Policymakers need to reform pension systems

The Arizona Republic
November 21, 2010
Kevin McCarthy Editorial

The national recession has had a devastating impact on Arizona. Over 300,000 Arizonans have lost their jobs.

At the worst possible time, taxpayers have been asked to pay higher taxes to sustain state and local government budgets that have been strained by record losses in tax revenue. One major challenge facing taxpayers is $10 billion in unfunded liability in Arizona's four statewide public pensions.

Public pensions special report

In the United States, one of the major benefits for public-sector jobs has always been a defined benefit retirement. Unlike most private-sector 401(k) retirement plans that rely on contributions and investment performance, public-sector defined benefit plans guarantee a monthly pension benefit reflective of years of service and salary earned.

However, across the country these defined benefit retirement programs are under considerable scrutiny. The unfunded liabilities in some of the systems are at crisis levels.

And taxpayers' eyes are just now being opened to the fact that these public pensions are viewed as vested rights that cannot be reduced, regardless of the hardship placed on taxpayers.

The annual taxpayer contributions for Arizona's four pension systems climbed $876 million (337 percent) from 2000 to 2009 and will likely continue to climb for the foreseeable future.

While taxpayers picked up skyrocketing costs, three of the systems (Public Safety Personnel Retirement System, Elected Officials Retirement Plan, and Correctional Officer Retirement Plan) cap the contributions for the employee.

The taxpayer costs for the public-safety system approach 30 percent of payroll in some jurisdictions while employee costs are capped at 7.65 percent. At least the Arizona State Retirement System is designed to split contributions between members and taxpayers.

Clearly, there are valid arguments for defined benefit retirement programs for large groups of government employees. Properly designed and managed, they can be an effective recruitment tool for public service.

It's likely that most Arizonans would not begrudge a public employee receiving a fair retirement benefit after a long career. However, the legal veil that insulates these systems has not only created unreasonable exposure for taxpayers, it has also led to abuses.

Over the years, state policymakers have improved the benefits to the point that many public employees can now retire in their 50s and return to the public payroll - often in the same full-time position.

Regrettably, the double-dipping, salary spiking and other abuses seem to be a natural extension of a system where the members lack any collective sense of responsibility for costs. With a straight face, high-paid government administrators rationalize their double-dipping as actually a savings to taxpayers. To be sure, if the taxpayers did not have unlimited exposure to fund these systems, public employees would view these abuses in a different light.

Maybe the most problematic aspect of these systems is the political environment in which policymakers debate benefit enhancements and pay for their costs. Benefit increases are granted at no immediate costs to the politicians voting for them. The actuarial impacts are delayed a year and then spread over 30 years. In fact, early this decade major benefits were extended by lawmakers who argued they were free because the system was "overfunded."

The bottom line is that policymakers need to reform these pension systems. There is growing sentiment to move to a defined contribution system.

While arguments in favor of maintaining a defined benefit plan will continue, they are becoming lost in an avalanche of debt and abuses. Certainly, moving to a defined contribution would dramatically change the current political shell-game that so poorly serves taxpayers.

Kevin McCarthy is president of the Arizona Tax Research Association and a recent board appointee to the Arizona State Retirement System.