Phoenix voters will decide whether to reform the city’s ailing employee-pension system.
City Council members moved Tuesday to put a pension-reform plan on the ballot for a March 12, 2013 election. Residents by law are the only ones who can change the pension system, which council members said has become a drain on the budget that pays for everyday services.
The proposed changes would increase the retirement age and contribution rate for new employees, saving taxpayers roughly $600 million over 25 years.
Taxpayers’ cost to fund the Phoenix Employees’ Retirement Plan has ballooned, from $28 million in 2000 to $110 million this fiscal year.
By reforming the system and requiring employees to pay more for their retirement, city leaders said they can spend more money on the services residents expect, such as police, fire, parks and social programs. The Council has enacted a food tax and cut services in recent years while pension costs soared.
The biggest source of savings under their plan is a provision that new employees pay the same amount toward their pensions as the city. Currently, employees contribute 5 percent of their paychecks for their pensions, as mandated by the city charter.
Phoenix’s contribution to the system is far higher — roughly 20.1 percent of each employee’s pay.
Multiple Council members have said it is an unfair obligation for the city’s general fund to bear.
The Council voted unanimously Tuesday to approve the plan recommended by City Manager David Cavazos. Their decision came after more than two hours of debate that highlighted the Council’s ideological divide over the scope and financial impact of employee benefits.
Proposed changes would apply only to new employees. Maricopa County judges have struck down changes to the state’s retirement system for existing employees, leading Phoenix officials to believe similar changes to the city’s system would not hold up.
The change also would not affect police officers, firefighters and elected officials because they are under state-run pension systems.
A minority of conservative-leaning Council members had attempted to place a cap on the city’s contribution, saying it would limit the risk to taxpayers.
That effort failed by a 6-3 vote.
Mayor Greg Stanton, who voted in favor of Cavazos’ recommendation, said he believes voters will recognize the “wisdom of this balance that has been struck.” Supporters said the proposal gives Phoenix money to restore and expand services, but does not put the city at a competitive disadvantage for employee recruitment and retention.
“I think that this recommendation gets it just about right,” Stanton said. “We simply cannot achieve our goals as a city unless we are a competitive workplace.”
The pension-reform proposal is the culmination of a process that began when former Mayor Phil Gordon appointed a pension-reform task force in early 2011.
Following recommendations from the task force, city staff modeled several scenarios, including a 401(k)-type plan, which would cost the city more up front.
Councilmen Bill Gates, Sal DiCiccio and Jim Waring argued that the city should cap its contribution at a set percentage.
Under their proposal, employees would pay the difference needed to fully fund the system, and could end up paying more than the city as a result.
Plans with a cap on the city’s contribution would save more money over the next 25 years — roughly $726 million at a 10 percent cap.
DiCiccio motioned to have the cap set at 13.6 percent — the projected contribution next fiscal year with an even split between city and new employees — and gradually lowered to 10 percent.
“The problem is … there were other plans that would save more money,” Waring said, objecting to the plan recommended by city staff.
“As far as I’m concerned, I feel like I’m on the side of the taxpayer.”
Changes set to be put before voters include:
Not allowing a new employee to retire until the combination of that person’s age and years of service equals 87. Workers currently can retire when their age and years of service total 80.
Employees who don’t meet the “Rule of 87” could still retire at age 60 with 10 or more years of service and 62 with five or more years.
Changing the formula used to calculate pensions so employees have an incentive to work longer.
With the current system, the multiplier used to calculate a retiree’s pension becomes less favorable on time worked beyond 32.5 years.
Giving the city more flexibility in how it can invest the plan.
Currently, the city cannot use certain types of investments that could increase its yield, such as private equity firms or high-yield bonds.
Allowing the city to put more money into the retirement system than required to meet its obligation for a single year. This would allow the city to pay down its unfunded liability in strong economic times. Under the current rules, it cannot contribute more.