A Collaborative Process for Pension Reform

At a time when differences of opinion regarding public policies are growing wider and partisanship is increasing rapidly, is there any hope for solving any of the vexing, complex issues of our time? Arizona’s recent experience with the challenging issue of pension reform suggests that there is.

Last month, Arizona Governor Doug Ducey signed comprehensive pension reform legislation for public safety officers into law. This pension reform is notable not only for the positive fiscal impacts for taxpayers and the sustainability it brings to the pension system, but also for the process used to craft the legislation and the widespread, broad bipartisan support it garnered along the way.

In 2014, Arizona public safety employees and their unions were becoming increasingly concerned about the fiscal state of the Public Safety Personnel Retirement System (PSPRS)-which covers all law enforcement personnel and firefighters statewide. The plan had been steadily deteriorating over a decade, with the funding ratio falling to around 50% and unfunded liabilities reaching into the billions. Legislation was passed in 2011 that sought to pay down unfunded liabilities by increasing employee contributions to the plan, but state courts rejected those changes as a violation of the Arizona constitution. Concern that their retirement security was jeopardy reached a point that, possibly for the first time in the nation, a coalition of public safety unions approached Republican state legislators in an effort to reform the pension system.

Senate President Andy Biggs and Senate Finance Committee Chairwoman Debbie Lesko welcomed the prospect of reform, but knew that any potential reform would need careful vetting in order to avoid the legal challenges that have vexed many previous reform efforts, both in Arizona and across the nation. With this in mind, Senator Lesko launched a year-long, collaborative stakeholder process to fully analyze the PSPRS system and potential reform options.

As of June 30, 2015, the plan had accumulated $6.6 billion in unfunded liabilities and dropped to just 48% funded. Arizona cities and towns are have been struggling to pay the soaring pension bills, facing a choice between cutting services or raising taxes as a result. A number of cities have run out of fiscal options and, for some, the threat of bankruptcy is looming.

In February 2015, Sen. Lesko organized the first of a series of monthly meetings for a broad range of stakeholders of the PSPRS system: employees, retirees, Gov. Ducey’s office, members of the legislature, PSPRS administrators, union leadership, the Arizona League of Cities and Towns, county representatives, and taxpayer advocates. From the beginning of the process, Sen. Lesko asked Reason Foundation’s Pension Integrity Team to assist with providing education, policy options, and actuarial analysis for the stakeholders.

Any hope of stakeholder consensus on a reform package depended on overcoming personal preconceived opinions and putting all potential reform scenarios on the negotiation table for discussion, analysis and vetting. The Pension Integrity Team’s proposed general framework for the goals of pension reform helped stakeholders focus on whether a proposed plan change furthered the common goals of:

1. Providing retirement security for all members (current and future) and retirees;

2. Reducing taxpayer and pension system exposure to financial risk and market risk;

3. Reducing long-term costs for employer/taxpayers and employees;

4. Stabilizing contribution rates;

5. Ensuring ability to recruit 21st century employees; and

6. Improving governance and transparency.

Along the way, stakeholder disagreements-some forceful-threatened to derail the process. For example, negotiations began to break down after the firefighters’ association asked mayors state-wide to vote against an Arizona League of Cities and Towns’ resolution supporting a set of principles a League task force developed to evaluate any reform legislation. The Pension Integrity Team quickly brought both sides together to examine the cause of their sudden opposition. During this process the Team determined they were both advocating for the exact same thing-only using different terms that each side misinterpreted. It is not uncommon in pension finance for groups to use different words and phrases to convey the same concepts, or the same words to convey different concepts, but the PSPRS stakeholders were not aware of this. The Pension Integrity Team responded by establishing a durable and common lexicon of pension reform to foster progress in deliberation. By re-establishing a common ground of terms, the clear intent of the resolution pleased all parties, and it moved forward receiving strong support from cities and towns throughout the state.

By the summer of 2015, the Pension Integrity Team’s diplomatic role evolved, facilitating consensus among stakeholders on the reform’s conceptual design and framework. The Team’s expertise helped multiple stakeholders actuarially vet their ideas for improving PSPRS, including suggestions from Sen. Lesko, a public sector union, and the League of Cities. The scope of these proposals started far apart, leading to unproductive working group meetings. Multiple times individuals or stakeholder groups threatened to quit the process. Other times contentious topics polarized stakeholders, further threatening the reform’s progress. At times negotiations shifted to a “shuttle diplomacy” of stakeholder parties staying at the table and communicating primarily through the Pension Integrity Team, which parsed and refined individual concepts of reform to foster consensus.

Over time, the various stakeholders gained enough trust with each other, and enough appreciation of the reform’s intent, for all sides to grant concessions in order to keep the reform progressing. The public safety labor union’s key priority was maintaining a 2.5% defined benefit multiplier for members who worked a full career; the legislature prioritized reducing taxpayer risks and avoiding added substantial near-term cost to the plan. The final reform legislation was able to achieve both of these priorities.

In the end, the collaborative stakeholder process crafted pension reform legislation that was comprehensive in scope, meaningful in fiscal effect-and agreed upon by Republicans and Democrats, employees and employers, business organizations and labor unions, and taxpayers and legislators. As the final piece of the reform legislation goes to voters for approval, key stakeholders-the Professional Fire Fighters of Arizona, Phoenix Law Enforcement Association, Arizona Fraternal Order of Police, League of Arizona Cities and Towns, and The Arizona Chamber of Commerce and Industry-have all endorsed the ballot measure.

It’s easy to understand why. This reform is as close to a win-win as practical:

• Government agencies will realize substantial savings (up to 43%) with each new public safety officer hired;
• Taxpayers will have their future exposure to risk reduced by more than 50%;
• The Arizona Public Safety Personnel Retirement System will see a 36% reduction in the future accrual of new employee pension liabilities;
• Future pension contributions will be significantly less volatile for both employers and employees;
• New employees, for the first time, will have the choice to select a portable pension benefit;
• Retirees will enjoy more retirement security and assurance of benefit increases whenever Arizona’s cost of living increases.

These are just a few of the benefits. For a more complete list of reform elements, click here and here.

Not everyone got exactly what they wanted. Some said the reform took away too many benefits; others said the reforms didn’t go far enough. Some stakeholders ultimately opposed the reform on these grounds. Yet, even the few who voiced opposition to the final legislation supported many individual concepts contained within the reform, despite opposing the final package.

The process that forged this reform is as significant as the reform itself. Senator Lesko deserves credit for her strong leadership and commitment to the process. All of the stakeholders deserve credit for their willingness to see the reform from all sides and their flexibility in yielding to achieve consensus.

The stakeholder process worked because building relationships builds trust, which shares the ownership of ideas. Consensus-based decision-making requires that individuals consider the needs of all the diverse groups affected, not personal or political interests.

Arizona’s ability to enact meaningful reform on the often-contentious issue of pension reform shows that in today’s bitterly divided political environment, we need more policymakers to welcome and encourage collaborative, consensus building to find solutions to the complex issues facing government agencies across the nation.