• Arizona state government accounts for nearly $473 million (5%) of the current unfunded pension liabilities held by the Public Safety Personnel Retirement System (PSPRS)—including $431 million in pension debt accrued by the Department of Public Safety (DPS).
• Unfunded pension liabilities accrue interest at the same rates as the PSPRS discount rate—currently 7.3% annually—making PSPRS unfunded liabilities among the most expensive taxpayer-backed debt held by the state. For comparison, the Arizona State Retirement System (ASRS) accrues interest at a 7.0% rate annually.
• Major reforms to PSPRS enacted by the legislature since 2016, along with several prudent policy and assumption changes made by the PSPRS Board of Trustees, have dramatically reduced the system’s risk, prompting dozens of employers, like Tucson, Flagstaff, and Prescott, to adopt various new funding tools designed to pay down their PSPRS debt faster, thus avoiding the high costs of pension debt accrual.

Paying Down Pension Debt Faster Is Prudent

• The proposed supplemental, one-time appropriation would pay down unfunded liabilities for state agency employers participating in PSPRS.
• Paying down debt associated with promised, constitutionally protected pension benefits faster is a time-tested way to save taxpayers money by avoiding interest costs.
• Actuarial modeling by the Pension Integrity Project at Reason Foundation finds that Gov. Doug Ducey’s proposed supplemental $611.3 million infusion into PSPRS would:
  • Yield between $137 million and $322 million in taxpayer savings over the next 30 years, depending on investment performance.
• A $1 billion infusion into PSPRS similar to that outlined in Senate Bill 1087 would:
  • Yield between $240 million and $564 million in taxpayer savings over the next 30 years, depending on investment performance.

Takeaway: The proposed “catch-up” payments for PSPRS’ unfunded liabilities would benefit taxpayers by reducing pension debt and producing long-term cost savings.

Paying Down PSPRS Debt Faster Is a Win for Taxpayers

The post Paying down PSPRS debt faster is a win for taxpayers appeared first on Reason Foundation.

In This Issue:

Articles, Research & Spotlights 

• Pension Reform for the “New Normal” Economy 
• The Growing Unfunded Pension Liabilities in Texas
• Pension Debt Is Pulling Funding Away from Michigan’s Schools
• Evaluating Arizona’s Public Safety Personnel Retirement Plan After Its Reforms
• Modernizing Police Retirement Plans
• Transit Agencies Are Strapped with Pension Debt 

News in Brief
Quotable Quotes on Pension Reform
Data Highlight
Contact the Pension Reform Help Desk

Articles, Research & Spotlights

Pension Reform for the “New Normal” Economy—Examining Colorado’s Successful Model

The pension reforms Colorado made in 2018 have put the state on track to have its Public Employee Retirement Association (PERA) fully funded in 30 years—a position that, unfortunately, many other public pension plans across the country are not in. A new Pension Integrity Project policy brief by Zachary Christensen compares how PERA would be able to respond to economic and market turbulence before and after the reforms implemented via Senate Bill 200 of 2018. The study shows that after the reforms, PERA is in a much-improved position to handle the current and future market shocks, due largely to the introduction of automatic adjustments. Colorado’s reform efforts can be a useful example for other pension plans across the country that need to make changes to adapt to the new economic and investment environment.  

New Texas ERS and TRS Pension Solvency Analyses

Since 2001, unfunded liabilities for the Teacher Retirement System of Texas (TRS) have grown by more than $50 billion. Over the same time period, unfunded liabilities for the Employees Retirement System of Texas (ERS) have grown by nearly $12 billion, resulting in ERS’ funded ratio falling from 105 percent to 70.5 percent. What’s more, Texas has reached its constitutionally set cap on annual contributions for ERS and is quickly approaching this limit for TRS. Achieving unrealistically high investment return targets in an increasingly volatile market—a strategy that failed to prevent growing pension debt despite a decade-long historic run-up in the market—is unlikely to be the savior of the retirement systems now. New analysis of TRS and ERS by the Pension Integrity Project examines the factors behind this recent growth in unfunded liabilities and suggests reforms Texas can use to close the funding gaps, including strategies to pay down pension debt faster, adopt more prudent actuarial assumptions and build more resilient and financially sustainable retirement systems for the future.

