City of Phoenix Pension Reform Initiative, Proposition 401 (November 2014)
|Voting on Local|
|Local Ballot Measures|
|July 25, 2014|
|Original Case study|
|San Jose & San Diego|
- 1 Text of measure
- 2 Support
- 3 Opposition
- 4 Reports and analyses
- 5 Background
- 6 Path to the ballot
- 7 Similar measures
- 8 See also
- 9 External links
- 10 Additional reading
- 11 References
The Pew Charitable Trust did a study in 2009 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, making the retirement fund only 73 percent funded. The city of Phoenix 2013 Actuarial Value Report showed that the unfunded liabilities of the city's pension system equaled $1.5 billion, with the pension fund having dropped to 56 percent funding. Moreover, the pension costs of the city have risen by 40 percent since 2011, resulting in a 2013 payment of $253 million. In 2003, the pension payment was $35 million.
A group called Citizens for Pension Reform, working with the Arizona Free Enterprise Club, announced that they began circulation of signature petitions in September of 2013 in order to put an initiative before voters that would entirely change the pension system for public employees going forward. On March 11, 2014, two days before the submission deadline, the group turned in more than 54,000 signatures, which is more than double the 25,480 valid signatures required to put the initiative on the ballot.
The initiative focuses 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.
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. 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.
Text of measure
The following language was approved by the Phoenix City Council to appear on the ballot for Proposition 401:
Amend City Charter: Eliminate participation in the current retirement plan and establish a defined contribution plan for new employees; allow current employees to transfer into this plan; prohibit City contributions to any other retirement plan, including deferred compensation plans, post-employment benefit plans and the police officer and firefighter retirement system.
A "YES" vote shall have the effect of amending the City Charter to change retirement plan terms for City employees as state above.
A "NO" vote shall have the effect of retaining the existing Charter provisions governing City employee retirement plans.
Supporters of the initiative are shocked by and extremely opposed to the ballot language approved by the city on July 2, 2014, calling it inaccurate, wildly misleading and a betrayal of the voters. Critics of the city council argue that the initiative explicitly does not affect the state-run pension plan for police and firefighters, making it unconscionable for the ballot language to claim as uncontested fact that the initiative would prohibit the city from providing funding for the police and fire retirement system.
Robert Robb, writing for the Arizona Republic, said:
I've been around politics a long time and don't expect politicians not to engage in politics. Yet there are times when even the crassest politicians are expected to act dispassionately and honorably. Crafting ballot language is one of those occasions. The voters are entitled to a neutral description of what they are being asked to decide, not language declaring as uncontested fact something very much subject to disputation.
Mayor Greg Stanton and the five council members who adopted this propagandistic ballot language – Kate Gallego, Michael Nowakowski, Laura Pastor, Daniel Valenzuela and Thelda Williams -- have betrayed the voters and dishonored themselves.
Stanton, who supported the ballot language ultimately approved by the city council, insisted that the language was a fair representation of the initiative text. He responded, "They can spin this any way they want. But the facts are that they blew it when it came to crafting the initiative language itself."
Outraged proponents of the initiative announced the intention to sue the city, seeking fair ballot language. The group, however, were afraid that they would suffer the same fate as pension reformers in Cincinnati, spending all of their funds fighting a political and legal battle with the city and leaving no money for campaigning and advertising. In the end they decided not to file a lawsuit over the ballot language, opting, instead, to go directly to the voters and attempt to explain their position directly. Speaking of the actions of city officials, executive director of the Arizona Free Enterprise Club Scot Mussi said, "They're going to keep spreading the same lie over and over again. We're better off going to the voters, explaining. We believe we'll prevail doing that."
The title of the proposed ordinance reads as follows:
An initiative measure amending the Phoenix City Charter Chapter XXIV, relating to employee retirement system plans, by adding Part V and adopting The Phoenix Pension Reform Act of 2014; Preventing pension spiking; Providing a retirement plan for future hires; Protecting certain rights of current employees in the city of Phoenix Employees' Retirement System; Providing for future termination of City of Phoenix Employees' Retirement System when it has no more participants or liabilities.
The full text of the ordinance proposed by this initiative is available here.
- Citizens for Pension Reform
- Vice Mayor Jim Waring, District 2
- Council Member Sal DiCiccio, District 6
- The Arizona Free Enterprise Club
Arguments in favor
Council Member Sal DiCiccio has argued that the city's $2.4 billion debt and the increasing city pension payments require a long term solution. DiCiccio was not satisfied by the reform in Proposition 201 and 202 and has written that he thinks Phoenix has a chance to become a standard for fiscal responsibility needed throughout the nation. He also has said 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."
When asked about the initiative, DiCiccio also 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.
