Pension Hotspots: Phoenix, AZ, and Ventura County, CA
By Josh Altic
The Pension Hotspots Report is a monthly publication about local pension reform efforts.
The January 2014 edition of the Pension Hotspots report will go into detail about the pension reform initiatives in Phoenix, Arizona and Ventura County, California, both of which seek to drastically reform public pension plans by moving from a defined benefit plan to a a 401 (k) style, defined contribution plan. The initiatives also seek to put an end to pension spiking. This report further investigates two city measures that seek additional, separate municipal revenue or debt specifically for use in alleviating pressure from pension debt. Finally, the January edition will touch on recent state-wide pension news in California and Illinois, as well as a new Morningstar report which analyzes the amount of public pension debt per person in the 25 largest cities in the U.S. and Puerto Rico.
In 2009, The Pew Charitable Trust conducted a study that estimated the Phoenix public employee retirement system had $5.115 billion in liabilities and that $1.399 billion of this fund was not backed by city assets, leaving the retirement fund only 73% funded. City Councilman Sal DiCiccio reported that the unfunded liabilities have nearly doubled and now amount to $2.4 billion in unfunded pension debt. Moreover, the pension costs of the city have risen by 40% since 2011, resulting in a 2013 payment of $253 million.
A group called Citizens for Pension Reform, working with The Arizona Free Enterprise Club, are currently circulating signature petitions in order to put an initiative before voters. If the initiative makes the ballot and is approved, it will entirely change the pension system for public employees going forward. The initiative would focus on two things:
- First, it would change the city's retirement system from a defined benefit system, in which retirees are guaranteed payments despite investment performance, to a 401(k)-style defined contribution plan, in which the city contributes a set amount and the retiree's benefits depend on his or her own contributions and investment performance.
- Second, it would take steps to put a stop to pension spiking by implementing limits on the pension benefits available to current employees.
Citizens for Pension Reform must collect 25,480 valid voter signatures to get their initiative on the 2014 ballot.
Pension costs increase timeline:
- Pension costs in 2000: $28 million
- Pension costs in 2012: $110 million
- Pension costs in 2013: $253 million
In March 2013, faced with ballooning city pension costs, Phoenix voters overwhelmingly approved two propositions that reformed the retirement system of city employees. However, many did not believe these propositions would adequately deal with the unfunded debt of the city's pension fund, leading these reform advocates, including council member Sal DiCiccio, to put their energy behind the The Phoenix Pension Reform Act of 2014.
Proponents and opponents:
Council Member Sal DiCiccio and other proponents of the initiative have argued that the $2.4 billion in unfunded liabilities and the increasing city pension payments require a long term solution. DiCiccio wrote that he believes Phoenix has a chance to become a standard for fiscal responsibility needed throughout the nation. He also stated that municipal stability is essential for thriving businesses and jobs. He wrote: "If you want to create a model for business growth, you must create an environment of stability. Businesses and jobs will begin to follow those cities, regions and states demonstrating financial stability. Imagine the message we send to the nation if we successfully tackle our long-term financial obligations. Imagine the message we send to Washington D.C. if we solve our long-term debt. And, imagine the message we send to job creators that our fiscal house is in order."
City officials opposed to the measure have said that if this initiative goes on the ballot and is approved, the taxpayers would not see savings for years and that, in the short term, it would cost them large sums because the city would have to pay off the $5 billion dollar fund in an expedited time frame without contributions from future employees, who would be part of the new system.
The Committee for Pension Fairness, supported by the Ventura County Taxpayers Association, filed the Sustainable Retirement System Initiative on January 16, 2014, proposing it as a solution in dealing with the nearly $1 billion in unfunded liabilities - debt not backed up by assets - facing the Ventura County pension system. The Committee argues that the large pension debt is causing more and more of the county's general budget to go towards pension contributions, shortchanging essential county services. In 2013, the county contributed $162 million to its pension fund, which is 260% more than the 2004 county cost of $45 million. The 2013 figure of $162 million amounted to 17% of the county's budget. The pension fund, from which current retirees receive most of their pension payments, is 79% funded, while an auxiliary fund run by the county is only 65% funded.
