Keep an Eye on Phoenix’s Pension Reform Initiative

Phoenix voters tomorrow will
get a chance to
push through some more reforms for its public employee pension
program, which is currently underfunded to the tune of $1.5
billion.
Proposition 487 (pdf) aims to shift new city employees to a
defined contribution (401k-style) plan rather than a defined
benefit (pension) plan in order to get rid of these liabilities.
Slowly. Eventually. Current employees won’t be affected by the
changes, so the city will still be obligated to pay these pension
debts.

The debate in Phoenix has centered on whether it affects police
and firefighter pensions (it’s not supposed to because they have
their own pension funds) and whether it would save money or cost
more money. That second battle seems the odd one. Anybody who
grasps how pensions work would understand that this will save money
in the long run by essentially eliminating future debt for
retirements. The fiscal argument against the change appears to be
something along the line that making this change would require the
city to actually pay its debts more quickly instead of dragging it
out, and more importantly, they wouldn’t be able to take from Peter
(new employees) to pay Paul (current and retired employees), which
seems kind of like admitting that public pensions as they stand
right now are a big pyramid scheme.

Our co-workers at the Reason Foundation (the non-profit that
publishes this web site and Reason magazine) have been
heavily involved in analyzing the finances of the reform
initiative, and they’re actually quoted on the page for Proposition
487 at the ever-useful Ballotpedia site. In August, Reason
Foundation’s Adrian Moore and Anthony Randazzo attempted to

dispel some of the arguments that this particular pension
reform would cost more than it saved:

Our actuarial analysis of the reform accounts for all elements
of the November ballot initiative and finds taxpayers are likely to
save as much as $1.6 billion over the next 25 years. In fact, the
raw savings could be used to pay down the current pension debt
faster and save Phoenix money in the long run, a move the city’s
actuaries actually recommended in their analysis.

Similar reforms in other states have been successful, but
opponents of the initiative are telling half-truths to make you
believe otherwise.

They say that Michigan had its unfunded liabilities increase
after making a similar switch in 1997. It is true that Michigan saw
its pension debt increase dramatically, but it is purposefully
misleading to claim that it had anything to do with the adoption of
a 401(k)-style pension plan.

The increase in Michigan’s pension debt occurred in the 2000s,
well after the reforms, and is entirely attributable to the legacy
defined benefit system. Michigan officials chose to underfund their
old-style system and to assume massive returns from Wall Street
would cover the underpayment. As was the case in many states, this
big gamble did not pay off and Michigan wound up with a much larger
pension debt. Meanwhile, the reformed pension system has been
financially stable and debt free since 1997, and there has even
been talk of moving teachers into a similar system. The story is
almost identical for the pension reform efforts in Alaska and West
Virginia.

Read more from the Reason Foundation about Phoenix’s pension
situation
here.

If Phoenix’s initiative passes tomorrow, don’t rush to celebrate
too quickly. Just as with nearly every effort by cities and states
to reduce the dangers of pension debts by shifting out of these
easily abused (by all sides) system, lawsuits are sure to
follow.