Robert Robb: Who Takes the Risk on Prop 487?

Columnist Robert Robb is the one writer at the Arizona Republic who isn’t in the tank for the Left. He provides this fair assessment of Proposition 487 …

There’s a good debate to be had about Proposition 487. Unfortunately, the opponents are choosing not to have it.

Prop. 487 would change the retirement program for new City of Phoenix workers from a defined benefit to a defined contribution system. Under a defined benefit system, workers are guaranteed a portion of their final salaries, in public systems usually around two-thirds, as a retirement benefit. Under a defined contribution system, taxpayers put a certain amount of annual pay into something similar to a 401(k). The retirement benefit depends on what the employee contributes and how well the investments do over time.

The question of whether a defined benefit or a defined contribution plan is more appropriate for public employees is as much philosophical as it is practical or actuarial. And the question is who should take the investment risk.

In a defined benefit plan, taxpayers guarantee the benefit and thus take the investment risk. If investments do worse than expected, taxpayers have to make up the difference. In a defined contribution plan, what taxpayers owe is fixed. The investment risk lies with the employee.

There are, however, also practical issues. Most public employee defined benefit plans are seriously underwater and straining government finances. Certainly that’s the case with Phoenix’s.

The Phoenix retirement plan only has assets to cover, based upon assumed market performance, about 64 percent of benefits owed. The unfunded liability is north of $1 billion. The cost of the program to the city has been escalating rapidly.

In addition to requiring new hires to enter into a defined contribution program, Prop. 487 would ban spiking (artificially boosting the pensionable salary with ancillary benefits) and other supplementary pension programs.

Proponents and opponents dispute whether the near-term effect of Prop. 487 would be to save the city money or cost it more. In reality, there’s no way to know. Knowing that requires knowing what the stock market will do over the next 20 to 30 years. And despite the pretenses of actuaries, that’s unknowable.

But two things are knowable. First, if there is a near-term cost, it is because switching to a defined contribution program for new hires requires the unfunded liability of the defined benefit program to be dealt with rather than kicked down the road.

And that raises an equity question. Opponents of Prop. 487 want to keep new hires in the defined benefit system so they can help pay off the unfunded liability for current workers and retirees. But that’s not how these systems are supposed to work. If past city governments and workers contributed too little, why should new hires have to contribute more to compensate? Shouldn’t the cost of that past mistake be more broadly socialized?

Second, it is knowable that passage of Prop. 487 will, over time, reduce and ultimately eliminate taxpayer risk for the performance of the stock market.

There are legitimate arguments against Prop. 487. There may be transition costs. Some contend that public employment is intended to be more secure than private-sector employment, so it is appropriate to shield public employees from investment risk regarding their retirement.

Rather than make these arguments, however, the city and its labor unions have gone into cahoots in a pettifogging campaign of misdirection.

The city council adopted ballot language stating that passage of Prop. 487 would prohibit the city from contributing to the retirement system for police and firefighters. Public safety employees aren’t in the city retirement program. They are part of a separate state system.

Prop. 487 plainly says it doesn’t apply to cops and firefighters. No fair interpretation of its operative provisions would find that it does. And it would be superseded by state law if it did. It’s a non-issue.

More recently, the pettifoggers are claiming that Prop. 487 might jeopardize public safety death benefits. Again, it categorically excludes cops and firefighters. It also only applies to retirement benefits. No judge in the history of jurisprudence, going back to the days of Hammurabi, would hold that dying is the same thing as retiring.

For voters, the issue presented by Prop. 487 should be straightforward: Do they think taxpayers or public employees should have the investment risk for the latter’s retirement income?

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