Calls for reform

California, New Jersey and Illinois are among many states now struggling with the costs of public-pension systems. Reform movements in some states have cut benefits and raised the age at which workers can start drawing pensions.

Internationally, there have been moves by financially strapped governments across Europe to raise the retirement age. In Greece, generous early-retirement practices led to a debt crisis that prompted unpopular changes earlier this year. Last month, amid mounting protests that hampered France's economy, the French parliament bumped the retirement age from 60 to 62 to preserve its pension system.

Arizona anti-tax groups and business leaders are calling for changes to ease Arizona's ever-growing pension costs.

Kevin McCarthy, president of the Arizona Tax Research Association and a recent board appointee to the Arizona State Retirement System, said ongoing enhancements to the retirement systems are unsustainable.

"I don't know how some of this stuff is rationalized," McCarthy said.

Lawmakers have taken small steps to bring costs under control.

Several modifications begin July 1, 2011, for ASRS, the state's largest system. Newly hired employees who are part of ASRS will be required to work a few years longer before they can draw a retirement check. Also changed was the formula by which retiring employees' average ending salary is calculated, slightly lowering pensions.

However, the state won't see a savings from the changes until those new hires begin to retire years from now.

Even those modest proposals took four years for the Legislature to finally pass.

Though the $23.1 billion ASRS trust is currently underfunded and payments exceed contributions, ASRS Director Paul Matson said the trust is in no danger of becoming insolvent because its size is expected to grow and its investment values will recover.

How pensions work

The largest of Arizona's six public-pension systems is ASRS, which covers 708 employers of state, county and municipal workers, public-school teachers and those working for Arizona's three state universities. Created in 1953, it has 92,216 retirees and 220,323 actively contributing members.

Three other systems cover elected officials, corrections employees and police and firefighters.

Tucson and Phoenix run their own systems. Public employees contribute a portion of their pay toward their pensions. Their employers also make contributions equal to or greater than the employees' amount.

All provide defined-benefit plans, meaning the retiree's benefits are guaranteed no matter how much he or she has paid into the system while working.

Under such a plan, each trust pays a pension whose annual amount is determined through a formula taking into account the employee's highest average wage at the end of a career, years of service and a benefit "multiplier."

For example, an ASRS retiree's benefit is calculated by multiplying the years of service by his or her average salary over the last three years of employment. That figure is then multiplied by the multiplier, a percentage set by state law and tiered by years of service.

So, an employee who has worked 20 years and had an average annual salary over the last three years of $40,000 would have a multiplier of 2.15 percent. That would result in a lifetime annual pension of $17,200.

The biggest public pensions are given to those who work longer and make more money at the end of their careers. There are 392 government retirees in Arizona who receive annual pensions

in excess of $100,000, and the average pension for all six systems is $23,221, according to

records the paper compiled. In the ASRS system, the average retirement age is 60, and the typical retiree works 19.26 years. The average annual lifetime ASRS pension is $19,788.

In the private sector, a 401(k) would have to accumulate $273,752 to $283,327 over a 20-year period to get the same $19,788 annual pension at retirement, according to Michael Juilfs and Jim Dew, certified financial planners who operate separate Scottsdale firms.

For the private employee, the money would last 19 to 20 years, assuming modest interest-rate gains during retirement. The calculations, however, are based upon retiring at 65 - common in the private sector but five years later than a typical ASRS retiree.

"Public employees have a better deal than they realize, and they are not that low-paid," Juilfs said.

Insufficient funds

Because of the recession and years of low investment returns, Arizona's public-pension funds are

now considered underfunded. Ideally, a trust is 100 percent funded, meaning the current value of the assets in the trust is equal to the pension cost calculated for all current and future retirees. Pensions funded at 80 percent or higher are considered healthy by industry standards.

As investment values slide, extra money has to come from somewhere.

Each trust has different contribution rates for employees and employers. In five of the six systems, the employer has a higher contribution rate than the employee. Only ASRS has matching contribution rates.

That ASRS rate in 2000 was low because the 1990s stock-market boom provided an investment surplus for its trust. Back then, the combined contribution rate, the total from employees and employers, was 4.34 percent. Today, it is 19.2 percent, with each side contributing half, or 9.6 percent. Matson projects the combined contribution rate, which includes a small amount going to retiree health-insurance cost, will steadily increase to 22.96 percent by 2018, then decline as the trust's financial health improves.

Even with far higher contribution rates, the ASRS trust's assets cover only 75 percent of its

liabilities. Matson chiefly blamed stock-market crashes in 2001 and 2008 for the ASRS trust's underfunding, and he said earnings in three other years did not meet projections of 8 percent growth.

Most of Arizona's other public-pension funds are in worse shape. The Public Safety Personnel Retirement System has the worst funding ratio, at about 66 percent.

During the past 30 years, many private businesses have dumped similar defined-benefit pension plans for defined-contribution plans such as 401(k)s. Employers make set contributions to

employees' individual retirement accounts but are not responsible for guaranteeing their

retirement income or earnings growth. In 1980, 84 percent of private-sector employees had defined-benefit plans, according to the U.S. Bureau of Labor Statistics. By March 2009, the most recent records available show, that number dropped to 21 percent.

Recent federal records show 84 percent of state and local government workers still have defined- benefit plans.

"Pension benefits have been cut so much that it appears firemen and teachers have a golden parachute when they really don't," said Elizabeth Ashack, a Bureau of Labor Statistics economist. "For them, it's just the way it used to be."

The Arizona National Federation of Independent Business said none of its 7,500 members offers a defined-benefit plan.

"It's becoming extinct in the private sector, especially for small businesses," said Farrell Quinlan, the federation's Arizona director.

Matson, the ASRS director, defends defined-benefit plans, saying retirees with pensions are less likely to be dependent on government services when they retire. He added that defined-benefit plans provide better long-term security for retirees and they typically are better managed than defined-contribution plans.

Big payouts

The system is providing many employees a comfortable retirement. Meanwhile, taxpayer costs are rising, with the system paying out more than it is taking in. In fiscal 2009, for example, ASRS contributions from employers and employees totaled $1.6 billion. Its benefit payouts: $2 billion, further depleting the trust.

Public-sector retirees' pensions benefits are guaranteed for as long as they live, and surviving

spouses collect some benefits even after the retiree dies. The largest annual pension in ASRS goes to Carol Peck, who retired as superintendent of the Phoenix-area Alhambra Elementary School District in July 2002 with 35 years of service. According to ASRS records, she had an ending salary of $275,022.

Now chief executive of the Rodel Charitable Foundation of Arizona, she receives a $226,422 annual pension.

Peck, who received numerous professional accolades, including national superintendent of the year, said in an e-mail response that her salary was above average compared with other superintendents but was "determined to be commensurate with my performance." She also wrote that teacher and staff salaries, as well as student performance, were above average at Alhambra. Peck declined further comment.

Traditionally, public-employee pension systems were recognized as a way to overcome inequities between lower public-sector salaries and higher pay in the private sector. However, that inequity is no longer the case in Arizona, according to the U.S. Bureau of Labor Statistics.

The average state-employee salary in 2009 was $46,841, and the average municipal-employee salary was $42,668. In the private industry, the average pay was $42,090.