- It would change the pension plan of newly elected officials and newly hired employees from the current defined benefit plans to a 401 (k)-style, defined contribution plan.
- It would guarantee county contributions to employee retirement funds, which would be under the control of the individual employee and entirely portable.
- It would not require any "matching" contribution from the workers but would allow employee contributions as desired.
- The initiative would also limit pension-based salary increases for five years, seeking to reduce allegedly immoderate pension payouts.
- The new system would put caps on the county's contribution to employee pension funds, allowing no more than the following rates:
- 4% of employee compensation to non-public safety employees enrolled in Social Security
- 11% of employee compensation to public safety employees not enrolled in Social Security
- 5% of employee compensation to public safety employees enrolled in Social Security
- If approved, the new system would apply to all county employees hired on or after July 1, 2015.
Supporters of the initiative point towards a couple allegedly exorbitant pensions given to retired county officials and the general trend of retired employees receiving pensions that are far larger than their final salaries as reasons why reform is needed in the county. A 1997 state Supreme Court ruling in Ventura County, called the "Ventura Decision," allowed retirees to add special pay such as vacation time, bonuses, health care allowances, education allowances, and car, uniform and equipment allowances to their "final salary" in calculating their final pension amount, a process called pension spiking. According to an analysis conducted by the Los Angeles Times in 2012, this process has allowed 84 percent of Ventura County retirees with pensions above $100,000 to retire with a pension that is greater than their highest working salary. Two such cases commonly referenced by pension reform supporters that illustrate exorbitant pensions include:
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- Ex-Ventura County Sheriff Bob Brooks retired in January of 2011 with a salary of $227,600 but is now receiving tax-payer guaranteed pension payments amounting to $283,000 per year.
- Former Ventura County Chief Executive Mary Robinson earned $228,000 per year in 2011, when she retired, but now she is given a pension salary of $272,000 annually.
The proposed initiative would put a stop to pension spiking going forward, because retirees' pensions would not depend on the employee's salary that can include additional benefits according to the "Ventura Decision," but would instead depend on the amount and investment success of each employee's personal retirement account.
Proponents and opponents:
Proponents of the initiative argue that the current pension system is not sustainable and is sinking the county further and further into debt. They allege that this, in turn, is causing pension costs to skyrocket, which is taking funds away from important public services. They also argue that many pension payouts are exorbitant. David Grau, of the Committee for Pension Fairness, said, “This impacts all residents of Ventura County. We’re trying to create a fair and sustainable system for everyone going forward instead of pushing the debt onto our grandchildren, our goal is to eliminate the $1-billion liability over time.”
Ventura County Supervisor Peter Foy is an advocate of the proposed pension reform. Some unions in the county have called for his removal from the county pension board because he supports the reform initiative. In regards to the county's current pension system, Foy said, “It’s getting very expensive. (The measure) is a tremendous step forward in getting financial control going forward for new employees. It’s the right thing to do.”
Those who oppose the measure dismiss the claims that pension expenses are taking money away from county operations and services as unfounded and exaggerated. Moreover, they claim the pension plan changes would make it harder to hire and retain public safety officers competitively, lowering the quality of service in the county. Sheriff Geoff Dean is among these critics of the initiative. He said, “The county has done an outstanding job managing its budget. It has the highest bond rating possible." He went on to criticize the initiative itself, saying, “It’ll certainly be detrimental to my ability to try to recruit and retain qualified people. It’s really not a good idea, especially in the area of public safety.”
Supervisor Foy responded to this particular opposing argument stating, “That’s the argument everyone wants to make. I don’t believe that at all. Young deputies, especially, are more concerned about what you pay them. (The measure) is not saying you’re not going to get a pension. The pension is in a different format.”
