By Eric Boehm | Watchdog.org
Cities and states across the country are facing a difficult financial future because of growing pension obligations.
Politicians are often, rightly, derided for creating the pension problems that are eating away at state budgets and then kicking the can down the road — leaving the next generation to pay for lofty promises made with half-empty investment accounts.
VOTED DOWN IN THE DESERT: Voters in Phoenix gave a thumbs down to relatively modest pension reforms. Meanwhile, the city’s pension fund is $1.5 billion in the red.
But given the chance to do something about the spiraling pension costs in Phoenix, Ariz., voters decided earlier this month they would rather kick the can too.
By a margin of 58-42, voters in Phoenix defeated a ballot measure that would have reined in costs by closing a major loophole in the city’s public pension system and moving non-uniformed city employees into a new, less generous pension system. Its passage would have been only a small step in the right direction, but its failure shows just how difficult fixing America’s public pension crisis will be.
The effort to defeat Proposition 487 was led by public sector unions who represent the city’s employees and helped along by the city council, which approved confusing language for the ballot question and released a questionable report about the costs and benefits of the changes.
The changes would not have affected police and firefighters’ pensions because they are enrolled in a separate, statewide pension system for all uniformed municipal employees in Arizona. That didn’t stop police and fire unions from jumping into the debate and muddying the issue — a political action committee named Firefighters Opposed to Prop 487 ran ads saying the changes would hurt public safety workers.
“I think the police and firefighters saw the writing on the wall,” said Jon Riches, an attorney with the Goldwater Institute, which favored the reforms. “If they didn’t fight against reforms here, it could have led to reforms that actually affected them further down the road.”
The media let them get away with it: in this story, the Arizona Republic spent 10 paragraphs detailing how opponents of the reform argued firefighters would lose their death benefits if Prop 487 passed, before finally pointing out none of those claims were true.
A report conducted by the city’s actuaries showed the changes included in Prop 487 would cost taxpayers at least $358 million over the next 20 years, but left out the fact those dollars would be owed one way or another — the only question is how soon they would have to be paid. It also failed to account for cost-saving measures in the proposal.
FIGHTING FIRE WITH FIRE: Firefighters unions opposed the changes in Proposition 487, even though the reforms would not have touched firefighters’ pensions.
“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,” said Michael Nowakowski, a member of the city council. “Most important, this initiative will make our city less attractive to current and future employees when compared to other public employers.”
A separate analysis, conducted by the Reason Foundation, a libertarian think tank based in Washington, D.C., looked at both the costs and benefits of approving Prop 487. It concluded taxpayers could save nearly $400 million by approving the reforms.
“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,” wrote Anthony Randazzo, a pension analyst for Reason.
Leaving all the math aside, Proposition 487 was a relatively simple (at least as far as anything to do with public pensions is simple) and modest set of reforms.
The proposal would have ended a practice known as “pension spiking,” in which a city employee can qualify for a more generous pension by trading in unused sick days and vacation days at retirement.
Former city manager David Cavazos made headlines in Phoenix last year when he traded in bundles of unused sick days to score a $200,000 annual pension. Cutting down on spiking could save the city as much as $12 million annually, according to one analysis.
The other part of the proposal would have moved all non-uniformed city employees into a new, 401-k style pension system that puts less of a burden on taxpayers. It would have closed the existing pension program, which is $1.5 billion in the red, according to the city’s own numbers.
Pensions are squeezing the city budget. Phoenix spent $253 million on pension payments in 2013, up from just $35 million in 2003.
But what happened in Phoenix shows the difficulty of fixing the pension problem. There are lots of entrenched special interests opposed to making even modest cost-saving changes.
There is little political rate of return for politicians to fix the system, which is why state legislatures and city councils keep putting off the difficult decisions. Getting reforms on the ballot worked for some beleaguered California cities in recent years, but the public’s lack of understanding about the complexity and seriousness of pension costs gives an opening for opponents of reform to spread misinformation.
Many of the same dynamics that factored into the debate over Prop 487 are present in other American cities where pension costs are climbing dangerously high while reforms are left unfinished.
The best approach, Riches says, it to take small bites. Perhaps Phoenix tried to do too much at one time.
“These things have the best chance when they are in front of voters, not in front of politicians,” he said. “But I think there was an effort to make these issues less clear than they should have been.”