Examining How Much Money Pension Debt Takes Away From Michigan’s Classrooms Each Year

In 2018, nearly a third of state funding for the Detroit Public Schools district went to its pension plan, the Michigan Public School Employees Retirement System (MPSERS). Returns that deviated from assumptions and missed payments have created over $40 billion in unfunded liabilities, debt that crowds out other school spending each year. While the normal cost per pupil (the cost of actual retirement benefits earned that year) was $252 in 2018, Detroit schools paid $2,202 per student for MPERS Debt, implying that each student would have an additional $1800 of funding if the plan had been fully-funded. Reason’s Truong Bui, Marc Joffe and Leonard Gilroy have created a data visualization of the cost of Michigan’s public-school pension debt on a per-student basis, which allows the viewer to compare funding and contribution numbers between districts in the state. 

Arizona Public Safety Personnel Retirement System Solvency Analysis

As a result of a 2016 pension reform effort, the Arizona Public Safety Retirement System (PSPRS) is on track to sustainable financial sustainability. The reform, for which the Pension Integrity Project played a major technical assistance and stakeholder engagement role, provided increased retirement security, lowered costs for employers and taxpayers, and provided new retirement choices to allow new public safety personnel to better match an evolving set of worker preferences. In this newly published analysis, Reason’s analysts examine the effects of Arizona’s 2016 reforms and identify the challenges that remain for PSPRS.

Adapting Police Retirement Plans to Serve an Evolving Workforce

As the national conversation on the role of policing continues, Reason’s Richard Hiller notes the need to rethink police retirement plans as the profession evolves. Due to a variety of factors, law enforcement officers tend to join and retire at younger ages, often around the age of 50 or 55. Despite the relatively early retirement, vesting periods for pension benefits guarantee that many officers may not even meet their goals. For example, Arizona’s plan for public safety workers showed only 54 percent of new hires remaining in service after five years, when they would vest in their pension benefit, which encouraged stakeholders to establish more plan options to fit the need of more public servants. Hiller urges policymakers to adapt pension plans to better account for the increased mobility in the workforce. 

Transit Agencies Have At Least $49 Billion in Retirement Debt 

As the COVID-19 pandemic continues to keep workers at home, many of the nation’s mass transit agencies are also struggling with growing pension funding shortfalls. In the best of times, transit agencies rely heavily on subsidies to operate. As tax and farebox revenues plummet during the pandemic, transit agencies have been urging Congress to provide a large bailout. However, as Reason’s Marc Joffe finds, the nation’s largest transit agencies have at least $49 billion in retirement system debt, so Congress should examine whether any potential bailout would be used to pay for pension contributions and debt rather than providing mass transit services for commuters who need them. 

News in Brief

ESG Investing and Public Pensions: An Update

While pension funds have been engaged in social investing for decades, the rise of environmental, social, and governance (ESG) investing has prompted the Department of Labor to set clear guidelines for fiduciaries. Jean-Pierre Aubry, Anqi Chen, Patrick M. Hubbard and Alicia H. Munnell of the Center for Retirement Research (CRR) have examined the impact of ESG investing in a new research brief and found that any form of social investing is not appropriate for public pension funds. Because ESG investing lowers potential investment returns and has an unclear effect in achieving its social goals, the report recommends against plans swapping to this framework. The brief is available here. 

2020 Public Plan Investment Update And COVID-19 Market Volatility

With 2020 financial reports now available for most public pension plans, Jean-Pierre Aubry of the Center for Retirement Research compiled an overview of the impact of COVID-19 on plan performance so far, finding that most plans fell below actuarial expectations. According to the report, while in 2019 plans outperformed their average assumed return of 7.2 percent with an average return of 8.9 percent, the average 2020 return was just 5.8 percent. The brief argues that plans may need to hold U.S. Treasuries, which rise in value during market shocks and can be easily liquidated if needed to pay contributions. The brief is available here. 

Impact of COVID-19 on Pension Plan Actuarial Experience and Assumptions, Including Mortality

COVID-19 has been responsible for over 225,000 deaths in the US so far. As a result, the American Academy of Actuaries has released a brief detailing the changes that the pandemic has posed to actuarial assumptions, including mortality tables. Due to the advanced age of most COVID-19 victims, the pandemic’s effect on mortality appears unlikely to have a significant impact on unfunded liabilities for most public pension plans. “While the excess mortality associated with the pandemic could have an impact on certain plans, other workforce demographic and economic implications appear to be far more financially significant,” the report finds. The brief is available here. 

