Arizona Reforms Second Public Safety Pension Plan

Commentary

Arizona Reforms Second Public Safety Pension Plan

Arizona Gov. Doug Ducey signed into law today pension reform legislation (Senate Bill 1442) that will put Arizona’s struggling Corrections Officer Retirement Plan (CORP) on a path to financial solvency. CORP covers all state and local corrections, detention and probation officers statewide, but has accumulated at least $1.4 billion in unfunded liabilities since 2000 and stands at only 53% funded today.

The CORP pension reform follows—and shares some common features with—the successful reform of the state’s Public Safety Personnel Retirement System (PSPRS) last year:

  • Both reforms replace a broken permanent benefit increase (PBI) mechanism with a traditional cost of living adjustment (COLA) tied to inflation. The post-retirement PBI was problematically funded from skimming assets off the top of good investment years and was a key factor driving the growth in CORP’s unfunded liabilities.
  • Both reforms created new retirement plan designs for future public safety personnel that will provide better retirement security for employees while minimizing financial risks to taxpayers.
  • Both reforms provide new hires for typically full career public safety positions with the choice between a fully funded defined benefit (DB) plan or a professionally managed defined contribution (DC) retirement plan.
  • In a unique feature, the CORP reform also provides a portable, professionally managed defined contribution retirement plan for corrections officers that historically have experienced significant turnover, ensuring that all employees have access to secure retirement savings.

Combined, the CORP pension reform effort is expected to shift approximately 90% of new hires into a DC retirement plan and nearly eliminate the potential for new unfunded liabilities once the current pension debt is paid off.

The CORP reform legislation had strong bipartisan support—passing the House of Representatives overwhelmingly with a 53-4 vote, and the Senate by a 23-7 vote. This overwhelming support was possible largely due to the fact it is the negotiated result of a 6-month, collaborative stakeholder process launched by State Senate President Pro Tem Debbie Lesko that ultimately garnered the support of a wide range of stakeholders, including public safety associations, employers, and taxpayer advocates.

Like the PSPRS reform in 2016, the Pension Integrity Project at Reason Foundation played a central role in designing policy options and negotiating the final reform. Our project team provided education, policy options, and actuarial analysis for stakeholders throughout the process, and we helped facilitate a consensus among stakeholders on the conceptual design and other parameters of the reform.

Key public safety associations were active in the stakeholder discussions—specifically the Arizona Police Association, the Consolidated Law Enforcement Associations of Arizona, and the Arizona Police Officer Association—and ultimately supported the CORP reform package in the interest of improving the plan’s solvency and putting a sustainable retirement system in place for the future. Additionally, the state lodge of the Fraternal Order of Police took a neutral position on the main reform legislation (SB 1442), but supported the companion legislation (Senate Concurrent Resolution 1023) that refers a constitutional amendment related to the PBI-to-COLA change to the ballot.

Other organizations supporting CORP reform include the County Supervisors Association of Arizona, Goldwater Institute, Americans for Prosperity-Arizona, Arizona Free Enterprise Club, and Retirement Security Initiative.

That a comprehensive pension reform could attract such a diverse group of stakeholder supporters is noteworthy on its own. Even more important is that the CORP pension reform marks the completion of a two-year bi-partisan process of overhauling retirement benefits for all public safety employees in Arizona. The CORP and PSPRS reforms together offer evidence that a collaborative, stakeholder engagement process can successfully deliver substantive policy change without the typical political divisiveness often seen in pension reform debates.

For more details of the reform and links to additional resources, see our full writeup here.

Daniel Takash is a policy analyst for Reason Foundation's Pension Reform Project.