November 2010 – Day 1: Pension Systems a Soaring Burden
Day 1 – Arizona pension systems a soaring burden
Craig Harris – The Arizona Republic – November 2010
Even as local governments and the state are slashing budgets, Arizonans are propping up public-pension systems that allow civil servants to retire in their 50s, receive annuities that can exceed $100,000 a year, and collect pensions while staying on the same job, The Arizona Republic has found.
Over the past decade, government agencies have been forced to pour billions of dollars into the state’s six pension systems to keep pace with continual benefit enhancements. The added cost of these enhancements has been largely borne by taxpayers as pension investments eroded amid stock-market declines.
Even some of the pension funds’ managers agree that these enhancements over the past decade have grown so expensive they are unsustainable without sharp increases in public funding and cuts to critical public services.
Legislators and other policy makers, meanwhile, have done little to overhaul the systems. In fact, pension reform is rarely, if ever, mentioned by Gov. Jan Brewer or the Legislature as they grapple with ways to bridge a two-year budget deficit estimated at $2.25 billion. A key lawmaker said that needs to change.
“It’s a ticking time bomb,” Arizona House Speaker Kirk Adams said of the state’s pension systems. “A lot of people for too long have tried to ignore it and set it aside. The Legislature needs to seriously look at what the options are.”
The tab for local governments and the state to run these systems grew 448 percent over the past 10 years to $1.39 billion annually, according to a Republic analysis of the benefits paid to more than 111,000 retired public employees. In many cases, taxpayer contributions to the pension funds far exceed workers’ contributions. In fact, most employees earn all their contributions back within three to four years of retiring.
Today, more money is spent on Arizona’s public-pension systems than on the individual state budgets for higher education, corrections, economic security or health insurance for the poor.
Even as governments cut budgets, public-pension costs will keep growing. The state Constitution forbids the government from decreasing a payout for any retiree now in the system. And a coming wave of Baby Boomer employees will soon retire, further increasing the costs.
Byron Schlomach, an economist who studies pensions for the Phoenix-based Goldwater Institute, said there is little political will to change public-employee retirements because they affect about 363,000 state and local public employees who wield clout and because lawmakers benefit from the best of the publicly funded systems.
“Some of the resistance is coming from people who you would think were conservatives, but they may have retired from another pension system,” Schlomach said. “They like the systems the way they are. They have their benefit, and they are resistant to change.”
For this series, The Republic filed 67 public-records requests. They were sent to the state’s four public-pension systems, the Phoenix and Tucson municipal pension systems and all 57 public-school districts in Maricopa County. The newspaper, through the Arizona Public Records Law, obtained the amount of pensions paid to retirees in the six systems and the salaries of hundreds of retirees who still hold government jobs, with most being educators.
The Republic’s analysis shows a system that pays some retirees well, including:
Elected officials. Among those who retired in the past decade, dozens now are paid more in annual retirement benefits than they were paid while in office.
Public-safety officers. An incentive program to keep officers working longer allows them to stop contributing to their pension funds five years early, keep working, then receive large lump-sum payouts – an average of $247,422 for police officers and $314,338 for firefighters. Those officers also then draw regular annual pensions.
City officials. The Phoenix retirement system allows employees to boost their public pay as they near retirement age, triggering increases in the annual amount of their pensions.
Educators. Employees in many school districts find ways to retire and then return to government jobs while also drawing a pension. Some in the public-education system have created a cottage industry to make so-called “double-dipping” easier. More than 900 teachers and administrators in Maricopa County school districts legally collect state pension checks while being paid to keep working for the schools. Some teachers make more than $100,000 a year in combined pension and salary, while administrators’ combined pay and pension can exceed $200,000 annually.
Criminals: Six elected officials and a former county manager now receive state pensions despite being convicted of crimes involving misconduct while in office.
The bottom line: While most private employers have scaled back retirement programs and put more or all of the financial responsibility for their funding onto employees, Arizona civil-servant retirement systems have not made major changes.
Calls for reform
California, New Jersey and Illinois are among many states now struggling with the costs of public-pension systems. Reform movements in some states have cut benefits and raised the age at which workers can start drawing pensions.
Internationally, there have been moves by financially strapped governments across Europe to raise the retirement age. In Greece, generous early-retirement practices led to a debt crisis that prompted unpopular changes earlier this year. Last month, amid mounting protests that hampered France’s economy, the French parliament bumped the retirement age from 60 to 62 to preserve its pension system.