Public costs

As governments juggle their budgets to keep their employees' pensions intact, they have simultaneously found themselves cutting public services because of shrinking revenue and a lingering economic downturn.

At the local level, cities have cut library hours, closed recreation facilities, curtailed public-

transit spending and furloughed or laid off employees. The state has cut health care for needy families, shuttered some state parks and motor-vehicle registration branches, trimmed law-enforcement and prison budgets, and laid off hundreds of workers.

Arizona still faces a combined budget deficit estimated at $2.25 billion this year and next. Gov. Brewer has said public education, health and welfare programs all are likely to see significant reductions in 2011.

As state officials slashed budgets in recent years, they repeatedly argued that they had to cut public services because huge portions of their budgets were off-limits. Spending approved by voters or otherwise guaranteed cannot be cut.

A large portion of that off-limits spending goes to pensions. But cutting that spending is difficult because pension costs are layered throughout dozens of government-agency budgets rather than being lumped together as a single expenditure.

Solutions

Along with a weak economy, Arizona lawmakers shoulder some of the blame for the pension imbalance. In 2001, they permanently increased the largest system's multiplier, which increased retiree payouts. Three years earlier, they successfully asked voters to approve a constitutional amendment that does not allow public-employee pension benefits to be diminished.

Since then, they have done little to soften the financial impact on taxpayers.

Adams, the House speaker, said that while lawmakers can tweak the pension systems, they likely will need to ask voters to change the state Constitution.

"If we are going to have any fundamental reform, the voters will have to get involved," Adams said. "They need to remove the roadblock so the Legislature can do something different like have a defined-contribution plan."

The governor said Arizona's pension systems are in better shape than other states', but "that doesn't mean we don't need to go in there and look at this and get the discussion on the table and fix it."

The Arizona Chamber of Commerce has openly encouraged lawmakers to consider new public retirement plans that combine a defined benefit and a defined contribution.

Suzanne Taylor, senior vice president of public policy for the chamber, said the current system is "not a sustainable path" for taxpayers.

Retirement system board member McCarthy, a limited-government activist, said lawmakers must

act quickly when the session begins in January. "We are not talking about small parts of state and local governments," he said. "We are talking about extraordinary costs, and people are finding out these things are choking state and local budgets. The person taking it is the taxpayer."

Part 2: Nov. 15, 2010

Generous pension benefits for Arizona elected officials Craig Harris, The Arizona Republic

There was a move in 2002 when Jane Dee Hull was Arizona's governor to raise her $95,000 salary because it was among the lowest of the nation's governors.

The raise never materialized. But thanks to a generous pension system for Arizona's elected officials, Hull now makes more in her golden years than when she served in office.

The generosity of that system is evident from a snapshot of its cost. Since 2000, the amount of public funding needed to maintain the elected officials’ retirement system has increased by 325 percent, from $4.1 million to $17.5 million a year, according to records obtained by The Arizona Republic.

Contributing factors: regular cost-of-living increases that outpaced inflation and the pension's investment losses.

The average annual pension for a former elected official is $40,069. The highest is $216,424.

The Republic, as part of an investigation into the state's public-pension systems, found at least 43 elected officials of the 500 who retired since 2000 earn more from their state pensions than when they served in office.

Three-fourths of those 43 officials are judges who, depending on the Arizona county, run for election or are retained by voters. They are enticed to leave the bench after 20 years because they, and other elected officials, are able to retire on a pension that pays them 80 percent of their final annual salary in the first year alone, before any cost-of-living adjustments kick in.

"That's pretty good to get 80 percent," said Anthony Webb, an economist at the Center for Retirement Research at Boston College. "That kind of pension is almost unheard of in the private sector, and it certainly is not available to regular government employees."

Politicians do well after leaving office because the Arizona Elected Officials' Retirement Plan has the richest payout formula of the six public-pension programs in the state. During the past decade, retirees also have benefited from 4 percent annual cost-of-living increases that outpaced inflation.

The plan covers elected officials in 21 cities and towns, all 15 counties and state government.

The Republic, through a public-records request, found 131 former elected officials receiving lifetime pensions in excess of $100,000 a year. That's roughly one out of every seven retirees in that system. Most of the higher pensions go to judges.

Hull served nearly 23 years in elective office as legislator, secretary of state and governor from

1997 to early 2003. She said she never ran for office to obtain a pension. "I wanted to do those jobs, and the pension came with it," said Hull, whose current annual pension is $100,011.

Rich pension formula

Elected officials receive their lifetime pensions from a trust that is funded through contributions from their employers (taxpayers), deductions from their own salaries and a portion of state court fees. Another key funding mechanism is the interest earned by investing the trust funds.

The pension is a defined-benefit plan; it guarantees a level of payment upon retirement. The pension amount is calculated using a formula based on the retiree's average salary during the last three consecutive years in office, the number of years of service and a multiplier.

The initial pension cannot exceed 80 percent of the maximum average salary but can grow over time with cost-of-living raises.

The formula's emphasis on the average of the last three years of salary often prompts legislators, who earn $24,000 a year, to seek new elective positions that pay more toward the end of their careers, said incoming Senate President Russell Pearce, R-Mesa.

"Every time someone is term-limited, they scurry to run for another office for a higher pension," Pearce said.

While the pension formula is similar to Arizona's other public-pension systems, a key difference is the formula's multiplier.

The multiplier for elected officials, set by the Legislature, is 4 percent, roughly twice as high as those in other systems. When calculating the pension, that factor is multiplied by years of service and the average ending salary. For example, a person with 20 years' service and an average ending salary of $100,000 would earn an $80,000 pension.

By comparison, an Arizona State Retirement System retiree earning the same pay and with the same experience would retire with a $43,000 pension because the multiplier is 2.15 percent.

Maricopa County Presiding Judge Norm Davis believes the system is fair for judges, who could earn far more in the private sector as lawyers.

"Most people come to the bench after 20 years of practicing law," Davis said. "If you changed the system, you would discourage a lot of high-quality applicants. It's a reasonable system given the nature of the job."

Ken Fields, a Maricopa County Superior Court judge who retired in 2007, said some judges are earning more in their retirement because their wages were frozen for long stretches while in office and since retiring their pensions have been given cost-of-living increases. Fields' pension is slightly lower than the $135,444 he made the final year on the bench.

Low contributions

Elected officials contribute the smallest percentage of their income to their own retirement when

compared with the other state-pension systems. The 7 percent contribution rate for elected officials is lower than what employees pay in the Arizona State Retirement System (9.6 percent), Corrections Officer Retirement Plan (8.41 and

7.96 percent, depending on position), and Public Safety Personnel Retirement System (7.65 percent).

Only the municipal pension plans are more generous. All Phoenix employees and most in Tucson

give 5 percent of their salaries to their pension. In order to keep elected officials' pension-contribution rates low, the governments employing them have had to increase their - the public's - subsidy of the system. That has been particularly true over the past several years, as the sour economy cut into investment earnings of the pension trust.

Cities and towns are now paying into the trust an amount equal to 29.79 percent of each elected official's salary, while state and county governments are paying 17.42 percent. In combination, their rate in the past 10 years has nearly tripled, from 10.2 percent to 28 percent.