—Sal DiCiccio, District 6, Ahwatukee and east Phoenix
Vice Mayor Jim Waring, who represents District 2 - consisting of northeast Phoenix - on the city council said:
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.
—Vice Mayor Jim Waring, District 2
- City Pension Reform Task Force
- Mayor Greg Stanton
- Council Member Kate Gallego, District 8 - southeast Phoenix and parts of downtown
- Council Member Laura Pastor, District 4 - central and west Phoenix
- Council Member Michael Nowakowski, District 7 - southwest Phoenix and parts of downtown
City officials 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 will cost them large sums because the city would have to pay off the $5 billion dollar fund in an expedited time frame and without contributions from future employees, who would be part of the new system.
When asked about Proposition 401, Mayor Greg Stanton said:
Since taking office, I've championed major pension reform to save $830 million and move Phoenix in the right direction. This initiative, though, isn't reform — it's reckless: it places a heavier burden on taxpayers in the near future, reduces pay for all city employees (including police officers and firefighters), and puts basic city services at risk. According to an independent, third-party actuary, the initiative won't save money, but would instead cost taxpayers up to $651 million over the next 20 years — and that doesn't include the millions the city will be forced to pay to trial lawyers to defend it in court.
—Greg Stanton, Mayor
Council Member Kate Gallego, District 8, said:
Oppose. Pension reform should save money, and this ballot initiative will not. It is full of legal inconsistencies and will be tied up in court for years. The ballot initiative will add new costs, estimated at $477 million over 20 years, while doing nothing to address our current $1.5 billion in liabilities. I represent a district that needs investments in our roads, parks and public safety. We cannot afford this poorly written initiative.
—Council Member Kate Gallego, District 8
Council Member Michael Nowakowski (District 7), representing southwest Phoenix and parts of downtown, said:
I agree that pension reform is necessary, however, this initiative will be subject to legal challenges that increases liability to the city, places risk on employees and reduces retirement benefits. Most important, this initiative will make our city less attractive to current and future employees when compared to other public employers. We have already had three separate committees work to find solutions, but instead put us at a disadvantage with the Rule of 87. I could not support another initiative that negatively affects our competitiveness. Our employees and city need real reform that is fair and has long term stability.
—Council Member Michael Nowakowski, District 7
Council Member Laura Pastor (District 4), representing central and west Phoenix, said:
The fact is, the costs associated with this initiative are still unknown, and I am extremely concerned about the unintended consequences that would impact Phoenix taxpayers and city employees. If new employees stop contributing to the current system, as this initiative requires, the city will have to continue to fulfill our pension commitments to retirees, now and in the future. The voters and the City Council supported pension reform in 2013 with projected cost savings of nearly $600 million over 25 years. I would like to give that initiative time to make an impact before we change the system again. For now, the council should focus on supporting public safety, community programs, strategic planning and reforming our budget process instead of a misguided attempt that could potentially gut our entire city budget.
—Council Member Laura Pastor, District 4
Reports and analyses
City actuarial report
Cheiron, the city's actuary, conducted a study on Proposition 401 that shows the contentious initiative costing the city between $358 million and $600 million over twenty years, rather than saving money. The study focuses on the closure of the city's current pension system for new hires, leaving the city to pay retirement benefits for past employees without contributions into the system from new employees, who would be a part of the new 401(k)-style pension system. The study claims this would basically accelerate the repayment of the city's huge unfunded pension liabilities. 
Reason Foundation, which also released a study on Prop. 401 summarized below, says that the city's report does not take into account three very important, money-saving aspects of Prop. 401:
- the elimination of pension spiking;
- new pension payment calculation algorithms; and
- prohibiting secondary, deferred-contribution retirement plans
Councilman Sal DiCiccio agreed with the initiative proponents and denounced the city's initial actuarial report. He wrote:
A recent My Turn by Cathy Gleason and Tom Simplot cited a study claiming pension reform could cost the city $358 million. They didn't tell you it was a biased study designed by the Phoenix pension board, which specifically left out the majority of the reforms included in the initiative. After Vice Mayor Jim Waring and I insisted the full reform initiative be analyzed, the same actuaries showed a potential savings of $508 million.
—Council Member Sal DiCiccio
Reason foundation, a policy research organization espousing libertarian values, also released an analysis of Proposition 401. 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.
Anthony Randazzo, writing for Reason Foundation, said:
The initiative represents a concrete idea in what has otherwise been a vague discussion about how to address the $1.5 billion in unfunded liabilities and pending recruitment troubles Phoenix faces. The question, however, is whether the proposed Act would ultimately benefit taxpayers or not.