Quotable Quotes on Pension Reform

“My point here is not to deprive current retirees of benefits they were promised or to take away benefits already earned by current employees. But it’s time for honest, independent assessments of the long-held assumptions that investment returns can be sufficient to fund COLAs indefinitely while also paying off today’s combined trillion-dollar unfunded liabilities.”
— Girard Miller, finance columnist, writing in “Public Pensions’ New Inflation Dilemma,” Governing, Sept. 15, 2020

“One of the issues you have is the liability can change. So even if you issue pension obligation bonds, there’s always a chance that those divisions don’t stay at 100 percent funded. That’s when problems arise. That’s when you suddenly have the bond payment and the pension payment.”
— Dean Bott, Grand Traverse County finance director, quoted in “Grand Traverse Pavilions Seeks Bonds to Cover Pension Debt,” Record Eagle, Oct. 4, 2020

“Private equity isn’t my favorite asset class. It helps us achieve our 7 percent solution. I know we have to be there. I wish we were 100 percent funded. Then, maybe we wouldn’t.”
—Theresa Taylor, chair of CalPERS board’s investment committee, quoted in “Marching Orders for the Next Investment Chief of CalPERS: More Private Equity,” The New York Times, Oct. 19, 2020

Data Highlight

Each month we feature a pension-related chart or infographic of interest curated by one of our Pension Integrity Project analysts. This month, Quantitative Analyst Anil Niraula visualizes the changes in funded status for state pension plans across the nation. Use or read more about the tool here. 

Contact the Pension Reform Help Desk

Reason Foundation’s Pension Reform Help Desk provides information on Reason’s work on pension reform and resources for those wishing to pursue pension reform in their states, counties and cities. Feel free to contact the Reason Pension Reform Help Desk by e-mail at pensionhelpdesk@reason.org. 

Follow the discussion on pensions and other governmental reforms at Reason Foundation’s website and on Twitter @ReasonPensions. As we continually strive to improve the publication, please feel free to send your questions, comments and suggestions to alix.ollivier@reason.org.

The post Pension Reform Newsletter: Modernizing Police Retirement Plans, Transit Agencies Strapped With Debt, and More appeared first on Reason Foundation.

Yavapai County: A 14x Increase in Pension Costs 

Yavapai County is no stranger to the increasing costs of public pensions. According to the Pension Integrity Project’s analysis of financial documents, the county’s total payments to ASRS and PSPRS have skyrocketed from about $587,000 per year in 2001 to over $8 million in 2018, with $5.5 million going to ASRS and $3 million going to PSPRS. This analysis does not account for additional costs derived from the Corrections Officers Retirement Plan (CORP) or the Elected Officials Retirement Plan (EORP), which means the costs have grown even more than displayed here (though at a much smaller scale for CORP and EORP relative to ASRS and PSPRS).

An increase in costs this large has far-reaching effects in local governments—Yavapai County is paying more than 14 times more in aggregate ASRS and PSPRS contributions relative to what it used to less than two decades ago. This is reflective of the overall statewide trend. The total combined annual contributions into ASRS and PSPRS have risen to nearly $2 billion, a big jump from the $128 million in payments in 2001. Though there are certainly varying degrees of severity—some municipalities like Prescott and Bisbee have explored bankruptcy in the recent past in large part due to the rising costs of servicing pension debt—governmental units across Arizona are facing similar challenges to Yavapai, and local policymakers all across the state are weighing a range of options between reducing services, raising taxes or reprioritizing spending to keep up with the higher price tags attached to ASRS and PSPRS.

Why Pension Costs Are Growing 

To some degree, increased dollar values dedicated to these pension payments is expected—as the state’s population grows, state and local governments need more employees, which generates higher overall pension liabilities over time. But in this case—and the case with many underfunded pension systems in the US today—the disparate rates of growth between payroll and pension payments indicate that there is something outside of growing employment that is the main source of increased costs.

To illustrate this point, the total payrolls for ASRS and PSPRS have nearly doubled since 2001. Pension costs, on the other hand, are now 14 times the amount they were in 2001 for ASRS and 17 times the amount for PSPRS employers.