Currently, the city of Piedmont owes CalPERS $7.8 million in unfunded liabilities belonging to a side fund alone, which is separate from and in addition to the full PERS plans and liabilities covered by the city. The city is on track to pay this debt off over nine years, paying interest on the nearly $8 million at a rate that amounts to 7.5%. If approved, Measure A, which was recommended by the Budget Advisory Committee and Financial Planing Committee and is slated for the February 4, 2014 election ballot, would allow the city to borrow $8 million dollars to refinance the PERS debt at a lower interest rate. City officials have estimated that refinancing would save the city between $600,000 and $700,000 over the projected nine year life of the loan. Because the Piedmont City Charter requires voter approval for issuing all bonds or incurring any debt, the city council referred Measure A to the February 4, 2014 election ballot. This measure is notable because it is requesting voters to approve a bond measure specifically designed to refinance pension plan debts when the pension system and fund was originally designed to be self-sufficient and solvent, given certain annual city contributions.
A measure on the ballot in Springfield, Missouri would, if approved, end a 0.75% sales tax that was approved by voters in 2009 to supplement the pension fund used to provide pension benefits to retired city police and fire personnel. By state law, the tax must be put to a vote every five years, which is the reason a question on the issue will appear on the April 8, 2014 election ballot. Furthermore, the state law requires that the ballot question ask voters if the tax should be repealed, which leads to the somewhat confusing situation in which a "yes" vote would result in a repeal, while a "no" vote would renew the tax.
In 2009, the pension fund was only 36% funded, meaning only 36% of the fund's liabilities were matched by fund assets. The tax that would be renewed by a "no" vote on this measure provided more than $100 million in revenue to the fund, and, as of June 2014, it was 67% funded. According to the city's website, the pension fund could be fully funded by 2019 if the sales tax is renewed in April.
The city and supporters of sales tax supplementing the pension fund have adopted the slogan "Are we there yet? NO!" to highlight that a "no" vote must be cast to renew the tax, and that, while the pension fund has made steps toward solvency, it is not there yet. The International Association of Fire Fighers, Local 152 (IAFF), is one of the chief supporters of the tax, and its members are urging the city to vote "No" in order to renew it.
Kamala Harris, the Attorney General of California, released the ballot title and summary for the California initiative aimed at granting local government agencies flexibility with respect to pension plans of their current employees. In 2012, Harris came under fire from editorial boards around the state for the ballot title she wrote for a statewide pension reform measure. Supporters of the measure subsequently withdrew it from consideration after seeing her title because they felt it so grossly misrepresented the goal of the initiative. The newly released ballot title, once again, disappointed both unions, which are opposed to the initiative, and supporters. Chuck Reed, the Democratic mayor San Jose and a chief supporter of the initiative, said of the summary, "You read this and you don’t know what we’re trying to do." It is widely expected that supporters will withdraw the measure due to their disapproval of the ballot title and summary, rather than working to gather the requisite 807,615 valid signatures to qualify it for the ballot.
Chicago: A new Morningstar report analyzing the per person debt of the 25 largest cities in the U.S. and Puerto Rico found that Chicago has the most daunting amount by a large margin, with the tab coming to $18,596 for every one of the over 2.5 million men, women and children in the city. Moreover, Laurence Msall, president of the budget watchdog group Civic Federation, said that Chicago's pension debt is much higher than the Morningstar analysis reported because it did not include pension debt at the CTA, Chicago Park District, Cook County Forest Preserve District or the Metropolitan Water Reclamation District.
Unions sue state: Meanwhile, a coalition of unions is suing the state for recently approved pension reform legislation that is designed to alleviate the state's portion of Chicago debt, as well as the problems caused by its own $100 billion pension debt hole. The unions claim the reform enacted by state legislators is unconstitutional and have described it as "theft." State AFL-CIO President Michael Carrigan said, “Teachers, nurses, emergency responders, and other workers and retirees will not stand by while politicians try to take away their life savings illegally."
