Prescott Arizona’s solution to unfunded pensions it to temporarily fix the problem with a tax hike. But that’s a band aid, not a fix.
Prescottonians are living longer, and most of us, especially middle and low income earners, are finding it difficult to save money. Pensions are great for retirement, but only if they are paid for and the risk is made by the employee, not our government.
Many factors are to blame for the underfunding of pensions, including misaligned risks and incentives, poor management, declining industries, an aging workforce, and the recent financial crisis.
The federal act known as ERISA is in force for one main reason, to protect workers from pension losses. Its slush fund, known as PBGC, insures pension benefits, but it’s going broke because of all the defaultin’ goin’ on. So, we taxpayers already pay for a department that bails out pension funds.
Unfunded liability has become an excuse to call for tax increases and expanded gambling in Arizona to make up the shortfalls, but critics say the problem is crowding out other essential services like education.
But, should the fix for an unforeseen problem, created by mayors and councils with no vision, be placed on tourists or new residents? Has Prescott looked into making extra payments to accelerate paydown of its debt? Would it consider cuts in benefits?
We may never have an answer to those, but pension debt and reform in other cities are instructive. Jacksonville hired an expert to conduct a forensics audit of their pension plan because a handful of retirees were hauling in $2 million among them, and some Floridians suspect nefarious money moves similar to North Carolina’s pension money move to offshore accounts, according to Florida news accounts.
Prescott spends a lot on consultants. How about an outsider to look at Prescott’s mistakes and offer future fixes? The electeds have shown an inability to forecast.
Moody’s Investors Services revised Houston’s debt outlook to “negative” due to concerns over its finances. Of course we aren’t the size of Houston but the principles apply.
According to Moody’s report, Houston’s three local retirement systems – which includes the Houston Municipal Employees Pension System, the Houston Police Officers’ Pension System and the Houston Firefighters’ Relief and Retirement Fund – had a total unfunded liability of $3.2 billion as of fiscal year 2014, “nearly double the liability reported five years ago.” But the real market value of Houston’s unfunded pension liability is $13.7 billion, according to a study published this year by a finance professor at Stanford University.
The term unfunded liability refers to the difference between what’s been promised to future retirees and what is actually on hand to provide benefits.
What forecasts and actuarial tables is the Prescott council or the mayoral candidates using to calculate Prescott’s unfunded liability? Are they letting the fund managers do the math?
And Houston just surpassed the perennial pariah – Detroit. More on the Motor City below.
The Center For Local Governance (CLG) at the Texas Public Policy Foundation, says the problem is structural, and defined benefit pension plans simply aren’t sustainable… even in lil ol “Biscuit, Arizona.”
Arizona is about in the middle of the four-corners states, according to PEW research. We have more unfunded liabilities than Nevada but less than Colorado for instance. More than New Mexico but less than Utah. But Arizona is well below the “funding rate,” which PEW says should be 80-percent of what you have to fund in a pension. Arizona actually pays managers of the retirement funds .49 percent, which is well above the other four-corner states’ management fees.
Arizona has a voter-approved section of the state constitution which makes public pension plans a contractual relationship. That provision says benefits “shall not be diminished or impaired,” presumably by hikes in employee contribution levels and decreases in cost-of-living adjustments. But, as you may remember even when we try to reform, we don’t get anywhere. A 2011 law to fund pensions and a 2012 law were both stricken by Phoenix-area judges. So, Prescott is stuck, like gravy on The Biscuit.
Did Andy Tobin and Karen Fann look into these unfunded mandates and offer solutions in the state legislature? Last year the Arizona House passed a bill requiring cities like Prescott to audit their expenditures and make them public to the citizens. Both “Pierces” sponsored similar legislation in the Senate.
Neither Tobin or Fann signed on as sponsors as far as this writer can tell by way of a cursory check of statehouse records. Hey, elected officials, why not take the easy political road and ram through ineffective, watered- down legislation to temporarily bandage a gaping wound?
And when Tempe took a look at the reform attempts, it cheated, using what the Arizona Republic called “pension spiking” – exchanging annual sick leave and vacation time for increased salary – turning those sick and vacation hours into dollars, and boosting salaries over their final work years to calculate their monthly pension checks. Anyone out there know what Prescott cops and fireman are logging on their time sheets?
Many states are embroiled in pension lawsuits. How did Arizona make news? The Arizona Supreme Court has appointed five judges to hear a lawsuit that would increase the judges’ pensions!! The judges don’t like the 2011 law that increases their investment in retirement from 7-to-13 percent!
Continually passing bad pension legislation creates what is known as benefit creep. “A billion here a billion there and all of a sudden you’re talking real money,” said the statesman.
