Reason Foundation

http://reason.org
http://reason.org/news/show/phoenix-pension-reform-act-could-sa

Reason Foundation

Phoenix Pension Reform Act Could Save $1.6 Billion

Anthony Randazzo
June 30, 2014, 9:27am

In November, Phoenix taxpayers will be considering whether or not to adopt a proposed change to the public employee pension system (COPERS). While the system does not include police or fire employees (they have their own separate pension system), changing the structure of COPERS could have substantial fiscal rewards for Phoenix.

The proposed Phoenix Pension Reform Act would do four things:

(1) All future workers would be enrolled in a defined-contribution plan up to a rate of 8%. Employees in the defined-benefit funds would remain, and the systems would naturally phase-out.

(2) So-called pension “spiking” would be ended by revising the calculation of current employees’ pensions to remove unused sick time and vacation from counting toward defining the pension benefit.

(3) The calculation of defined benefits would be revised from a final highest average salary of three years to five years.

(4) Finally, employees would no longer be able to enroll in multiple retirement systems, such as participating in both the COPERS defined-benefit system and defined-contribution deferred salary programs outlined in city employee labor contracts.

We recently published an actuarial analysis of how these changes would affect the city of Phoenix, and in that report we assumed a 7% defined-contribution rate and that the savings from ending spiking and changing the final average salary calculation would be put back into the pension fund to pay down debt.

Table 2 in that analysis provided the raw savings from these changes, which I've reproduced below:

Proposed Reform

Dollar of Savings

Type of Savings

End Spiking

$155.9 million

Pension Debt Reduction

End Spiking

$460.1 million

Pension Normal Cost Savings

Final Average Salary Change

$53.6 million

Pension Debt Reduction

Final Average Salary Change

$161.9 million

Pension Normal Cost Savings

End Dual Retirement Plan Enrollment

$652.3 million

General Budget Cost Savings

Usually, when measuring the cost/savings of a change to the status quo, the most accurate method is to just use the existing system valuation. But Phoenix provides a somewhat unique wrinkle.

In 2013, Phoenix taxpayers passed a ballot initiative as “Prop 201” that requires future employees in the defined-benefit system to share half the cost of prefunding their benefits and half of the city's debt amortization payment. As a result, the city is projected to have declining contribution rates within the next five years (good for taxpayers). But the cost sharing also means employee contributions are going to increase sharply, creating little incentive for individuals to come work for the city (bad for taxpayers).

This means the current projected reduced contribution rates for the city are not a realistic benchmark. The status quo is unsustainably dependent on high employee contribution rates. As I wrote in our full analysis, "in effect, Prop 201 artificially lowered projected employer contribution rates because it did so in a manner that will have to be changed soon or see salary costs grow to retain [future] employees."

Therefore, I argue a more accurate way to measure the fiscal affects of the pension reform is to measured against the pre-2013 reform. There has only been one fiscal year of employees hired under the recent pension reform (the current, yet to be completed fiscal year). And the projected decline in contributions for the city are merely savings on paper. They will never come to pass.

Developing a model of the Phoenix pension system prior to the Prop 201 reform enabled us to use more realistic assumptions in projecting city contribution rates. This model shows Phoenix taxpayers will have $39.2 million in lower costs after the first year of reform, $175.9 million in savings after five years of reform, and $1.6 billion in reduced outlays for retirement expenses after 25 years.

COPERS uses a 25 year valuation so we counted the savings over that time frame as well. But, we believe that measuring beyond five years creates a much lower degree of confidence because it is hard to know what will happen in the long-term, so we provide summary figures for shorter period of time in our full analysis as well.

If we were to measure the Pension Reform Act against the current valuation of COPERS, the savings over 25 years is $394.7 million. That's still a lot of money, but is more than a billion different. The difference between the figures is the projected declining city contributions to pension funding because of the last round of pension reform. Since that projection is incredibly unlikely to become reality it is not a good benchmark, which is why we have our separate preferred method.

The good news for Phoenix taxpayers is that using either methodology, there are still substantial budgetary savings.

For more analysis see the full actuarial study.


Anthony Randazzo is Director of Economic Research


Print This