In Phoenix, for example, the city is paying $26,215 this year toward Mayor Phil Gordon's eventual pension. His annual salary is $88,000. Maricopa County pays $13,344 annually for each member of the Board of Supervisors. Each is paid a $76,600 annual salary.

The rise in cost has Jack Cross, former administrator for the pension plan, rethinking the merits.

Cross, who retired in 2002 and now runs an investment firm, has the distinction of taking home the largest pension from the system he once administered. Although not elected, Cross was part of the plan because of his position as its administrator.

When he retired, his pension was $164,464, but seven cost-of-living raises of 4 percent each have boosted that to $216,424. Cross concedes it is probably time to change the system.

"When things get rough like this, it sure points out that there may need to be a different mechanism," he said.

Part 3: Nov 16, 2010

Arizona pension plan for police, fire adds to cost Craig Harris, The Arizona Republic

Fearing a potential exodus of police officers and firefighters eligible to retire, the Arizona Legislature a decade ago created the Deferred Retirement Option Plan as a way to keep experienced public safety officers on the job.

The deal seemed simple: If officers agreed to work up to five extra years before retiring, the DROP program would pay them a lump sum in addition to their annual pension when they finally retired.

The program remains enticing. Today, participants' lump-sum payments at retirement average $268,938 for all public-safety officers. The average payment for police officers is $247,422, and $314,338 for retiring firefighters.

Officers enrolled in DROP also draw their annual pensions once they step off the job.

The lump-sum payouts, combined with cost-of-living increases that have outpaced inflation and multiple years of investment losses, caused taxpayers' costs for the program to soar.

As a result, the Public Safety Personnel Retirement System is so underfunded that even its top administrator says the overall pension program needs to be changed, perhaps drastically, to stem the expanding public subsidy.

"The plan is upside down," said Jim Hacking, its director. "It's not reasonable or realistic for our constituent groups or anybody to say, 'We will not do anything.' It's not a rational response."

As DROP was rolled out during the past decade, public-safety retirees received cost-of-living adjustments to their primary plan, and average annual pension benefits grew to $44,025 - the highest among all Arizona public pension systems.

The public's tab through employer contributions for the combined pensions, cost-of-living increases and DROP payouts in the past decade has grown from $46.8 million to $316.2 million a year - a spike of nearly 576 percent, or 22 times more the rate of inflation during the same period. Those increasing costs mirror the growth in Arizona's five other public-pension systems. An Arizona Republic investigation has found the pension systems are costing taxpayers at least $1.39 billion a year - more than the current state budgets for higher education, corrections or a health-insurance program for the poor.

Byron Schlomach, an economist with the Goldwater Institute and a critic of the state's pension systems, said the public-safety benefits are overly generous and the burden for taxpayers was unreal.

"It's nice they have figured out a way to rob us," said Schlomach. "This is ridiculous. How can anybody justify this?"

Hacking said there was "no question DROP added some liabilities" to the public-safety pension trust, but he believes the system has been hurt more by investment losses at the beginning and

end of the last decade due to stock market conditions, and by guaranteed cost-of-living increases

to retirees. Supporters of DROP say it has helped police and fire departments retain experienced talent while allowing municipalities to better plan when to add staff.

"Police officers were leaving as soon as they were eligible to retire," said Jim Mann, executive director of the 6,500-member Fraternal Order of Police. "There's a real need to keep experienced officers on the job because it costs so much to train new officers."

Tim Hill, president of the Professional Fire Fighters of Arizona, which also has 6,500 members, said the lump-sum payments were misleading. While they sound high, he contends the program saves the pension system money in the long run. He said once public safety officers opt into DROP, they no longer continue to accrue credits for their years of service. By comparison, he said, officers who remain a full 25 years or more and do not take part in DROP have their pensions calculated based on total years of service, giving them larger pensions that, over time, may eclipse DROP's upfront cost.

Neither employee organizations nor the pension system could provide precise estimates of whether DROP has been a net expense or savings for the pension system. However, around the same time the public-safety system instituted DROP, the Arizona State Retirement System, the largest public pension program, rejected the same program because its director said it was too costly.

While the payouts are rich, participation in DROP in recent years has fallen after steadily growing from 2002 to 2006, when a record-high 1,746 members were enrolled. Last year, participation fell to 1,044, or roughly 5 percent of the total active membership in the pension program.

Hacking said enrollment fell because in the past few years there have been fewer employees with the required 20 years of service to enter the program.

How it works

The Public Safety Personnel Retirement System allows its members to enter DROP after 20 years of service. They then must remain with their employer for up to five more years, and during that time neither the employee nor employer contributes to the retirement system.

Upon entering DROP, the employee's pension is calculated based on years of service up to that point and the highest consecutive three years of compensation. The amount the employee would have received in a pension is essentially set aside by the public-safety pension system, and the money is guaranteed to increase at the trust's assumed rate of growth, currently 8.25 percent.

The DROP payments are higher for those who come into the program with a larger salary and more years of service.

By law, the interest is paid even if the assumed rate doesn't materialize. That means there's no risk to the employee, but it's a big problem for taxpayers when the stock market drops, which caused negative returns for the trust in 2001, 2002, 2008 and 2009. When the system loses money, employers using tax dollars have to pay more to make up the losses.

Anthony Webb, an economist at the Center for Retirement Research at Boston College, said the guaranteed growth rate for DROP participants is unheard-of in the private sector unless money is placed in high-risk investments, but even then, there are no guarantees.

Hacking said the interest rate is set by state law, and he said the pension system is well diversified and not dependent on high-risk investments.

Along with the DROP benefit, participants have other benefits unique to public-safety personnel. Because of the recognized physical stresses of police and firefighting jobs, and the dangers of being killed on the job, public-safety pension systems generally have allowed participants to retire earlier than those in the private sector.

The average age for public safety retirees is 50.8 years, and the pension continues until a person dies. At that point, a spouse receives 80 percent of the pension until that person dies and the pension payments stop.

Benefits for DROP participants skyrocketed in 2007, when some of the first participants left the program and collected payouts after participating for the maximum five years.

That year, DROP benefits totaled $151.9 million, a 566 percent increase from the previous year when $22.8 million was paid. In 2007, DROP accounted for one-third of all pension benefits paid to police and firefighters. The previous year, it accounted for just 8 percent of all benefits.

DROP payments declined to $98 million and $91 million, respectively, in the past two years. But they still accounted for roughly 21 percent of all pension benefits for 2008 and 2009.

'Unsustainable'

A consequence of the large payouts and diminished investment earnings is that the pension trust currently is funded at just 65.8 percent, the lowest among the six public pension systems in Arizona.

That means the money now in the trust would pay for only 65.8 percent of the system's current liabilities if they all came due at the same time. The goal is to be 100 percent funded; 80 percent is considered healthy by industry standards.

The closer a pension is to being fully funded, the lower the contribution rates for members and their employers.

Arizona law sets trust contributions by police and firefighters at 7.65 percent of their wages. If

investment returns are poor and the trust is underfunded, the employee contribution is not raised. Instead, any shortfall is generally made up by employers through tax dollars, though the trust also is partly funded through taxes on homeowner-insurance policies.

Employers currently contribute an amount equivalent to nearly 21 percent of an employee's gross wages. That's roughly four times the rate 10 years ago.

