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City of Phoenix Pension Reform, Propositions 201 and 202 (March 2013)

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Two City of Phoenix Pension Reform Questions, Propositions 201 and 202 are on the March 12, 2013 ballot for voters in the City of Phoenix in Maricopa County, Arizona.

Proposition 201, if approved, will amend the Phoenix City Charter to make five changes in the Phoenix Employees' Retirement Plan. The most important of these changes would require any member of the Plan to contribute half of the funds for his or her retirement and establish that retirement eligibility occurs when the sum of the employee's age and years of service equals 87 instead of 80, which is the current rule. Proposition 201 leaves intact the current retirement eligibility rules of 60 years of age with 10 years of service and 62 years of age with 5 years of service. Proposition 201 also establishes certain multiplier benefits to increase over time instead of decrease in order to encourage later retirement.[1]

Proposition 202, if approved, will put in place what is known as a "prudent investor rule". It would also ensure that the city's Retirement Plan remains tax-exempt and make the amended plan compatible with all applicable federal tax laws.[2][3]

Due to a court decision restricting pension plan changes to new hires only, if Proposition 201 and 202 are approved, they will apply only to those employees hired on or after July 1, 2013. The provisions of the two propositions will not apply to any employees who were hired by the city prior to July 1, 2013, nor will the provisions apply to any now-retired former city employees. Police and fire employees, and elected officials, are exempt from the changes proposed in Propositions 201 and 202.

If the proposed changes are approved, the city's contribution to the Phoenix Employees' Retirement Plan is expected to decrease by 51%, yielding an approximate cumulative savings of $596 million by year 2037, while the highest employee contribution rate is estimated to be 13.6 percent of salary.[1][4]

Summary statements

The following statements were issued on the election notice by the City of Phoenix:

Statement for Amendment 201:

This text is quoted verbatim from the original source. Any inconsistencies are attributed to the original source.

This proposition, if adopted, would amend the City Charter to put in palce new terms of participation in the City of Phoenix Employees' Retirement Plan for employees hired by the City of Phoenix on or after July 1, 2013. More specifically, for these new employees only: (1) the member's contribution rate to the Retirement Plan for each year will be 50 percent; (2) the current Rule of 80 retirement option would be replaced with a Rule of 87 retirement option; (3) the pension multiplier factor applied to various years of service in the calculation of the member's retirement benefits would would be changed from a multiplier that decreases over time to a muliplier that increases over time; (4) the member would not be eligible to receive a month of service credit for any month in which the member had less than 20 days of service; and (5) any minimum pension obligation is eliminated. Additionally, this proposition, if adopted, would allow new employees of the City of Phoenix who prior to July 1, 2011 were allowed to participate in Arizona State Retirement System, and still have contributions and service on record with that System, to participate in the Retirement Plan on the terms that existed prior to these changes.

Statement for Amendment 202:

This text is quoted verbatim from the original source. Any inconsistencies are attributed to the original source.

This proposition, if adopted, would amend the City Charter to put in place a prudent investor rule for the Retirement Board responsible for directing investments for the City of Phoenix Employees' Retirement Plan, and would also add provisions confirming that the Retirement Plan is a tax-exempt governmental retirement plan and is administered in accordance with applicable federal tax laws. In addition, this proposition, if adopted, would allow the City to contribute more than its annual actuarial required contribution to the Retirement Plan in a fiscal year when the City has the financial ability to do so to reduce Plan liabilities.[3]

Controversy

Supporters of this measure argue that it saves the city money and cuts back on the quickly growing pension costs of the city while retaining an attractive Retirement Plan to draw quality workers for city employment. Among these supporters is Phoenix City Mayor, Greg Stanton, who argued that this model, of the three proposed by the council, is the the one that strikes the appropriate balance between limiting the city's expenditure and providing competitive employment opportunities for the city's workforce. Concerning this pension plan model and the money it could save, Stanton said, "We are going to be able to put significantly more resources into police, fire, our library system, parks and recreation. Under the proposal, it's a true partnership with our employees. We share in the risk. We share in the benefit."[1]


Some conservative council members, however, called for even more drastic reform arguing that this model merely slows down the movement towards very problematic financial difficulties and possibly bankruptcy.[5] DiCiccio voiced his preference for model number three, which was a 401 type pension plan. But since a 401 type plan lacked council support, DiCiccio argued for the reform measure to include city contribution capping limits. Speaking about city employee pension funding, DiCiccio said, "These costs are skyrocketing. The taxpayers need to be protected. I'm going to try to see if I can rally the votes for (a contribution cap)."[1]Jim Waring joined DiCiccio in calling for a contribution cap for the city to protect the tax payers from over spending, but these contribution caps were rejected by the council in a six to three vote.[4]

Court case

After the Pension Reform Task Force presentation to the council in February, but before any legislative action on the Council's part, a court case was decided by the Maricopa County Supreme Court which changed the pension reform possibilities for Phoenix even though it was brought about by an unrelated statewide pension reform. When Bill 1614 was voted into law by the Arizona Senate, changing the employee contribution to the Arizona State Retirement System from 50 to 53 percent, seven schoolteachers sued. Judge Eileen Willett decided in favor of the teachers, ruling the pension changing bill unconstitutional as retirement benefits are considered by the Arizona Constitution to be contractual relationship between the state and its employees and state law forbids "impairing the obligation of a contract." In her ruling, Willett wrote, "When the plaintiffs were hired as teachers, they entered a contractual relationship with the State regarding the public retirement system of which they became members. Their retirement benefits were a valuable part of the consideration offered by their employers upon which the teachers relied when accepting employment."[6] Since this ruling prevented the City of Phoenix from changing the pension of any current employees or retirees, the Phoenix City Council went on to propose models for reform that only took effect on new hires.

Path to the ballot

According to reports, the Phoenix City Retirement Plan cost the taxpayers $28 million in 2000 while it cost them $110 million in the 2012 fiscal year. This drastic increase in the tax burden caused by the Retirement Plan is likely to have been a factor in the Phoenix City officials decision to push for pension reform.[1] The City Council released a list of goals for pension reform which consisted of rebalancing contribution and making a 50/50 partnership with employees, attracting high quality workers with a competitive pension plan and saving tax payer money. To these purposes, the Pension Reform Task Force[7] was appointed in January of 2011 and worked with management, consultants and other stakeholders to propose recommended changes. There were 13 public meetings and several public input sessions held by the task force and on February 14, 2012 the final recommendations were presented to the City Council. The task force presentation was in favor of a continued Defined Benefit Program, a 50/50 contribution split between the employees and the city and an increase in retirement age. But the Task Force was opposed to a Defined Contribution Plan.[8] In May 2012, the pension reform options were made more limited by the Maricopa County Superior Court judgement that ruled against the changing the pension plan of any existing employee or retiree. Next the council developed three reform models that would only apply 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 will be placed on the ballot in March for the voters decision. The second model put forward for deliberation by the council was the same as the first model except that it added a cap on the cities contribution at 10%, 7% or 5%. The addition of a contribution cap was voted down in a six to three vote. Model three proposed a mandatory 401 system with 10%, 7% or 5% contribution from the city.[4] The next step for pension reform in Phoenix is a decision by the voters on March 12, 2013.

See also

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