This trend is also visible in annual contribution rates, which are expressed as a percentage of covered payroll. [Note: For the purpose of this analysis, we will consider ASRS as an example since they represent the largest pool of pension liabilities and constitute the majority of overall public pension contributions statewide; however, a similar analysis can be performed for PSPRS.] Employers participating in ASRS have seen their required contributions to the pension plan—excluding contributions to the health and disability plans—go from just under 2 percent of payroll in 2002 to nearly 11 percent over the last sixteen years, a nearly six-fold increase. [Note that the total required contribution for all ASRS post-employment programs, including the health plan, was 11.5 percent of payroll in 2018]. This means that employers like school districts are having to dedicate a significantly larger portion of their budget to pension costs, diverting resources away from the classroom and making it increasingly difficult to adjust teacher salaries and fund other priorities like technology and student enrichment programs.

Notably, since 2001, there have been no major increases in retirement benefits for ASRS members and retirees that would prompt a commensurate ramp-up in costs. In other words, the overall benefits promised to teachers and state and local public employees has remained relatively static over the past two decades, but costs have gone up significantly.

So, what is driving up the costs of Arizona’s pension plans? A deeper analysis of ASRS and PSPRS contributions reveals that Arizona’s escalating pension debt is the primary culprit. Over the past two decades, ASRS has precipitously accumulated an unfunded liability of $15.6 billion, with most—but not all—of the shortfall stemming from underperforming investments. This growing shortfall requires greater annual payments into the fund, so the system can eventually get back to full funding.

Due to slow adjustments to assumptions and a forecast of lower overall returns when compared to previous decades, investment returns below expectations are likely to apply continued pressure in the form of more pension debt and, consequently, higher annual contributions. Using forecasts of future ASRS and PSPRS contributions under various one-year return scenarios, it is clear that investment underperformance can play a significant role in even more prohibitive costs for all Arizona municipalities.

Just one year of returns at 6.5 percent—about one percentage point below the assumed rate—would require an additional $2.4 million in 2022 contributions for both ASRS and PSPRS combined. Assuming contribution shares stay relatively similar, Yavapai would be facing an additional $11,406 in 2022 pension expenses under this scenario, with over 76 percent of that ($8,737) coming from added ASRS costs.

Breaking Down the Pension Costs: Funding Benefits Earned Today v. Paying Pension Debt

Splitting annual pension contributions into the amount needed to prefund benefits (also known as the normal cost) and the amount needed to amortize (or pay off) pension debt demonstrates the influence unfunded liabilities are imposing on ASRS and PSPRS contributions. Where no pension debt amortization payments were necessary in 2001, debt payments now make up a third of the annual $1 billion cost for ASRS and two-thirds of the annual $857 million contributed into PSPRS. Splitting contributions by these two categories shows that the main driver of increasing pension costs is, in fact, the significant amount of debt accrued by the system. The following charts illustrate how normal cost and amortization payments have each contributed to growing ASRS and PSPRS costs.

The rising contribution rates reflect that previous economic and demographic assumptions that influence pension math have not held, and that the pension promises made to public employees are going to be much more expensive going forward—hence, the rise in the “normal cost” of prefunding future benefits. What’s worse, it took the ASRS board of trustees many years to change outdated actuarial assumptions—primarily the assumed rate of return—creating a large fiscal hole related to current pension liabilities that needs to be filled through additional pension debt payments.

Effectively, employers and members of ASRS are having to pay for both increases at once. This interaction, with pension debt amortization payments driving up pension costs, is ubiquitous among all Arizona governments, from Maricopa County with its 4,000,000 residents to the city of Bisbee with its population of just over 5,000. These amortization payments create significant difficulties for local governments, as they are required to allocate funds that are several multiples of what they used to be just a few years ago. Taxpayers and public employees also bear the brunt of this issue, via increased taxes and pension contributions, all with no improvement (or often a reduction) in services and benefits.

Conclusion

State and local policymakers owe it to their constituents to continue to build upon the reform efforts undertaken with PSPRS in recent years and expand them to ASRS. Through a multi-year effort, public safety employees and employers collaboratively made great strides in addressing the system’s most immediate needs through reform, while not sacrificing the value and attractiveness of the plan. There are still more reforms that could be considered, however, including improvements to funding and amortization policies. Likewise, several issues associated with ASRS continue to put the retirement security of Arizona workers at risk. Stakeholders for both systems need to foster a comprehensive and collaborative effort to manage the growing costs of the retirement plans, preferably one that is based on sound research and common understanding.

