More Facts about Prop 487 and the Problem of Union Spiking

The Phoenix City Retirement Plan cost taxpayers $28 million in 2000 while it cost $110 million in the 2012 fiscal year and $253 million in 2013.[11][12] In the face of this ballooning of city pension costs, Phoenix voters overwhelmingly approved two propositions that reformed the retirement system of city employees, Proposition 201 and 202, in 2013. Supporters argue that the measure will save millions of dollars for the city in the long-run and will put a stop to exorbitant pension payouts caused by pension spiking. Supporters also argue that Prop. 487 will provide a stable, sustainable retirement system to new employees and any current employees that wish to switch to the new system. Many are worried that the current system is unsustainable and will drag the city into bankruptcy, following the fate of cities like Detroit and San Bernardino.[11]

Phoenix city councilmen who support Prop 487 said …

I am a strong supporter of pension reform, and you should be, too. Facts: 50 Phoenix retirees will be getting $183 million by the time they are 75. A librarian took $280,000 in cash at retirement, and then started a pension of $102,000 per year. This creates strain on public safety, senior services and libraries. The initiative is not perfect, but it does two things: First, it ends all forms of pension spiking. Second, it moves new employees to a 401(k) retirement system, just like yours. Pension reform saves taxpayers millions, stops the abuse and creates more predictability in budgeting.[16]
—Sal DiCiccio, District 6, Ahwatukee and east Phoenix[21]

Vice Mayor Jim Waring, who represents District 2 – northeast Phoenix – on the city council, said:[21]

I support the pension-reform initiative. It will end pension spiking. It will save the city millions in the long run. It will fundamentally change a broken and prohibitively expensive system. Real reform is desperately needed. The March 2013 ballot issue may save taxpayers up to $600 million, but no real reforms were enacted and the financially ruinous status quo persists. In this case, voters will have the chance to make real reforms. If we don’t act, rising pension costs will continue to cause budget deficits and reductions in public safety.[16]
—Vice Mayor Jim Waring, District 2[21]

Supporters of the initiative respond to opponents’ arguments that the initiative could remove death and disability benefits from employees by simply saying the claims are unfounded and false. Scot Mussi said, “This one is just a flat-out lie. It has absolutely nothing to do with death and disability benefits.” He went on to say that the initiative does not prevent the city from offering a separate disability-benefit and death-benefit program for new workers and that the initiative explicitly does not effect current employees who choose to stay in the current pension system. Some supporters also say that the city could easily buy insurance plans for certain employees instead of funding a pension system under Prop. 487.[13]

Reason foundation, a policy research organization espousing libertarian values, also released an analysis of Proposition 487. The report shows significant financial benefits for the city under the initiative, including possible savings of $31 million in the first year and $399.3 million over the next 20 years.[27]

Spiking

Many supporters of pension reform are motivated by a desire to end the use of “pension spiking,” a practice in which city employees convert certain benefits such as unused sick time or saved vacation pay to boost the salaries on which their pensions are based or extend their credited length of city service. Some were further upset by the fact that some employees, such as firefighters and police officers, are allowed to use pension spiking while other rank-and-file employees are limited or restricted from the practice. Some city employees filed suit against the city when they were denied the ability to spike their pensions when other employees were permitted to use the increasingly controversial practice. The city argued in court that it is not legally bound to let employees include unused sick time in their pension-benefit calculations but began allowing it voluntarily in 1996 and can change their position at will.[4]

Several reports released by the Arizona Republic highlighted the pension spiking of executive-level public-safety officers and managers. The reports featured 10 public-safety retirees that had increased their lump-sum retirement benefits to over $700,000 and their annual pension payouts to more than $114,000 per year. According to backers, the proposed pension reform initiative would prohibit the practice of pension spiking.[4]

A study by the Arizona Republic estimated a $12 million dollar cost to the city taxpayers per year from spiking practices, when using overtime and premium pay to boost pensions was counted as spiking. City officials denied the study because they claimed overtime and premium pay were part of base salaries and not a “perk” and, therefore, should not be counted as spiking.[33]

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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?