Ask conservatives and they will tell you we need: an honest diagnosis of the problem as it exists, a vision or goal needs to be stated, taxpayers are assuming the overwhelming majority of the risk, try a defined contribution system like a 401(k) that shares the risk, create an oversight committee on pensions, and make employees pay more.
Libertarians might say, “Cut benefits.” Ask a union member or a liberal, and the solution is simpler: pension reform should make sure that commitments and obligations to current workers are fulfilled, pensions should be secure and safe from unsystematic risk, and borrow if necessary.
Go to the AFL-CIO website and you’ll think you’re in La La Land; the website opines: plans are usually funded entirely by employers through tax-exempt contributions and automatically cover all qualified employees.
We can learn from Illinois. Yes, I know we aren’t Illinois either but look at how taxpayer risk can increase, especially for those of us who have never been firemen, teachers or police officers… Former Gov. Rod Blagojevich borrowed $10 billion to pay for Illinois pensions. His successor borrowed another $7 billion to pay for pensions, according to the Quincy Illinois newspaper.
When will Prescott and Tempe go hat in hand to the Arizona Statehouse? When will Arizona ask the feds to help fund its pensions? These are not rhetorical questions, they are tough questions, requiring long range vision.
It took Detroit 60 years to go from a thriving metropolis to third-world status, according to CLG. Yes, I hear you, Prescottonians: “We aren’t Detroit.” But what’s the old adage? Learn from history so you don’t repeat it?
When Detroit declared bankruptcy in 2013, it had $19 billion in debt. But bankrupt city estimates “comically understated pension debts,” according to the CLG and Chicago newspapers. One critic said, “They’re using this funny math and their systems still look absolutely terrible.”
Colorado Springs may lose $100 million due to pension obligations and lawsuits. The lawsuit is called Justus v. State, and the judge was critical of the PERA (public employees) and COLA (cost of living) formulas utilized by both parties. Ever been to “The Springs”? Urban congestion. Pothole city.
Don’t the politicians and unions get it: if you fix our potholes we will trust you with a little more money, but fix the little things first, show us progress and then we’ll trust you with a little more.
Chicago’s pension reform has resulted in a windfall for lawyers suing on both sides, according to The Trib, but employees have agreed to a reduction in future benefit increases. What has Prescott done for future decades?
PEW Charitable Trust’s analysis of pension plans shows the 238 pension funds in all 50 states are short $968 billion of what is owed to retirees. Michigan’s unfunded liability topped $32.7 billion in 2013, the PEW study shows.
“States cannot count on investment returns over the long term to pay down these liabilities,” said David Draine, a senior researcher of public sector pensions at PEW. Granted, we’re talking about li lol Prescott, not heavily populated cities or states, but the same tough choices have to be made … like Michigan’s 2012 reform requiring teachers to contribute more to their pensions or face benefit cuts.
I’m not shilling for Wisconsin Governor Scott Walker but his fix for state pensions makes employees contribute more to their plans, putting more of their skin in the game.
Granted, General Motors is not a city but it has been destroyed by union pensions. Even GM’s union recognized that new mortality tables assume longer life expectancies for plan participants.
At year-end 2014 the GM plans were underfunded by $11 billion. This is the auto company all Americans bailed out. The problem is not that we don’t want to pay retirement benies, the problem is that neither the workers or the unions or the government leaders have vision for the future that takes into account costs of living, actuarial tables showing how much longer retirees are living and just plain clear, logical long range planning.
The blog known as http://psprswrongs.com/ says even Americans sympathetic with labor unions are beginning to realize that, left unchecked, unions pensions will cloud our financial future. And, unlike private sector unions, government unions don’t have to deal with the hazard of pushing their employers too far. Government is not profit-oriented and so it has limitless ability to tax, the blog site claims.
Arizona’s formerly fiscally conservative government has not reacted to such important reforms like weaning state workers off of defined benefit plans, or crafting laws that allow cities to do the same. And, of course, Arizona actually has a law requiring secrecy in contract negotiations.
Where was Prescott city council’s “vision thing” 20 years ago? And will a new mayor and council members make any tough pension reforms?
James Quintero, director of the CLG, emailed me, “Unfortunately for the average individual, this too often means paying higher taxes or accepting fewer government services to shore up these unworkable programs.”
This is a democracy and as hard as it might seem to cops, teachers and firemen, many of us don’t want to bail out your pensions. We can live with your pension as it was the day you joined, but we can’t be accountable for how it was mismanaged since. For now, Prescott needs reforms and the retirees should have to bite the bullet.