Reason Foundation’s analysis of the Phoenix Pension Reform Act finds it would actually save taxpayers $31 million in the first year of reform, and ultimately reduce pension costs by $399.3 million over the next 20 years compared to the status quo.
—Anthony Randazzo of Reason Foundation
The following chart is taken from the report released by Reason Foundation and shows projected savings provided by Prop. 401:
Props 201 and 202
Propositions 201 and 202 were referred to the March 12, 2013 ballot on October 31, 2012 through a unanimous (9-0) vote of the Phoenix City Council, despite many who did not believe the reform found in these two measures was adequate to deal with the city's pension debt.
The Phoenix City Retirement Plan cost taxpayers $28 million in 2000 while it cost $110 million in the 2012 fiscal year and $283 million in 2013.
The rapidly rising costs of the retirement plan is what led to the decision of the Phoenix City Council to push for pension reform. The City Council released a list of goals for pension reform which consisted of rebalancing contributions and making a 50/50 partnership with employees, attracting high quality workers with a competitive pension plan and saving money. To accomplish these goals, a "Pension Reform Task Force" was appointed in January of 2011. The task force was charged with the responsibility of working with management, consultants and other stakeholders to propose recommended changes.
The Pension Reform Task Force held 13 public meetings and several public input sessions. On February 14, 2012, the final recommendations were presented to the City Council. The Pension Reform Task Force made these recommendations:
- A continuation of the city's Defined Benefit Program.
- A 50/50 contribution split between the employees and the city
- An increase in retirement age.
The Task Force, however, was opposed to having the city move from a "defined benefit" plan to a "defined contribution" plan.
In May 2012, the pension reform options available to the city were limited by a Maricopa County Superior Court judgement. This judgment held that municipalities in the county, including the City of Phoenix, are not allowed to change the pension plan of any existing employee or retiree. This meant that any changes to the city's pension plans could apply only to newly-hired employees. With that constraint, the City Council developed three reform models, each of which only applied to new hires. The first model mostly adhered to the changes recommended by the Pension Reform Task Force. This model is the one that was finally selected by the Council and was placed on the ballot as Propositions 201 and 202.
The second model put forward for deliberation by the council was the same as the first model except that it added caps on the city's contribution at 10 percent, 7 percent or 5 percent. The addition of a contribution cap was voted down in a six to three vote. Model three proposed a mandatory 401 system with matching 10 percent, 7 percent or 5 percent contributions from the city. Council member Sal DiCiccio, along with backers of the new pension reform initiative, did not believe Props 201 and 202 did enough to save the city from a pension payment induced financial crisis.
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.
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.
A study by The 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.
The city council, on October 31, voted 5-4 to approve new spiking regulations that some say are adequate and legal while others contend they are essentially useless and will not solve the problem. The plan was developed by the city's Pension Fairness and Spiking Elimination Subcommittee and prohibits applying cellphone, car allowances or lump-sum payments for sick and vacation leave from being applied to pension salaries. Employees are still allowed, under the plan, to use pre-existing sick and vacation leave balances toward boosting their pensions.
The votes in favor were from Stanton, Valenzuela, Johnson, Tom Simplot and Thelda Williams, while Councilmen DiCiccio, Waring, Gates and Michael Nowakowski cast the four dissenting votes. DiCiccio, Waring and Gates objected that the biggest spiking factor was the lump-sum payouts received at retirement for unused sick and vacation leave and that this plan does nothing to stop such practices. A more strict proposal was rejected 6-3.
Councilman Daniel Valenzuela said, "For those who say that it is not enough, it is what can be legally done," and he called it “morally and ethically right and legal.”
DiCiccio said, “It does not stop the spiking — it just does not do that. The council is going to be able to declare this huge victory today when, in fact, all it does is keep the spiking.”
Councilmember Sal DiCiccio has consistently been a strong advocate for drastic pension reform, financial responsibility and debt control. Expressing his opinion in 2013 that Propositions 201 and 202, while helping a little, were not nearly enough to solve the problems with Phoenix's retirement system, he advocated for strict city contribution caps and further limitations on city pension payouts. On August 27, 2013, DiCiccio was re-elected to the City Council, serving District 6, after a rather heated battle with union groups, who fired hundreds of thousands of dollars into their campaign against him and in support for his opponent, Karlene Keogh Parks.
|Referendum 1 Part B|
Election results from Phoenix City elections office
DiCiccio has also been a very outspoken anti-spiking advocate and began his own online petition, garnering signatures in order to pressure the mayor, Greg Stanton, into ending pension spiking practices for all city employees.