But Mann, of the Fraternal Order of Police, countered that while employer contribution rates may be high now, there were times when police officers and firefighters paid higher rates than their employers. When employers had lower rates, he noted, they were not asking to pay more to make it equitable.

Employer rates are projected to rise to 37.5 percent by 2024 in order to make up for the system's

current indebtedness. One reason for the increase: cost-of-living raises have been given to public-safety pensioners for 24 consecutive years.

In 2009, each retiree received an additional $1,761, a flat amount calculated on the average pension.

Hacking said the current overall program was "unsustainable," and he said he would work with

employees and employers to propose changes to the Legislature next year. He declined to disclose specific reforms, but he said it was possible DROP "will not look like the one we have now."

Part 4: Nov 17 2010

Arizona pension payouts bolstered by Phoenix Craig Harris, The Arizona Republic

Phoenix officials repeatedly said former City Manager Frank Fairbanks turned down raises because of tough times during the last few years of his tenure even though he was underpaid compared with counterparts across the country.

But records obtained by The Arizona Republic while researching public-pension practices show Fairbanks actually accepted raises and bonuses, and received pay for unused vacation and sick leave, to earn $1.3 million during his final three years before retiring Nov. 5, 2009. His reported annual salary was $236,998, but that was only his base pay.

By significantly boosting his pay toward the end of his career, Fairbanks spiked his annual pension from the City of Phoenix Employees' Retirement Plan to $246,813 a year - the largest pension among all six public-pension systems in Arizona. That pension amount is roughly $47,000 more than the pension provided to every living former U.S. president.

Fairbanks' pension is one high-profile example of the rising costs to taxpayers of Arizona's six public-pension systems. An Arizona Republic investigation has found that increased benefits combined with declining pension-system investments over the past decade has led to soaring costs for taxpayers to keep the public-pension systems afloat. Last year's tab: $1.39 billion.

In Phoenix, the municipal pension program allows employees to add deferred compensation, fringe and travel allowances, and sick leave into their benefit calculations to boost their pensions.

This practice helps explain why Phoenix retirees receive on average about $10,000 more a year than retirees in the Arizona State Retirement System, the state's largest, covering state workers, public-school teachers and employees in most other Arizona cities.

Fairbanks insisted he never took a raise, that the increased money was "retention pay." City

records call the pay hikes "performance enhancement." "I made a fair amount of money, but the last time I checked there were 40 or 50 at the state who made more than me. I don't know if I made 10 percent of what the football coaches at ASU and UofA made. What I did impacted the community a little more than what the football coaches did," Fairbanks said. "Any evaluation done by the city, we came out the best in the country or the best in the world. The point is things weren't all that bad. The city was doing good work."

Along with Fairbanks, 27 other Phoenix retirees receive six-figure retirement checks.

Taxpayers pay more

The city's pension trust is underfunded and has been battered by lower-than-projected investments, causing city taxpayers to pay more into the system.

In the past 10 years, the city's (taxpayers') cost to fund pensions for Phoenix employees increased 277 percent to $88.1 million a year. This fiscal year, which ends June 30, 2011, the cost is projected to hit $93.7 million or close to what the city spends to fund all of its parks programs.

While pension costs keep rising, the city this year increased rates and fees, imposed a 2 percent tax on food in April, and reduced library hours and parks and transit services to balance its budget. City employees, who have seen no reductions in their pension benefits, took compensation reductions of about 3 percent.

Councilman Sal DiCiccio, a critic of the city's spending practices, said the public should be outraged.

"They will demand change when they see retirees are making $100,000 in pension benefits," DiCiccio said. "The city is out of touch with the pain the public is going through."

In response to The Republic's examination of the city's pension system, Mayor Phil Gordon said he would form a blue-ribbon pension task force to examine the rising costs for Phoenix. "It's something we have to address," Gordon said. "You brought it to light."

City Manager David Cavazos said he received approval from council members Sept. 22 to hire a consultant to review pay and benefits, including pension payouts, for Phoenix employees and to compare compensation costs with national standards. That approval came more than a month after The Republic filed a public-records request seeking information on pension benefits paid to Phoenix retirees.

Add-ons raise pay

While Fairbanks was in office, only his base salary was publicly disclosed.

Through public-records requests, The Republic discovered recently that Fairbanks' average annual total compensation during his final three years as a city employee was $434,828, well beyond his reported base pay. The final three-year average is a key factor, because it is that number that is plugged into a formula to determine a retiree's annual pension.

The amount of Fairbanks' final paycheck: $351,345, which included a payment of $237,654 for

sick leave he never used. During those last three years, he accepted four raises totaling $17,321 and two bonuses worth $40,000 each, records show.

The sick-leave payout, cashing in of unused vacation time, his car and phone allowances, and his raises and bonuses all were added to his base salary to calculate Fairbanks' final three-year average pay on which his pension benefit is based.

During his final year, meanwhile, Fairbanks froze all pay raises for those in city management,

citing severe budget problems. The city for more than a month refused to release Fairbanks' compensation records, despite two public-records requests. After the newspaper threatened the city with legal action for not complying with the Arizona Public Records Law, Mayor Gordon ordered release of the records.

The mayor said he was unaware Fairbanks had received such a large final check, though he was aware that the final payment included a $40,000 bonus the City Council had approved. All other additional pay beyond his base pay was based on Fairbanks' employment contract with the city, records show.

The mayor said the practice of cashing out unused sick leave and vacation should end because the city cannot afford it. He also said changes should occur to the pension system, because "it can't sustain itself."

Toni Maccarone, a city spokeswoman, defended Fairbanks' compensation, saying he was city manager for 19 of his nearly 38 years with the city, managing a $3 billion budget and more than 14,000 employees.

"His compensation was a fraction of the amount paid to CEOs with similar levels of responsibility, and his pension was part of that compensation," Maccarone said.

Fairbanks, 64, said his pension was large, but not out of the ordinary for someone with his length of service. "I had been discussing retirement for at least five years before I left, and the City Council asked me to stay on. I passed up job offers to go elsewhere," said Fairbanks. "I was paid less than city managers in similar sized cities."

Fairbanks, however, was referring to his annual base pay.

Bob Murray, a consultant who recruits city managers and helped negotiate the contract for Cavazos, the current Phoenix city manager, said most city managers earn about $220,000 a year. He said those at the top of the scale earn about $350,000, and in a few rare cases total compensation exceeds $400,000 a year.

Murray said it is common in California for city managers to cash in sick leave and vacation to spike pensions, but that it is rare in other parts of the country.

Rising pension cost

Phoenix's pension program was created in 1953 by a vote of city residents. It is a defined-benefit plan similar to Arizona's five other public-retirement systems. It pays retirees lifetime annuities based on a formula that includes each retiree's final average compensation, years of service and a multiplier.

There are 4,931 retirees now drawing pensions, and the system is funded at 69.3 percent. That means if everyone in the Phoenix system cashed in their pension, the plan has enough money to pay just more than 69 cents on the dollar.

A fully funded system is at 100 percent. When that ratio falls, then contributions must increase either from employees or their employer. Retirement experts say a system is considered healthy if funded at 80 percent or better.

