Arizona Senate Bill 1365 threatens higher taxpayer costs and pension risks 

Arizona Public Safety Personnel Retirement System Tier 3 reform is working

• Arizona Public Safety Personnel Retirement System, PSPRS, Tier 3 arose from a bipartisan, stakeholder-negotiated pension reform in 2016, after a rapid freefall saw PSPRS decline from 120% funded in 2001 to nearly 40% funded by 2016.
• Tier 3 included a risk-managed pension design with a 50/50 contribution rate split between employers and employees, consistent with many other state pension systems, including the Arizona State Retirement System, Washington State’s public safety pension, and Michigan’s teacher pension.
• 50/50 cost sharing is foundational to Tier 3 risk management and a key reason employers have felt confident enough in PSPRS’ trajectory to make $5 billion in supplemental contributions since 2019, improving PSPRS to nearly 70% funded today.

Senate Bill 1365 would break Tier 3’s 50/50 cost-sharing mechanism and risk higher taxpayer costs

• Senate Bill 1365 would cap the contribution rate paid by Tier 3 employees at 9.5% and require employers to cover any needed remainder in the likely event of underperforming markets.
• Reason Foundation’s actuarial modeling for PSPRS forecasts that SB 1365 could result in taxpayers being required to cover approximately $1 billion in unanticipated additional costs over the next 30 years, assuming market conditions similar to those seen since 2000.
• Applying a cap on employee contributions would return to the types of design features that allowed PSPRS to get over $10 billion underfunded.

SB 1365 unlikely to affect recruitment & retention

• The push to cap employee contribution rates in PSPRS Tier 3 is rooted in the idea that it would help improve recruitment and retention, but states where pensions already have caps on employee contribution rates have also seen recruitment and retention challenges. 
• Studies and actual employee turnover data show that pensions rank far down the list of employee priorities compared to others like salary, flexibility, work-life balance, job satisfaction, and upward mobility.
• States that have expanded employee pension benefits under similar logic since the Great Recession have seen higher costs but no discernable change in recruitment and retention.

Takeaway

With over $7 billion in unfunded liabilities remaining to tackle, it would be poor financial stewardship to fundamentally alter the design of a successful PSPRS reform only seven years into a multidecade turnaround project, especially given the weak influence pensions have on employee recruitment and retention.

Full Backgrounder: Arizona Senate Bill 1365 threatens higher taxpayer costs and pension risks