Morningstar report on pension debt
A new Morningstar report analyzing the per person debt of the 25 largest cities in the U.S. and Puerto Rico found that Chicago has the most daunting amount by a large margin, with the tab coming to $18,596 for every one of the over 2.5 million men, women and children in the city. The report also highlighted Puerto Rico with the second highest per person pension debt at $9,987 and New York as a close third with $9,842 of debt per city resident. The best funded pension systems were found in Washington D.C., where the pension books are in the black by enough to give each person in the city $409. The following is a full list of the 25 cities and Puerto Rico, listed in descending order from most pension debt per capita to least:
- Chicago: $18,596
- Puerto Rico: $9,987
- New York: $9,842
- Boston: $7,802
- Philadelphia: $7,057
- Columbus: $6,814
- San Francisco: $6,453
- Los Angeles: $6,426
- San Jose: $6,014
- San Diego: $5,973
- Denver: $5,356
- Detroit: $3,758
- Jacksonville: $3,675
- Indianapolis: $3,426
- Phoenix: $3,351
- Austin: $3,009
- Dallas: $2,733
- Houston: $2,622
- Fort Worth: $2,377
- El Paso: $2,149
- Seattle: $1,997
- San Antonio: $1,623
- Nashville: $1,291
- Memphis: $893
- Charlotte: $585
- Washington: -$409
List of 2014 local pension measures
- City of Piedmont Pension Debt Refinance Bonds, Measure A (February 2014)
- City of Springfield Police/Fire Pension Fund Sales Tax Measure, Question 1 (April 2014)
- Ventura County Sustainable Retirement System Pension Reform Initiative (November 2014)
- City of Phoenix Pension Reform Initiative, Proposition 487 (November 2014)
So far in 2014, no local pension measures have been approved.
So far in 2014, no local pension measures have been defeated
- Morningstar, "Determing the Aggregate Per Capita Pension Liability," January 16, 2014
- Pew Charitable Trust, "Cities Squeezed by Pension and Retiree Healthcare Shortfalls," March, 2013
- Moody's website
- Standard and Poor's credit ratings website
- Governmental Accounting Standards Board website
- Pension Tsunami website
- Pew Charitable Trust, "A Widening Gap in Cities Shortfalls in Funding for Pensions and Retiree Healthcare," January 16, 2013
- Bonds Case Briefs, "WHERE DO TAXPAYERS HAVE HIGHEST TOTAL UNFUNDED PENSION LIABILITY?," accessed January 31, 2014
- The Civic Federation, "Report Identifies Chicago as Pension Obligation Outlier Among Large U.S. Cities," January 30, 2014
- Pew Charitable Trusts, "Cities Squeezed by Pension and Retiree Healthcare Shortfalls," March, 2013
- Azcentral.com, "Phoenix pension ‘spiking’ rules vary for city employees," September 14, 2013
- Pew Charitable Trust, "A Widening gap in Cities," January, 2013
- Arizona Free Enterprise, "Stop Pension Abuse," accessed January 30, 2014
- Free Enterprise Club website
- Azcentral.com, "Phoenix ballot initiative would overhaul pension system," September 16, 2013
- Pension Reform Task Force Presentation Document (timed out)
- Ahuwatukee Foothill News, "DiCiccio: Why we need real pension reform — you decide," September 17, 2013
- Committee For Pension Fairness, "Pension Facts, accessed January 24, 2014
- Thousand Oaks Acorn, "Taxpayer group trying to get reform measure on November ballot," January 23, 2014
- Citizen's Journal, "VCTA Endorses County Committee for Pension Fairness," January 16, 2014
- Full Text of the Initiative, accessed January 24, 2014
- Public CEO, "VENTURA SPAT SPARKED PENSION SHIFT," January 28, 2014
- Smartvoter.org, Piedmont Measure A information, accessed January 16, 2014
- News-Leader.com, "Pension backers seek a 'no' vote," January 11, 2014
- Springfield elections division website, accessed January 14, 2014 (dead link)
- IAFF website, accessed January 14, 2014
- Orange County Register, "Steven Greenhut: Harris distorts democracy to aid unions," February 17, 2012
- Contra Costa Times, "Ballot measures summaries should be written by neutral party," February 25, 2012
- Fresno Bee, "California attorney general clears pension-change ballot measure for signature-gathering," January 6, 2014
- Chicago Tribune, "Chicago pension tab: $18,596 for every man, woman, child," January 29, 2014
- Morningstar, "Determing the Aggregate Per Capita Pension Liability," January 16, 2014
- Bloomberg Business week, "Illinois Unions Sue to Stop $100 Billion Pension Funding Fix (1)," January 29, 2014