November 2010 – Day 2: Arizona Elected Officials Pension
Generous pension benefits for Arizona elected officials
Craig Harris – The Arizona Republic – Nov 2010
There was a move in 2002 when Jane Dee Hull was Arizona’s governor to raise her $95,000 salary because it was among the lowest of the nation’s governors.
The raise never materialized. But thanks to a generous pension system for Arizona’s elected officials, Hull now makes more in her golden years than when she served in office.
The generosity of that system is evident from a snapshot of its cost. Since 2000, the amount of public funding needed to maintain the elected officials’ retirement system has increased by 325 percent, from $4.1 million to $17.5 million a year, according to records obtained by The Arizona Republic.
Contributing factors: regular cost-of-living increases that outpaced inflation and the pension’s investment losses.
The average annual pension for a former elected official is $40,069. The highest is $216,424.
The Republic, as part of an investigation into the state’s public-pension systems, found at least 43 elected officials of the 500 who retired since 2000 earn more from their state pensions than when they served in office.
Three-fourths of those 43 officials are judges who, depending on the Arizona county, run for election or are retained by voters. They are enticed to leave the bench after 20 years because they, and other elected officials, are able to retire on a pension that pays them 80 percent of their final annual salary in the first year alone, before any cost-of-living adjustments kick in.
“That’s pretty good to get 80 percent,” said Anthony Webb, an economist at the Center for Retirement Research at Boston College. “That kind of pension is almost unheard of in the private sector, and it certainly is not available to regular government employees.”
Politicians do well after leaving office because the Arizona Elected Officials’ Retirement Plan has the richest payout formula of the six public-pension programs in the state. During the past decade, retirees also have benefited from 4 percent annual cost-of-living increases that outpaced inflation.
The plan covers elected officials in 21 cities and towns, all 15 counties and state government.
The Republic, through a public-records request, found 131 former elected officials receiving lifetime pensions in excess of $100,000 a year. That’s roughly one out of every seven retirees in that system. Most of the higher pensions go to judges.
Hull served nearly 23 years in elective office as legislator, secretary of state and governor from 1997 to early 2003. She said she never ran for office to obtain a pension.
“I wanted to do those jobs, and the pension came with it,” said Hull, whose current annual pension is $100,011.
Rich pension formula
Elected officials receive their lifetime pensions from a trust that is funded through contributions from their employers (taxpayers), deductions from their own salaries and a portion of state court fees. Another key funding mechanism is the interest earned by investing the trust funds.
The pension is a defined-benefit plan; it guarantees a level of payment upon retirement. The pension amount is calculated using a formula based on the retiree’s average salary during the last three consecutive years in office, the number of years of service and a multiplier.
The initial pension cannot exceed 80 percent of the maximum average salary but can grow over time with cost-of-living raises.
The formula’s emphasis on the average of the last three years of salary often prompts legislators, who earn $24,000 a year, to seek new elective positions that pay more toward the end of their careers, said incoming Senate President Russell Pearce, R-Mesa.
“Every time someone is term-limited, they scurry to run for another office for a higher pension,” Pearce said.
While the pension formula is similar to Arizona’s other public-pension systems, a key difference is the formula’s multiplier.
The multiplier for elected officials, set by the Legislature, is 4 percent, roughly twice as high as those in other systems. When calculating the pension, that factor is multiplied by years of service and the average ending salary. For example, a person with 20 years’ service and an average ending salary of $100,000 would earn an $80,000 pension.
By comparison, an Arizona State Retirement System retiree earning the same pay and with the same experience would retire with a $43,000 pension because the multiplier is 2.15 percent.
Maricopa County Presiding Judge Norm Davis believes the system is fair for judges, who could earn far more in the private sector as lawyers.
“Most people come to the bench after 20 years of practicing law,” Davis said. “If you changed the system, you would discourage a lot of high-quality applicants. It’s a reasonable system given the nature of the job.”
Ken Fields, a Maricopa County Superior Court judge who retired in 2007, said some judges are earning more in their retirement because their wages were frozen for long stretches while in office and since retiring their pensions have been given cost-of-living increases. Fields’ pension is slightly lower than the $135,444 he made the final year on the bench.
Elected officials contribute the smallest percentage of their income to their own retirement when compared with the other state-pension systems.
The 7 percent contribution rate for elected officials is lower than what employees pay in the Arizona State Retirement System (9.6 percent), Corrections Officer Retirement Plan (8.41 and 7.96 percent, depending on position), and Public Safety Personnel Retirement System (7.65 percent).
Only the municipal pension plans are more generous. All Phoenix employees and most in Tucson give 5 percent of their salaries to their pension.
In order to keep elected officials’ pension-contribution rates low, the governments employing them have had to increase their – the public’s – subsidy of the system. That has been particularly true over the past several years, as the sour economy cut into investment earnings of the pension trust.
Cities and towns are now paying into the trust an amount equal to 29.79 percent of each elected official’s salary, while state and county governments are paying 17.42 percent. In combination, their rate in the past 10 years has nearly tripled, from 10.2 percent to 28 percent.
In Phoenix, for example, the city is paying $26,215 this year toward Mayor Phil Gordon’s eventual pension. His annual salary is $88,000. Maricopa County pays $13,344 annually for each member of the Board of Supervisors. Each is paid a $76,600 annual salary.
The rise in cost has Jack Cross, former administrator for the pension plan, rethinking the merits.
Cross, who retired in 2002 and now runs an investment firm, has the distinction of taking home the largest pension from the system he once administered. Although not elected, Cross was part of the plan because of his position as its administrator.
When he retired, his pension was $164,464, but seven cost-of-living raises of 4 percent each have boosted that to $216,424.
Cross concedes it is probably time to change the system.
“When things get rough like this, it sure points out that there may need to be a different mechanism,” he said.