Arizona anti-tax groups and business leaders are calling for changes to ease Arizona’s ever-growing pension costs.
Kevin McCarthy, president of the Arizona Tax Research Association and a recent board appointee to the Arizona State Retirement System, said ongoing enhancements to the retirement systems are unsustainable.
“I don’t know how some of this stuff is rationalized,” McCarthy said.
Lawmakers have taken small steps to bring costs under control.
Several modifications begin July 1, 2011, for ASRS, the state’s largest system. Newly hired employees who are part of ASRS will be required to work a few years longer before they can draw a retirement check. Also changed was the formula by which retiring employees’ average ending salary is calculated, slightly lowering pensions.
However, the state won’t see a savings from the changes until those new hires begin to retire years from now.
Even those modest proposals took four years for the Legislature to finally pass.
Though the $23.1 billion ASRS trust is currently underfunded and payments exceed contributions, ASRS Director Paul Matson said the trust is in no danger of becoming insolvent because its size is expected to grow and its investment values will recover.
How pensions work
The largest of Arizona’s six public-pension systems is ASRS, which covers 708 employers of state, county and municipal workers, public-school teachers and those working for Arizona’s three state universities. Created in 1953, it has 92,216 retirees and 220,323 actively contributing members.
Three other systems cover elected officials, corrections employees and police and firefighters. Tucson and Phoenix run their own systems.
Public employees contribute a portion of their pay toward their pensions. Their employers also make contributions equal to or greater than the employees’ amount.
All provide defined-benefit plans, meaning the retiree’s benefits are guaranteed no matter how much he or she has paid into the system while working.
Under such a plan, each trust pays a pension whose annual amount is determined through a formula taking into account the employee’s highest average wage at the end of a career, years of service and a benefit “multiplier.”
For example, an ASRS retiree’s benefit is calculated by multiplying the years of service by his or her average salary over the last three years of employment. That figure is then multiplied by the multiplier, a percentage set by state law and tiered by years of service.
So, an employee who has worked 20 years and had an average annual salary over the last three years of $40,000 would have a multiplier of 2.15 percent. That would result in a lifetime annual pension of $17,200.
The biggest public pensions are given to those who work longer and make more money at the end of their careers. There are 392 government retirees in Arizona who receive annual pensions in excess of $100,000, and the average pension for all six systems is $23,221, according to records the paper compiled.
In the ASRS system, the average retirement age is 60, and the typical retiree works 19.26 years. The average annual lifetime ASRS pension is $19,788.
In the private sector, a 401(k) would have to accumulate $273,752 to $283,327 over a 20-year period to get the same $19,788 annual pension at retirement, according to Michael Juilfs and Jim Dew, certified financial planners who operate separate Scottsdale firms.
For the private employee, the money would last 19 to 20 years, assuming modest interest-rate gains during retirement. The calculations, however, are based upon retiring at 65 – common in the private sector but five years later than a typical ASRS retiree.
“Public employees have a better deal than they realize, and they are not that low-paid,” Juilfs said.
Because of the recession and years of low investment returns, Arizona’s public-pension funds are now considered underfunded.
Ideally, a trust is 100 percent funded, meaning the current value of the 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.
As investment values slide, extra money has to come from somewhere.
Each trust has different contribution rates for employees and employers.
In five of the six systems, the employer has a higher contribution rate than the employee. Only ASRS has matching contribution rates.
That ASRS rate in 2000 was low because the 1990s stock-market boom provided an investment surplus for its trust. Back then, the combined contribution rate, the total from employees and employers, was 4.34 percent. Today, it is 19.2 percent, with each side contributing half, or 9.6 percent. Matson projects the combined contribution rate, which includes a small amount going to retiree health-insurance cost, will steadily increase to 22.96 percent by 2018, then decline as the trust’s financial health improves.
Even with far higher contribution rates, the ASRS trust’s assets cover only 75 percent of its liabilities.
Matson chiefly blamed stock-market crashes in 2001 and 2008 for the ASRS trust’s underfunding, and he said earnings in three other years did not meet projections of 8 percent growth.
Most of Arizona’s other public-pension funds are in worse shape. The Public Safety Personnel Retirement System has the worst funding ratio, at about 66 percent.
During the past 30 years, many private businesses have dumped similar defined-benefit pension plans for defined-contribution plans such as 401(k)s. Employers make set contributions to employees’ individual retirement accounts but are not responsible for guaranteeing their retirement income or earnings growth.