In the past 10 years, the cost for Phoenix residents to fund the city's pension system has increased because the amount the city contributes to the pension fund for each employee has more than doubled, primarily because of investment loses during the market downturn. The contribution now stands at an amount equal to 16 percent of each eligible employee's wages. That will increase to 18 percent next fiscal year.

The amount each employee contributes to that fund, meanwhile, remains at 5 percent of his or her wages. That rate is among the lowest in the state.

In addition to funding its own municipal pension fund, the city has been hit with rapidly rising costs in other Arizona pension systems to which it contributes on behalf of its police, firefighters and elected officials.

During the past decade, a period marked by rapid growth in the city, Phoenix's contributions to the public-safety pension system increased nearly 13 fold to $93.2 million, while contributions to the state pension system for elected officials nearly quadrupled to $136,142.

DiCiccio said he is fed up with what he called a greedy pension system taking advantage of taxpayers.

Gordon disagrees. "We have 14,000 employees, and we have a pension system and salary system where many employees are underpaid, both in comparison to the public sector and private sector," Gordon said. "We have employees who work much harder than any other organization."

Yet records obtained by The Republic tell a different story.

They show the average salary in 2009 for a Phoenix worker, not including police and fire, was

$53,906. The average pension was $29,880 a year. The average retirement age: 58.9. The average salary in 2009 for a state employee was $46,841. The average pension in the Arizona State Retirement System, which covers state employees, was $19,788. The average retirement age: 60.4.

In private industry, the average salary in Arizona was $42,090, and only one in five employees has a pension similar to the city's. The U.S. Bureau of Labor Statistics and the U.S. Social Security Administration do not keep records on the average age of retirees in the private sector. Many financial planners say it is around 65.

2nd retirement plan

Along with its pension plan, the city offers an additional plan to enhance employee retirements. There are 10,706 workers enrolled in the plan, which will cost the city up to $38.4 million this fiscal year. That equals three-fourths of the $50 million generated from the new Phoenix food tax.

The average salary of those employees is $64,137, according to records obtained by The Republic.

For each participating employee, the city contributes to a 401(a) deferred-compensation plan that

is similar to a 401(k) plan in the private sector. The percentage contributed on behalf of each employee is determined by negotiations between employee groups and city management. Generally, the higher the salary, the higher the percentage, which peaks at 9.6 percent for police, fire and general city executives. For employees at the higher end of the pay scale, that means the city puts $96 into their 401(a) for every $1,000 of pay.

The city does not, however, require a matching amount to be contributed by the employee. Instead, it is a straight payment on behalf of each employee, with managers and executives receiving the largest.

Cavazos, the city's highest-paid employee with a $236,998 base salary, has a contract calling for the city to contribute an additional amount equal to 11 percent of his annual pay, or $26,070, into a deferred-compensation account. He is the only employee at that contribution level. Cavazos also is reimbursed 3 percent, or $7,110, of his required 5 percent annual contribution to the city's main pension system, meaning he only pays in 2 percent.

Cavazos said it is normal and customary for a city manager to receive a higher compensation package, and he has taken required furlough days like all other executives and managers. He also said he would neither seek nor accept any bonus or salary increase this year.

Changing the system

DiCiccio said Phoenix's pension system needs to be fixed. But he said City Council action is unlikely. Instead, he believes it will take a citizens' initiative.

While DiCiccio is an outspoken critic, he receives a $7,477 annual state pension for elected officials from his previous tenure on the council. And since being appointed in February 2009, he has received a $61,600 council salary, making him what is commonly referred to as a double dipper.

DiCiccio provided The Republic with records showing he unsuccessfully tried to stop his state pension after he returned to office, and he has donated $3,000 of his pension to the city's general fund since taking office again.

Just as DiCiccio by law cannot stop his pension, Cathleen Gleason, Phoenix's budget and research director, said the city's charter prohibits Phoenix from raising contribution rates on employees currently in the pension system. However, the city could make new hires put a larger share of their pay into the system, and Gordon said he could support a two-tiered system in which longer-tenured employees paid one rate and newer employees another.

Tucson, the only other Arizona city with its own pension system, implemented changes for anyone hired after June 30, 2006, after watching its pension costs steadily increase.

Tucson's new employees pay a variable contribution rate that is nearly twice as high as the 5

percent rate for employees hired before the cutoff. Michael Hermanson, administrator for the Tucson Supplemental Retirement System, said his city wanted to have all employees pay a higher rate, but that it likely would have faced a court challenge.

Still, by making the change it did, that helped Tucson's contributions decline from a high of $24.3 million in 2006 to $21.3 million in 2009.

Part 5: Nov 18, 2010

Some retired teachers rehired while drawing pensions Craig Harris, The Arizona Republic

Retired teachers are returning to classrooms across Maricopa County, some making $100,000 a year by collecting a pension and a paycheck at the same time, while retired administrators are doing the same thing and making more than $200,000.

Welcome to what is commonly known as double-dipping, education style. With the Deer Valley Unified School District leading the way, nearly every public-school district in Maricopa County is using a legal loophole to allow senior educators to simultaneously retire and remain on the job without interruption, records obtained by The Arizona Republic show.

That means they can begin collecting their publicly funded pensions without ever missing a regular paycheck. In most cases, it works this way: When they retire, they are hired by a private firm that contracts their services back to the school district from which they retired. Instead of being paid by the district, they are being paid by a firm that is being paid by the district.

The loophole itself is not significant. State law says that retired state educators only can come back to work part time through that arrangement during the first year of retirement. After that first year, though, they can return to working full time directly for the district.

What is more significant, critics say, is the financial impact, a blow the underfunded Arizona State Retirement System can ill afford.

There are more than 900 educators benefiting from the practice, and by law they stop contributing to the retirement-system trust the minute they retire. By law, their employer also stops contributions to the trust on their behalf.

As they continue to work, they are preventing new employees from getting those jobs -

employees who, along with their employer, would be contributing to the pension system. That means the burden of keeping the pension system financially healthy is shifted to other teachers and ASRS members, such as local and state government workers, whose contributions to their pension trust continue to go up.

It also shifts costs among ASRS employers. For example, school districts that don't allow double-dipping may find themselves contributing more to the trust to keep it healthy, and so might cities and the state.

School districts that allow the practice counter that they are saving money by not having to make pension contributions. They also say the cost usually is less to bring back retired educators because they work for a smaller salary and most don't receive health-care benefits.

The practice of double-dipping is one example of problems within Arizona's six public-pension systems. An Arizona Republic investigation has found that increased benefits combined with declining returns on pension-system investments in the past decade have led to soaring costs for taxpayers to keep the public systems afloat. Last year's tab: $1.39 billion.

The newspaper estimates that the practice of double-dipping is costing the ASRS trust at least $8.6 million in employee and employer contributions this year, based on public records obtained from ASRS and all Maricopa County school districts. Officials from ASRS do not keep records on how much money the system is losing from double-dipping, and they could neither confirm nor deny the newspaper's findings. But ASRS Director Paul Matson said it was a problem, and he will ask the Arizona Legislature to help fix it next year when lawmakers convene.

"It clearly violates the spirit of the retirement system," said Rep. John Kavanagh, R-Fountain Hills, the House Appropriations chairman during the Legislature's most recent session. "We provide a retirement system so when people are too old to work, they can have money to live off of. People who retire and go back to the same job are abusing that gift."