Path to the ballot
Citizens for Pension Reform needed to collect 25,480 valid voter signatures before March 14 to get their initiative on a 2014 ballot. On March 11, 2014, the group turned in over 54,000 signatures, which is more than double the required threshold. This means that even if only half of the submitted signatures are found to be valid, the proposed Pension Reform Initiative will still go before voters. Moreover, the Citizens for Pension Reform Committee double checked the signatures with the city of Phoenix's own voter lists to ensure the validity of the submitted signatures.
The city clerk had until April 30, 2014, to certify that a sufficient number of signatures were valid. On April 25, 2014, over 33,000 signatures were certified, qualifying the initiative for the November ballot. Because the Pension Reform Initiative seeks to amend the city charter, the city council cannot directly approve the initiative but must present it to the city voters.
The initiative process in Phoenix:
The signature requirement percentages for valid petitions, as established by state law, are based on the number of voters in the last mayoral election. For petitions to be valid, they must contain valid signatures equal to 15 percent of the votes cast in the last city mayoral election. Petitions must be filed within two years from the date on which the official number is assigned and signatures obtained more than 6 months prior to the date of filing shall be invalid and certified so by the clerk (Phoenix Charter, Chap. XV). After the city clerk has certified that the petition for ordinance initiative is valid and sufficient, the Council must either:
- Pass the initiative unaltered within 20 days of petition certification. For initiatives seeking to amend the city charter, the council cannot pass the initiative themselves but must submit it to the city voters.
- Within 25 days, either call a special election less than 120 days after the council's decision on the initiative or resolve to place the ordinance on the next regular city election if that election is less than 6 months after the council's decision on the petition. Petitions to amend the Charter cannot simply be adopted by the council, but must be submitted to a decision of the electors. (See above for state prescribed initiative process)
- AZCentral.com, "Pension spiking may cost Phoenix $12 mil per year," October 17, 2013
- Casa Grande Dispatch, "Editorial: Phoenix pensions," October 24 2013
- AzCentral.com, "Phoenix takes modest steps to fix pension ‘spiking’ rules," November 1, 2013
- Ahwutukee Foothills News, "DiCiccio, proponent of pension system overhaul, prefers voters have final say," March 18, 2014
- AZ Central, "Phoenix pension-reform initiative is not a sham," March 25, 2014
- Phoenix Pension Reform Act website, "Phoenix Pension Reform Act to be on November Ballot," April 28, 2014
- Pew Charitable Trusts, "Cities Squeezed by Pension and Retiree Healthcare Shortfalls," March, 2013
- Phoenix Pension Reform Act website, accessed February 27, 2014
- 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
- AZ Central, "Phoenix voters may see pension-reform plan on ballot," June 11, 2014
- Free Enterprise Club website, accessed February 19, 2014
- Ahwatukee Tea Party, "Phoenix Pension Reform Act Files Petition Signatures," March 11, 2014
- Azcentral.com, "Phoenix ballot initiative would overhaul pension system," September 16, 2013
- Pension Reform Task Force Presentation Document
- Ahwatukee Foothill News, "DiCiccio: Why we need real pension reform — you decide," September 17, 2013
- Phoenix City Clerk website, "Ordinance S-41041, Ballot language for Proposition 401," archived July 16, 2014
- Note: This text is quoted verbatim from the original source. Any inconsistencies are attributed to the original source.
- Arizona Republic, "Phoenix leaders fighting over pension-reform ballot language," July 2, 2014
- Arizona Republic, "Phoenix council betrays voters, dishonor themselves," July 7, 2014, archived July 16, 2014
- Arizona Republic, "The group has said the ballot language is biased," July 23, 2014
- Maricopa County Libertarian Party website, "Phoenix Pension Reform Act text," accessed January 30, 2014
- Arizona Republic, "Most on Phoenix council oppose pension-reform act," June 20, 2014, archived July 18, 2014
- The Arizona Republic, "Pension 'reform' would cost taxpayers $358 million," July 16, 2014
- Reason Foundation, "Phoenix Pension Reform Act Summary Analysis," June 10, 2014, archived July 18, 2014
- Arizona Republic, "Real numbers show need for pension reform," July 24, 2014, archived July 25, 2014
- Phoenix Pension Reform FAQ
- See the Pension Reform Task Force Document here for a list of the members of the task force
- Intellectual Conservative Arizona, "Phoenix Pensions: No Reform/Slightly Better," September 27, 2012
- AZCentral.com, "Pension spiking may cost Phoenix $12 mil per year," October 17, 2013
- AzCentral.com, "Phoenix takes modest steps to fix pension ‘spiking’ rules," November 1, 2013
- Ahwatukee Foothill News, "DiCiccio wins District 6 City Council seat," August 30, 2013
- Ballotpedia Staff Writer Josh Altic interview with Paul Jacob, January 22, 2014
- Ballotpedia, "Laws governing local ballot measures in Arizona," accessed March 12, 2014