Notes on Methodology:

Contribution amounts for Yavapai County are given in ASRS and PSPRS GASB 67 reports going back to 2016. Contributions before 2016 are calculated by applying the average contribution share from 2016-18 to total statewide contributions. Forecasted 2022 contributions use Pension Integrity Project actuarial modeling. Contributions for Yavapai use the County’s average share of the state’s total contributions from 2016-18 and apply this share to the forecasted total contribution under different return scenarios.

Pension Debt Drives Rising Costs for Arizona Municipal Governments: Yavapai County

The post Examining Yavapai County and How Pension Debt Drives Rising Costs for Arizona Municipal Governments appeared first on Reason Foundation.

City of Bisbee: A 16x Increase in Pension Costs

The City of Bisbee is no stranger to the increasing costs of public pensions. According to the Pension Integrity Project’s analysis of financial documents, the city’s total payments to ASRS and PSPRS have skyrocketed from about $100,000 per year in 2001 to over $1.6 million in 2018, with $202,000 going to ASRS and $1.4 million going to PSPRS. This analysis does not account for additional costs derived from the Corrections Officers Retirement Plan (CORP) or the Elected Officials Retirement Plan (EORP), which means the costs have grown even more than displayed here (though at a much smaller scale for CORP and EORP relative to ASRS and PSPRS).

An increase in costs this large has far-reaching effects in local governments—Bisbee is paying more than 16 times more in aggregate ASRS and PSPRS contributions relative to what it used to less than two decades ago. This is reflective of the overall statewide trend. The total combined annual contributions into ASRS and PSPRS have risen to nearly $2 billion, a big jump from the $128 million in payments in 2001. Though there are certainly varying degrees of severity—some municipalities like Prescott and Bisbee have explored bankruptcy in the recent past in large part due to the rising costs of servicing pension debt—governmental units across Arizona are facing similar challenges to Bisbee, and local policymakers all across the state are weighing a range of options between reducing services, raising taxes or reprioritizing spending to keep up with the higher price tags attached to ASRS and PSPRS.

Why Pension Costs Are Growing 

To some degree, increased dollar values dedicated to these pension payments is expected—as the state’s population grows, state and local governments need more employees, which generates higher overall pension liabilities over time. But in this case—and the case with many underfunded pension systems in the US today—the disparate rates of growth between payroll and pension payments indicate that there is something outside of growing employment that is the main source of increased costs.

To illustrate this point, the total payrolls for ASRS and PSPRS have nearly doubled since 2001. Pension costs, on the other hand, are now 14 times the amount they were in 2001 for ASRS and 17 times the amount for PSPRS employers.

This trend is also visible in annual contribution rates, which are expressed as a percentage of covered payroll. [Note: For the purpose of this analysis, we will consider ASRS as an example since they represent the largest pool of pension liabilities and constitute the majority of overall public pension contributions statewide; however, a similar analysis can be performed for PSPRS.] Employers participating in ASRS have seen their required contributions to the pension plan—excluding contributions to the health and disability plans—go from just under 2 percent of payroll in 2002 to nearly 11 percent over the last sixteen years, a nearly six-fold increase. [Note that the total required contribution for all ASRS post-employment programs, including the health plan, was 11.5 percent of payroll in 2018]. This means that employers like school districts are having to dedicate a significantly larger portion of their budget to pension costs, diverting resources away from the classroom and making it increasingly difficult to adjust teacher salaries and fund other priorities like technology and student enrichment programs.

Notably, since 2001, there have been no major increases in retirement benefits for ASRS members and retirees that would prompt a commensurate ramp-up in costs. In other words, the overall benefits promised to teachers and state and local public employees has remained relatively static over the past two decades, but costs have gone up significantly.

So, what is driving up the costs of Arizona’s pension plans? A deeper analysis of ASRS and PSPRS contributions reveals that Arizona’s escalating pension debt is the primary culprit. Over the past two decades, ASRS has precipitously accumulated an unfunded liability of $15.6 billion, with most—but not all—of the shortfall stemming from underperforming investments. This growing shortfall requires greater annual payments into the fund, so the system can eventually get back to full funding.

Due to slow adjustments to assumptions and a forecast of lower overall returns when compared to previous decades, investment returns below expectations are likely to apply continued pressure in the form of more pension debt and, consequently, higher annual contributions. Using forecasts of future ASRS and PSPRS contributions under various one-year return scenarios, it is clear that investment underperformance can play a significant role in even more prohibitive costs for all Arizona municipalities.

