of Phoenix has assets to cover about 60 percent of promised benefits, according to AZCentral.
Pension spiking, permitting employees to cash out used sick and vacation time and have that counted as additional income when figured into their retirement benefits, ended in Phoenix in 2013. Judges ruled that the formula used to calculate benefits was the only benefit protected by the city charter and spiking was not a part of that formula.
Recent rulings that struck down changes to the calculation of increases and an increase in contribution rates have resulted in different public employees paying different contribution rates and eligible for different benefits.
“Fixing this will involve more realistic modeling by ASRS [Arizona State Retirement System] as well as further investments by the public and conciliations from retirees and pension members, both in the form of ballot measures because it involves changing the Arizona Constitution,” Max Goshert, associate director at Grand Canyon Institute, told The Center Square. “Taxpayers will likely have to make further investments, but being proactive about this issue will be less costly in the long run.”
Riches said that pensions should transition to defined contribution plans, rather than defined benefit plans.
“Recognizing the problems inherent in defined benefit plans, the private sector moved in this direction decades ago,” he said. “Of course, government has been slow to follow, if it has followed at all.”
For the time being, under Arizona’s Constitution, most major pension reforms will have to be centered on new hires.
“In the meantime, the unfortunate reality is that greater and greater portions of government budgets are going to be dedicated to funding retirees, rather than government services,” Riches said.