Andrew Morrill, president of the 31,000-member Arizona Education Association, agrees.

"We can't afford to do this," Morrill said. "You are putting greater pressure on the retirement system, and it will drive up contributions."

Policies vary

Teachers and other employees for public-school districts in Arizona are part of ASRS, which has 220,323 members including municipal, county and state employees. For the past five years, as the practice of educators double-dipping has gone on, ASRS retirees have not seen an increase in pension benefits because the trust is underfunded.

The other five public pension systems in Arizona also are underfunded, but policies on cost-ofliving adjustments vary. For example, municipal retirees in the Phoenix and Tucson systems are not receiving pension increases, but retired public-safety, elected officials and correctional officers in three other state systems received increases July 1, their managers say.

In ASRS, workers and employers each contribute an equal amount to the pension trust. That amount is determined as a percentage of an employee's wages, and the eventual pension payouts come from a defined-benefit plan in which annuities never decrease.

The overall rate, which includes retiree health-insurance costs, has significantly risen during the past decade because of poor market conditions. The rate is expected to steadily increase to 22.96 percent by 2018 before declining as the trust's financial health improves, ASRS says.

The pension is a defined-benefit plan; it guarantees a level of payment upon retirement. Some educators defend the practice of retiring and then returning to work.

" 'Double-dip' is a negative comment for the people who are now taking the opportunity for phased retirement and have qualified for their pensions," said Sandra McClelland, founder of Smartschoolsplus Inc., which helps retired educators return to school districts. "They could leave the district and go to a private enterprise. This is a way for the district to get a return on their investment."

Officials at ASRS, the state's largest pension system, said double-dipping reduces contributions, but they believe the amount is insignificant to the $23.1 billion trust. Officials have not calculated precisely how much money is foregone, however.

The Republic determined the loss among Maricopa County educators by filing public-records requests with the county's 57 school districts and obtaining the salaries of retirees still working. Those salaries totaled at least $44.8 million. By multiplying that figure by 19.2 percent - the current total contribution rate by both employee and employer to fund the pension - the missing payments would be $8.6 million.

Stretching the system

The Republic also found:

-There are at least 920 teachers, administrators and office personnel in 50 Maricopa County districts who are double-dipping. Seven districts had no employees double-dipping.

-

The average salary for all school employees was $48,748.

-

The average retirement benefit for those employees was $30,741. That's 55 percent more than the average $19,788 ASRS pension.

-

The Deer Valley Unified School District had the most double-dippers with 140. Paradise Valley Unified School District was next at 137.

-Twenty-five districts employed more than 10 retirees.

Kevin McCarthy, an ASRS board member and president of the Arizona Tax Research Association, believes double-dipping hurts the pension system.

"You can argue whether or not double-dipping is fair, but that misses the point," McCarthy said. "The most important point is that it undermines the sustainability of the system. You can't dress it up as a positive, no matter how you look at it."

Matson said he would ask lawmakers to impose an "alternate contribution rate" that employers must pay if they hire ASRS retirees. He said the rate would help pay off the trust's deficit, and it would be roughly two-thirds of the contribution that the employer normally would make toward that employee's pension and long-term disability.

But that is also likely to drive up taxpayers' costs because employers will now be making new contributions for the double-dippers. The double-dippers still will not be making payments on their own behalf because they already receive pensions and cannot accrue any additional work credits to enhance those pensions, Matson said.

Matson said he would ask lawmakers to have the new rate take effect in a few years so it

wouldn't hurt school districts that currently are struggling because of the economic downturn. If the law were in place today, Matson said school districts would pay an amount equal to roughly 6.5 percent of a double-dipping employee's salary to the trust. For a teacher making $40,000, that would be a $2,600 contribution.

Matson said that for the past four years, ASRS has tried to get lawmakers to impose an alternative rate, but it was opposed by Smartschoolsplus, one of the main contractors that hires retirees and puts them back to work in school districts. The company now supports the plan.

Saving money?

In addition to Tempe-based Smartschoolsplus, the other main contractor that hires retirees and puts them back to work in their districts is Cottonwood-based Educational Services Inc. Both are run by former educators.

Each charges the school district a 4 percent service fee based on an employee's gross income.

John Tavasci is co-owner of Educational Services Inc. He started his business in 1999 and has worked with about 140 school districts in Arizona. Smartschoolsplus was founded in 2002, and it works with 80 districts around the state.

Both businesses began around the time Arizona was facing a teacher shortage, and they were

instrumental in keeping educators in classrooms. Tavasci said most districts hire retired educators at about 80 percent of what they were making prior to retirement, and many districts no longer pay health-insurance costs of the rehires, which results in more savings.

However, The Republic found some districts giving educators their full pay after retirement and returning to the same jobs.

Tavasci said the educators are "talented people the districts want to keep." He also said they paid

into the retirement system, and it was their choice what to do after qualifying for a pension. While school districts and the contractors say the districts are saving money because retired teachers are returning for reduced pay, Morrill said it would be less costly to hire a first-year teacher with benefits. And, Morrill said, that first-year teacher would be contributing to the retirement system.

'A bit of a hardship'

At the Deer Valley Unified School in north Phoenix, Superintendent Virginia McElyea said the deferred-retirement program saves the district money, and it retains valuable, experienced educators who return for less than what they were making.

"It's a way to make sure we leverage our investment in employees who have been with us for a while," she said.

The district's 75 retired teachers who returned to work average $45,378 in salary and $26,765 in pension, for a combined income of $72,143, records show.

The average Arizona teaching wage is $47,277, according to the Digest of Education Statistics. That average teacher, however, would be contributing $4,539 to ASRS, making their take-home pay less than the salary for teachers who double-dip in Deer Valley.

Maria Leyva, president of the Deer Valley teachers union, said the practice puts burdens on other teachers who have to contribute more to the retirement system.

"I don't resent them for doing it," Leyva said. "They are seen as mentors, and they help other teachers. But financially, it's a bit of a hardship."

In Deer Valley, the biggest combined annual income of nearly $300,000 goes to McElyea, who retired Oct. 28, 2006, but has remained in the top job.

McElyea receives a salary of $182,150 from the district and a pension of $112,355 from ASRS,

according to records. As a working retiree, she also saves $17,486 by not contributing to ASRS. McElyea said it was unfair to lump her retirement pay with her salary because the pension was earned from her years of service.

According to ASRS records, the average retiree gets back every dollar he or she contributed to the system within three to four years of retirement.

"What a person makes in retirement is irrelevant," McElyea said. "They would make that whether they are at home watching TV or doing something else. I really think if this is an issue that someone is concerned about at the state level, then the Legislature or state retirement system should look at it."

Part 6: Nov 19, 2010

Arizona's convicted officials still get pension from the state

Big pension costs also a burden for other states by Craig Harris, The Arizona Republic

Arizona has problems with its public-pension systems, but some states have more dire concerns as their pension trusts teeter on the brink of insolvency.

Three states have taken the unusual step of stopping cost-of-living raises for public employees already in retirement, while a few others have required employees to work longer to claim their benefits.

One of the reasons Arizona's pension trusts are in better shape than those in some other states is because their protection was mandated in a public vote 12 years ago. That vote may be coming back to haunt Arizona taxpayers, as it forces them to pay a growing share of the cost for those guaranteed benefits.