Just one year of returns at 6.5 percent—about one percentage point below the assumed rate—would require an additional $2.4 million in 2022 contributions for both ASRS and PSPRS combined. Assuming contribution shares stay relatively similar, Bisbee would be facing an additional $1,570 in 2022 pension expenses under this scenario, with 80 percent of that ($1,251) coming from added PSPRS costs.

Breaking Down the Pension Costs: Funding Benefits Earned Today vs. Paying Pension Debt

Splitting annual pension contributions into the amount needed to prefund benefits (also known as the normal cost) and the amount needed to amortize (or pay off) pension debt demonstrates the influence unfunded liabilities are imposing on ASRS and PSPRS contributions. Where no pension debt amortization payments were necessary in 2001, debt payments now make up a third of the annual $1 billion cost for ASRS and two-thirds of the annual $857 million contributed into PSPRS. Splitting contributions by these two categories shows that the main driver of increasing pension costs is, in fact, the significant amount of debt accrued by the system. The following charts illustrate how normal cost and amortization payments have each contributed to growing ASRS and PSPRS costs.

The rising contribution rates reflect that previous economic and demographic assumptions that influence pension math have not held, and that the pension promises made to public employees are going to be much more expensive going forward—hence, the rise in the “normal cost” of prefunding future benefits. What’s worse, it took the ASRS board of trustees many years to change outdated actuarial assumptions—primarily the assumed rate of return—creating a large fiscal hole related to current pension liabilities that needs to be filled through additional pension debt payments.

Effectively, employers and members of ASRS are having to pay for both increases at once. This interaction, with pension debt amortization payments driving up pension costs, is ubiquitous among all Arizona governments, from Maricopa County with its 4,000,000 residents to the city of Bisbee with its population of just over 5,000. These amortization payments create significant difficulties for local governments, as they are required to allocate funds that are several multiples of what they used to be just a few years ago. Taxpayers and public employees also bear the brunt of this issue, via increased taxes and pension contributions, all with no improvement (or often a reduction) in services and benefits.

Conclusion

State and local policymakers owe it to their constituents to continue to build upon the reform efforts undertaken with PSPRS in recent years and expand them to ASRS. Through a multi-year effort, public safety employees and employers collaboratively made great strides in addressing the system’s most immediate needs through reform, while not sacrificing the value and attractiveness of the plan. There are still more reforms that could be considered, however, including improvements to funding and amortization policies. Likewise, several issues associated with ASRS continue to put the retirement security of Arizona workers at risk. Stakeholders for both systems need to foster a comprehensive and collaborative effort to manage the growing costs of the retirement plans, preferably one that is based on sound research and common understanding.

Notes on Methodology:

Contribution amounts for Bisbee are given in ASRS and PSPRS GASB 67 reports going back to 2016. Contributions before 2016 are calculated by applying the average contribution share from 2016-18 to total statewide contributions. Forecasted 2022 contributions use Pension Integrity Project actuarial modeling. Contributions for Bisbee use the City’s average share of the state’s total contributions from 2016-18 and apply this share to the forecasted total contribution under different return scenarios.

Pension Debt Drives Rising Costs for Arizona Municipal Governments: City of Bisbee

The post Examining the City of Bisbee and How Pension Debt Drives Rising Costs for Arizona Municipal Governments appeared first on Reason Foundation.

City of Globe: A 16x Increase in Pension Costs 

The city of Globe is no stranger to the increasing costs of public pensions. According to the Pension Integrity Project’s analysis of financial documents, the city’s total payments to ASRS and PSPRS have skyrocketed from about $115,000 per year in 2001 to over $1.8 million in 2018, with $0.2 million going to ASRS and $1.6 million going to PSPRS. This analysis does not account for additional costs derived from the Corrections Officers Retirement Plan (CORP) or the Elected Officials Retirement Plan (EORP), which means the costs have grown even more than displayed here (though at a much smaller scale for CORP and EORP relative to ASRS and PSPRS).

