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Report: Public employee pension systems on path toward financial stability

Editor’s Note: A previous version of this story misspelled the last name of Spencer Brien in the 15th paragraph.

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The funds:

Arizona State Retirement System
• Active members: 207,572
• Non-active vested: 208,573
• Retired members (including beneficiaries): 122,257
• Average annual benefits: $19,560
• Funded ratio: 75.3 percent

Public Safety Personnel Retirement System
• Active members: 18,436
• Non-active vested: 1,442
• Retired members (including beneficiaries): 10,159
• Average annual benefits: $49,571
• Funded ratio: 58.7 percent

Corrections Officers Retirement Plan
• Active members: 14,580
• Non-active vested: 1,463
• Retired members (including beneficiaries): 3,810
• Average annual benefits: $25,319
• Funded ratio: 69.7 percent

Source: Grand Canyon Institute

PHOENIX – Arizona’s public pension systems for state employees, public safety personnel and corrections officers are on a path toward financial stability, according to a study by a bipartisan think tank.

Despite having funding to meet 71.6 percent of pension obligations, a gap of $14.5 billion, reforms enacted in 2011 have curtailed the growth of future liabilities, according to the Grand Canyon Institute.

“We are back on track, but it will take a while to recover,” said Dave Wells, research director for the group, which has former Democratic and Republican lawmakers on its board.

The reforms approved by the state Legislature including changing the minimum retirement age to 65 with five years of service, 62 with 10 years of service, 60 with 25 years of service and 55 with 30 years of service. If an employee retires and returns to work, as in the case of a teacher, employers must pay back any money the state would have paid toward the employee’s pension fund.

The changes apply to those hired after July 1, 2011.

Other reforms increased the contribution rate of the Public Safety Personnel Retirement System to 9.5 percent and decreased the amount of benefits the pensions would receive if the portfolio performed above 9 percent in a year.

The study also noted that Arizona now follows best practices for public pension plans as laid out by the National Institute on Retirement Security.

Some states have moved from defined-benefit to defined-contribution plans, in which employers and new employees pay into 401(k)-style plans that have employees face the risks of market ups and downs. But the report said such a change here would actually increase the cost to Arizona taxpayers.

Wells said that’s because employees covered by a defined-contribution plan wouldn’t contribute enough to generate the return needed to meet obligations owed to longer-term employees who would still be covered by the defined-benefit plans.

“We would have to collect more money to make it up, which would make it harder to pay off the $14.5 billion (in liabilities),” he said.

Byron Schlomach, director of the Center for Economic Prosperity at the Goldwater Institute, an independent watchdog group that promotes limited government and free enterprise, said the current system costs Arizonans too much.

“Anything’s sustainable when you have a bunch of taxpayers paying for it,” he said.

Disagreeing with Wells, Schlomach said that if the state moved to a defined-contribution plan it would create an investment fund large enough to meet pension obligations to retirees who would remain covered by the current plans.

“We need to put the risk where it belongs, and that’s on the human being in the system and not on everybody else,” he said.

Spencer Brien, an assistant professor at Arizona State University’s School of Public Affairs, criticized the study’s analysis of defined-contribution plans.

“They’re comparing their optimistic view of the defined-benefit plans with the bad practice of defined contributions,” he said. “If they compared the best practice of defined contributions, they would have a better outcome in their analysis.”

He said local governments would be better off with defined-contribution plans like a lifecycle fund, in which portfolios are automatically adjusted throughout the lifespan of the fund, going from higher risk to lower risk as investors near retirement.

Dennis Hoffman, a professor of economics at ASU’s W.P. Carey School of Business, said the fact that Arizona’s pensions don’t have an automatic rise in the cost of living for members or a significant health care obligation makes the system sound.

“Arizona has been very good at meeting its obligations,” he said.

Hoffman, who serves on the board of trustees of the Arizona State Retirement System, said citizens need to realize that pension funds are a contract.

“They’ve traded money for the services that this worker provides. If they don’t like the deal, they shouldn’t have dealt it in the first place.” he said. “At some level we just have to face the fact that as taxpayer you get what you pay for.”

David Canella, spokesman for the Arizona State Retirement System, said he is pleased with the study, adding that the 2011 reforms made the system more sustainable.

“We were happy with the report that shows some of the same points we’ve found,” he said.