Arizona's six publicly funded pension systems are in no danger of going broke anytime soon, pension managers say. Yet, the four statewide systems and municipal plans in Phoenix and Tucson are underfunded, causing increases in publicly financed contributions from government employers during the past 10 years to help cover benefits.

Arizonans are paying roughly $1.39 billion from public treasuries this fiscal year to resuscitate the ailing systems that provide lifetime annuities for more than 111,000 retirees. The public's tax-paid contributions outpace what the state spends on prisons, higher education or health insurance for the poor.

Other states, which also are cutting public services amid a stubbornly weak economy, face similar funding shortfalls in their pension systems.

The Pew Center on the States, a Washington, D.C., non-profit organization that focuses on public policy, released a study earlier this year saying there was a $1 trillion gap between what states have been setting aside to pay for employees' retirement benefits and how much will actually be needed to pay for those benefits in their entirety in the future.

The shortfall amounts to more than $8,800 for every U.S. household, and is expected to be made up during the next 30 years by state and local governments through a combination of careful management, productive investments and larger contributions from members and their employers.

In addition to the Pew study, Northwestern University professor Joshua Rauh, who studies public pensions, released a report this year that predicts pension funds in at least seven states could face difficulties meeting their liabilities by the end of 2020 because contributions to the trusts were insufficient in recent years and investment income plunged during the market downturn.

None of Arizona's is among them.

Rauh predicts that taxpayers will bear a larger share of the financial burden to make pension trusts whole again, and he believes the federal government could be called upon to bail out financially insolvent states.

Some action, however, must come from states themselves. Keith Brainard, research director for the National Association of State Retirement Administrators, said some states are dealing with pension liabilities that they can't afford by raising retirement ages, increasing employee and employer contributions into their pension trusts, and scaling back benefits.

Brainard said Colorado, Minnesota and South Dakota have rolled back automatic cost-of-living adjustments for current retirees, though lawsuits have been filed objecting to those moves.

May be even bleaker

While the Pew study paints a bleak picture for the future of public-pension financing, one of its key researchers said the situation likely is worse than portrayed.

Kil Huh, director of research for Pew, said the study was based on fiscal 2008 data that did not capture potentially crippling financial losses that public-pension systems absorbed during the stock market slide at the end of 2008 and into 2009.

"Our numbers were very conservative," Huh said. "We missed the Wall Street crisis that really hammered assets for major investment and pension plans. We know the picture has deteriorated and gotten worse."

In 2000, Huh said, more than half of the states had fully funded public pensions. When the report came out last February, there were only four: New York, Washington, Florida and Wisconsin.

Today, he said, it is down to Wisconsin.

Pew's report called Arizona a national leader in managing its long-term liabilities for pensions and retiree health-care benefits, saying it funded 80 percent of its total pension bill, the minimum benchmark that the U.S. Government Accountability Office says is preferred by experts. At 100 percent funded, a pension would have enough money to meet all current and future pension payments.

More recent data, however, shows the Arizona State Retirement System, the state's largest, is only 75 percent funded, while pension plans for Arizona's public-safety officers, elected officials and Phoenix municipal employees are below 70 percent.

While Arizona's funding ratios have dropped, Huh said, the state is in better shape than some of its peers because it has a constitutional mandate to fund pension plans.

Pensions protected

The Grand Canyon State has iron-clad protections for public pensions, despite its reputation for fiscal conservatism and a penchant for lagging in funding of public services and education.

In 1998, the Republican-controlled Arizona Legislature asked voters to approve Proposition 100, a constitutional amendment that prohibited lawmakers from raiding any of the public-employee pension trusts for extra cash to balance the state budget.

At the time, all four of the statewide public-employee trusts were overfunded, with surpluses ranging from 14 to 21 percent, because of the huge stock-market growth during the 1990s.

Those surpluses meant that the trusts had far more assets than needed to meet then-current and projected retirement payments. Overfunding also meant governmental agencies could reduce the amount of cash they paid into the trusts, saving money for taxpayers.

Proposition 100 not only kept lawmakers' hands off the trust funds, but mandated that public- employee pension benefits "shall not be diminished or impaired." The ballot measure passed with a 61 percent approval rating.

Arizona is now one of nine states where participants in public pensions have a guaranteed right to a benefit that cannot be eliminated or diminished, according to the GAO.

Marc Spitzer, now a commissioner with the Federal Energy Regulatory Commission, was then

an Arizona lawmaker championing the legislation. Spitzer said all of Arizona's pension systems were funded at more than 100 percent in the late 1990s, and he was concerned then that the Legislature would raid the funds to pay for state programs.

"There is an insatiable appetite to spend money whether times are good or not. There were people going to members of the House and Senate who wanted their programs funded, and I didn't want it at the expense of the retirement systems," Spitzer said. "I didn't want the retirement systems punished for being properly managed."

Spitzer, a Republican, said the measure had bipartisan support. And, he added, the Legislature

established cost-of-living increases for the pension systems. Today, Spitzer still thinks those protections and increases were a good idea, despite the fact that the trusts are now underfunded.

He said the state has a responsibility to protect pension funds.

"It was a contract, and I didn't want the contract overridden by some other legislation," Spitzer said.

Part 8: Nov 21, 2010

Pension reform a difficult task

Craig Harris, The Arizona Republic There is no debate among high-ranking elected officials: Arizona's six public-pension systems are in trouble as they consume an ever-growing portion of public money to improve their financial health.

Yet there is little consensus about how to fix them, and there has been little political resolve to tackle such an explosive issue because it could involve tampering with pensions for hundreds of thousands of current and future retirees who feel the current benefits were earned and promised to them.

The Arizona Legislature's incoming House speaker and Senate president said lawmakers can go only so far to slow the rate of growth for the state's pension systems, which an Arizona Republic analysis found cost taxpayers $1.39 billion last year, a 448 percent increase from a decade ago.

These rising taxpayer costs, coming at a time when state and local governments have cut services to balance their budgets, have been driven in part by the pension trusts' investment losses during the market downturn but also by ongoing pension-benefit improvements and efforts to hold down costs for employees themselves.

The upward trend in taxpayer costs is expected to continue for at least the next few years.

The key to reversing it is getting voters to repeal a 1998 provision in the Arizona Constitution,

lawmakers say. The provision's language, which was overwhelmingly approved by voters, says: "Membership in a public retirement system is a contractual relationship . . . and public retirement system benefits shall not be diminished or impaired."

Trimming benefit payouts would allow lawmakers to lower publicly funded contributions to those systems. But that change may be difficult, they say, because of the strong influence on the Legislature of Arizona's 363,000 state and local public employees.

"It's time we get serious about reforming the public-pension systems," said House Speaker Kirk Adams, R-Mesa. "But if we are going to have any fundamental change, the voters will have to get involved."

Adams said he would work to get the Legislature to have voters in 2012 change the state Constitution, which prohibits benefits from being diminished for those in the public-pension systems. Adams said he has yet to get support from the Republican-controlled Senate or Gov. Jan Brewer, a fellow Republican.

In 1998, the intent of the measure was to protect public-pension trust funds, which had surpluses at the time, from being raided by lawmakers in the event of lean budget times. Since then, the pensions have not been touched by lawmakers.