In 1980, 84 percent of private-sector employees had defined-benefit plans, according to the U.S. Bureau of Labor Statistics. By March 2009, the most recent records available show, that number dropped to 21 percent.
Recent federal records show 84 percent of state and local government workers still have defined-benefit plans.
“Pension benefits have been cut so much that it appears firemen and teachers have a golden parachute when they really don’t,” said Elizabeth Ashack, a Bureau of Labor Statistics economist. “For them, it’s just the way it used to be.”
The Arizona National Federation of Independent Business said none of its 7,500 members offers a defined-benefit plan.
“It’s becoming extinct in the private sector, especially for small businesses,” said Farrell Quinlan, the federation’s Arizona director.
Matson, the ASRS director, defends defined-benefit plans, saying retirees with pensions are less likely to be dependent on government services when they retire. He added that defined-benefit plans provide better long-term security for retirees and they typically are better managed than defined-contribution plans.
The system is providing many employees a comfortable retirement. Meanwhile, taxpayer costs are rising, with the system paying out more than it is taking in. In fiscal 2009, for example, ASRS contributions from employers and employees totaled $1.6 billion. Its benefit payouts: $2 billion, further depleting the trust.
Public-sector retirees’ pensions benefits are guaranteed for as long as they live, and surviving spouses collect some benefits even after the retiree dies.
The largest annual pension in ASRS goes to Carol Peck, who retired as superintendent of the Phoenix-area Alhambra Elementary School District in July 2002 with 35 years of service. According to ASRS records, she had an ending salary of $275,022.
Now chief executive of the Rodel Charitable Foundation of Arizona, she receives a $226,422 annual pension.
Peck, who received numerous professional accolades, including national superintendent of the year, said in an e-mail response that her salary was above average compared with other superintendents but was “determined to be commensurate with my performance.” She also wrote that teacher and staff salaries, as well as student performance, were above average at Alhambra. Peck declined further comment.
Traditionally, public-employee pension systems were recognized as a way to overcome inequities between lower public-sector salaries and higher pay in the private sector. However, that inequity is no longer the case in Arizona, according to the U.S. Bureau of Labor Statistics.
The average state-employee salary in 2009 was $46,841, and the average municipal-employee salary was $42,668. In the private industry, the average pay was $42,090.
As governments juggle their budgets to keep their employees’ pensions intact, they have simultaneously found themselves cutting public services because of shrinking revenue and a lingering economic downturn.
At the local level, cities have cut library hours, closed recreation facilities, curtailed public-transit spending and furloughed or laid off employees.
The state has cut health care for needy families, shuttered some state parks and motor-vehicle registration branches, trimmed law-enforcement and prison budgets, and laid off hundreds of workers.
Arizona still faces a combined budget deficit estimated at $2.25 billion this year and next. Gov. Brewer has said public education, health and welfare programs all are likely to see significant reductions in 2011.
As state officials slashed budgets in recent years, they repeatedly argued that they had to cut public services because huge portions of their budgets were off-limits. Spending approved by voters or otherwise guaranteed cannot be cut.
A large portion of that off-limits spending goes to pensions. But cutting that spending is difficult because pension costs are layered throughout dozens of government-agency budgets rather than being lumped together as a single expenditure.
Along with a weak economy, Arizona lawmakers shoulder some of the blame for the pension imbalance. In 2001, they permanently increased the largest system’s multiplier, which increased retiree payouts. Three years earlier, they successfully asked voters to approve a constitutional amendment that does not allow public-employee pension benefits to be diminished.
Since then, they have done little to soften the financial impact on taxpayers.
Adams, the House speaker, said that while lawmakers can tweak the pension systems, they likely will need to ask voters to change the state Constitution.
“If we are going to have any fundamental reform, the voters will have to get involved,” Adams said. “They need to remove the roadblock so the Legislature can do something different like have a defined-contribution plan.”
The governor said Arizona’s pension systems are in better shape than other states’, but “that doesn’t mean we don’t need to go in there and look at this and get the discussion on the table and fix it.”
The Arizona Chamber of Commerce has openly encouraged lawmakers to consider new public retirement plans that combine a defined benefit and a defined contribution.
Suzanne Taylor, senior vice president of public policy for the chamber, said the current system is “not a sustainable path” for taxpayers.
Retirement system board member McCarthy, a limited-government activist, said lawmakers must act quickly when the session begins in January.
“We are not talking about small parts of state and local governments,” he said. “We are talking about extraordinary costs, and people are finding out these things are choking state and local budgets. The person taking it is the taxpayer.”
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