Pension reform put to a vote in Phoenix

February 26, 2013

No matter where you are in Phoenix, chances are you aren’t far from a sign urging you to vote yes on Proposition 201. And it’s almost as certain you won’t find even a bumper sticker telling you otherwise. That’s because there is no official opposition to the proposal, which cuts costs for the city’s pension system. That does not mean, however, it’s free from controversy.

Prop 201 is projected to save Phoenix nearly $600 million over the next 25 years. It would do that by raising the retirement age by an average of three years and upping the amount of new employee contributions into the system. But whether it goes far enough – or too far – depends on who you ask.

Deputy City Manager Rick Naimark said Phoenix’s pension system dates back to the 1940s and ’50s.

“And while we’ve made 25 changes to it over time, voter-approved changes, it’s been a long time since anybody looked at all of this,” Naimark said.

As a city employee, he must remain neutral, but he says the potential changes do make sense. Pensions in Phoenix, like many cities, don’t adjust to the economic climate. They are the product of a complex calculation using an employee’s salary and the number of years he or she worked for the city. The city is obligated to pay that amount, regardless of its financial situation. In the years leading up to retirement, both the city and the employee pay into the system.

But here’s where it gets tricky – Naimark said the employee never pays more than 5 percent in Phoenix. And the rest, to keep the system afloat, must come from the city.

“You’ve got to be able to pay that out, or the system is financially not stable,” Naimark said.

As the economy continues to drag, the city’s contribution to the pension system has gone up. Right now, it’s at 20 percent. Prop 201 would shake all that up. Both the employee and the city would be equally responsible for contributions.

“So it’s a 50/50 proposition,” Naimark said, “instead of the city putting in 80 percent, and employee putting in about 20 percent.”

This would more than double a new employee’s contribution, which might sound like a big change. But to Phoenix City Councilman Sal DiCiccio, it doesn’t even register.

“You know, it moves the retirement age up a little bit. It does save money,” DiCiccio said. “But real reforms were not achieved.”

Instead, he said, Phoenix has merely copied Arizona’s pension plan, a plan he says “nobody likes.”

“You know, the City of Phoenix had an opportunity to move real pension reform forward, and it failed,” he said, “but it’s being billed and the taxpayer is being told something that is just not necessarily true.”

DiCiccio says that opportunity was missed when he and two other city council members introduced a proposal that would have moved the city to a 401k plan and capped taxpayer liability. It was defeated before it could ever get to a citywide vote. The loss was frustrating for DiCiccio.

But lack of reform might be the best option, according to economists like John Mathis. He’s a professor at the Thunderbird School of Global Finance in Glendale, and he believes many pension issues will simply be solved by the recovering economy. He worries that Prop 201 will significantly decrease employees’ take-home pay.

“That’s going to have a depressing impact on the local economy,” Mathis said. “Will it be severe enough that it will cause a down-turn in economic activity? I’m not sure that will be the case. But it will definitely weaken it and slow it down.”

Despite these worries, Phoenix Mayor Greg Stanton says Proposition 201 is necessary – especially as the economy continues to find its footing. That doesn’t mean there won’t be complications. For example, what if two garbage men who started working for the city at different times each make drastically different contributions to the pension system?

“It will not be an easy issue to manage through, but it’s still the right thing to do for the long term fiscal health of the city,” Stanton said.

For Stanton, it’s all about thinking long term. And admits that, no, the pension plan is not in dire straights – at least not yet.

“But you’ve got to get ahead of the curve sometimes, so this is good, long-term planning for the City of Phoenix, and we have to ask the voters for support,” Stanton said. “I’ve already voted. I voted yes, by the way.”

Early voting continues through Election Day, on March 12.