Lawmakers in 2001 enhanced benefits for the Arizona State Retirement System, the largest public-pension plan in the state, by changing the formulas to allow workers larger pensions.

"When things were good, they (lawmakers) were overly generous," said incoming Senate President Russell Pearce, R-Mesa. "No one looked at the future impact. . . . We need to look at things now and decide what we can afford."

Pearce himself benefits from three Arizona public-pension systems. He has eight years of service as a state and county government administrator in the ASRS system. He has about 10 years of service and growing in the Elected Officials' Retirement Plan, and since 1991 he has received a pension from the Public Safety Personnel Retirement System for his time as a sheriff's deputy.

Currently, Pearce's annual public-safety pension is $47,957, according to records.

Pearce said he would favor eliminating the Elected Officials' Retirement Plan because he believes people should not be given the wrong reasons to run for office.

Reforms elsewhere

Governments are taking steps to rein in public-pension benefits when they have become a budget burden.

A handful of states are considering going to 401(k)-style systems in which employees simply set

aside their own retirement funds over time, with those funds earning income as investments. The issue is defined-benefit plans. Nearly all states, including Arizona, have them for public employees. Under such systems, pensions are based on an employee's ending salary, years of service and a fixed percentage rate that is multiplied by the other two factors.

Typically, those plans require employers (taxpayers) and employees to contribute to a trust fund, which can grow through investments. The trust then pays lifetime annuities, and in many of those systems, including some in Arizona, pensions have been boosted by cost-of-living increases that outpaced inflation. If the market falters, the amount of pension payments to retirees is still guaranteed, and contributions from still-working employees or from public employers, or both, are increased to cover investment losses.

In a significant indication of change, six newly elected governors in Alabama, Nevada, Pennsylvania, Tennessee, Wisconsin and Rhode Island have suggested that they want to amend their states' pension systems to 401(k) plans similar to the private sector's, said Stephen Fehr, a pension expert for the Pew Center on the States. The center is a non-profit policy-advocating group.

"They want to shift away from guaranteed pensions," Fehr said.

Even in states with strong labor unions, such as California and Illinois, action has been taken, Fehr noted.

Voters in eight of nine California cities and counties approved measures during the recent election to cut public-pension benefits. In addition, Fehr said, more than 40 suburban communities in Chicago approved a ballot question that called on the Illinois Legislature to reduce benefits for future state workers.

Earlier this year, 21 states took action to reduce their pension liabilities, Fehr said. Arizona was one of those. Lawmakers required those in ASRS hired after July 1, 2011, to work a few years longer to draw their pensions. The Arizona Legislature also modified the calculation to determine

pension benefits for new hires. The changes do not affect current ASRS members or retirees. To retire with full benefits, incoming ASRS members, state and local government workers and teachers now will have to obtain 85 points (calculated by combining age and years of service) rather than the previous 80. And the amount of their annual pensions will be based on their average annual wage during their last five years of employment rather than their last three years. That change is expected to lower starting pensions slightly.

Pearce and Adams said those changes were only modest reforms, and it took four years for Arizona lawmakers to approve them.

"Misery loves company because every state and the federal government have similar issues with their public-pension systems," Adams said. "We shouldn't have a system where taxpayers are paying into a 401(k) system and receiving Social Security, but public employees are receiving benefits that are far better than what the private sector is getting."

Even those receiving Social Security, which is a defined-benefit plan, are not guaranteed cost-ofliving increases, as is the case in some of Arizona's public-pension plans.

In 2011, for the second straight year, Social Security benefits will remain flat because the inflation rate that would trigger cost-of-living raises is so low.

Calls for change

While there is talk nationally about moving public-pension systems to 401(k)-style programs, only Alaska and Michigan have adopted them as their primary plans, Fehr said.

In a 401(k) or defined-contribution plan, an individual invests money from a paycheck and may have a matching contribution from an employer going into an investment account. However, unlike in a defined-benefit plan, the employee is not guaranteed a specific annual pension at retirement. Instead, the employee gets whatever proceeds are in the investment account.

That investment account increases or decreases in value over time, depending on the financial

markets. The Arizona Chamber of Commerce and Industry, which has a strong lobby at the Legislature that focuses on government spending and accountability, wants Arizona to adopt a 401(k)-style system because proponents say it is less costly than a defined-benefit plan.

"Our focus is whether this type of pension, a defined-benefit system, is right for the future," said Suzanne Taylor, the chamber's senior vice president of public policy. "Our question is whether this system is sustainable and whether we should be moving new employees to what's in the private sector. . . . We haven't had a crisis so far, but we don't want to have one."

Taylor said it would be nearly impossible to change to such a system for current public employees and retirees because of guarantees afforded them in the state Constitution. Politically and legally, she said, it would be easier to make changes for future employees.

But if the state immediately ended defined-benefit plans and moved to 401(k) systems, a significant new problem would develop, said ASRS Director Paul Matson. Matson said ASRS

and Arizona's other systems are underfunded, and additional contributions are needed from both current and new employees and their employers to cover those deficits. If future employees were to be taken out of that equation, costs for current members and their employers to erase the trust deficits would skyrocket.

Nonetheless, Adams and Pearce suggested it is time for Arizona to move to a two-tiered public-pension system in which pension benefits are scaled back for new employees.

Plans in the works

Matson strongly advocates for the current defined-benefit plan, saying it provides better financial security for its retirees, making them less dependent on other government services. Matson also believes the ASRS plan is sustainable without significant reform.

Matson, however, favors changes for those who retire from the ASRS system and then return to work for an ASRS employer. When these employees take a "double dip," neither they nor their employers contribute to the ASRS trust when they return to work. Opponents of the practice say it hurts the trust's stability and is unfair to other ASRS members whose contribution rates must go up to offset the lack of contributions from working retirees.

Matson plans to ask the Legislature to create an alternative contribution rate paid by employers of double-dippers. Employees who have retired and returned to work would not be asked to contribute under Matson's plan.

The Republic found that double-dipping by more than 900 educators in Maricopa County is

costing ASRS at least $8.6 million in lost contributions this year. Jim Hacking, director of the state's pension system for public-safety officers, said he plans to meet with members of his plan in December to make recommendations for legislative changes.

The Public Safety Personnel Retirement System is the most underfunded in the state, and taxpayer-subsidized contributions from public employers are nearly three times the contributions made by police and firefighters from their own paychecks.

Hacking said the current program providing annual cost-of-living increases and deferred-

retirement incentives that include large lump-sum payouts needs to be fixed. "It's our plan to do everything we can so the plan is restored to a state of good financial health," Hacking said.

Gov. Brewer vowed to work with pension managers and the Legislature to restore the health of the public-pension systems. "There are concerns whether the (pension) systems are sustainable and if they are fair going into the future," Brewer said. "We need to sit down and vet the systems at the Legislature."

The price of inaction could be far greater than what it already has cost Arizona taxpayers. "Given the situation across the country, we have pension systems that are going bankrupt all over," the governor said. "We don't want to find ourselves in that situation, and we are going to have to address the issues."

House speaker unveils sweeping plans

Adams wants to eliminate some pension perks, practices by Craig Harris - Nov. 21, 2010