An increase in costs this large has far reaching effects in local governments—Globe is paying more than 16 times more in aggregate ASRS and PSPRS contributions relative to what it used to less than two decades ago. This is reflective of the overall statewide trend. The total combined annual contributions into ASRS and PSPRS have risen to nearly $2 billion, a big jump from the $128 million in payments in 2001. Though there are certainly varying degrees of severity—some municipalities like Prescott and Bisbee have explored bankruptcy in the recent past in large part due to the rising costs of servicing pension debt—governmental units across Arizona are facing similar challenges to Globe, and local policymakers all across the state are weighing a range of options between reducing services, raising taxes or reprioritizing spending to keep up with the higher price tags attached to ASRS and PSPRS.

Why Pension Costs Are Growing 

To some degree, increased dollar values dedicated to these pension payments is expected—as the state’s population grows, state and local governments need more employees, which generates higher overall pension liabilities over time. But in this case—and the case with many underfunded pension systems in the US today—the disparate rates of growth between payroll and pension payments indicate that there is something outside of growing employment that is the main source of increased costs.

To illustrate this point, the total payrolls for ASRS and PSPRS have nearly doubled since 2001. Pension costs, on the other hand, are now 14 times the amount they were in 2001 for ASRS and 17 times the amount for PSPRS employers.

This trend is also visible in annual contribution rates, which are expressed as a percentage of covered payroll. [Note: For the purpose of this analysis, we will consider ASRS as an example since they represent the largest pool of pension liabilities and constitute the majority of overall public pension contributions statewide; however, a similar analysis can be performed for PSPRS.] Employers participating in ASRS have seen their required contributions to the pension plan—excluding contributions to the health and disability plans—go from just under 2 percent of payroll in 2002 to nearly 11 percent over the last sixteen years, a nearly six-fold increase. [Note that the total required contribution for all ASRS post-employment programs, including the health plan, was 11.5 percent of payroll in 2018]. This means that employers like school districts are having to dedicate a significantly larger portion of their budget to pension costs, diverting resources away from the classroom and making it increasingly difficult to adjust teacher salaries and fund other priorities like technology and student enrichment programs.

Notably, since 2001, there have been no major increases in retirement benefits for ASRS members and retirees that would prompt a commensurate ramp-up in costs. In other words, the overall benefits promised to teachers and state and local public employees has remained relatively static over the past two decades, but costs have gone up significantly.

So, what is driving up the costs of Arizona’s pension plans? A deeper analysis of ASRS and PSPRS contributions reveals that Arizona’s escalating pension debt is the primary culprit. Over the past two decades, ASRS has precipitously accumulated an unfunded liability of $15.6 billion, with most—but not all—of the shortfall stemming from underperforming investments. This growing shortfall requires greater annual payments into the fund, so the system can eventually get back to full funding.

Due to slow adjustments to assumptions and a forecast of lower overall returns when compared to previous decades, investment returns below expectations are likely to apply continued pressure in the form of more pension debt and, consequently, higher annual contributions. Using forecasts of future ASRS and PSPRS contributions under various one-year return scenarios, it is clear that investment underperformance can play a significant role in even more prohibitive costs for all Arizona municipalities.

Just one year of returns at 6.5 percent—about one percentage point below the assumed rate—would require an additional $2.4 million in 2022 contributions for both ASRS and PSPRS combined. Assuming contribution shares stay relatively similar, Globe would be facing an additional $1,805 in 2022 pension expenses under this scenario, with nearly 79 percent of that ($1,425) coming from added PSPRS costs.

Breaking Down the Pension Costs: Funding Benefits Earned Today v. Paying Pension Debt

Splitting annual pension contributions into the amount needed to prefund benefits (also known as the normal cost) and the amount needed to amortize (or pay off) pension debt demonstrates the influence unfunded liabilities are imposing on ASRS and PSPRS contributions. Where no pension debt amortization payments were necessary in 2001, debt payments now make up a third of the annual $1 billion cost for ASRS and two thirds of the annual $857 million contributed into PSPRS. Splitting contributions by these two categories shows that the main driver of increasing pension costs is, in fact, the significant amount of debt accrued by the system. The following charts illustrate how normal cost and amortization payments have each contributed to growing ASRS and PSPRS costs.

The rising contribution rates reflect that previous economic and demographic assumptions that influence pension math have not held, and that the pension promises made to public employees are going to be much more expensive going forward—hence, the rise in the “normal cost” of prefunding future benefits. What’s worse, it took the ASRS board of trustees many years to change outdated actuarial assumptions—primarily the assumed rate of return—creating a large fiscal hole related to current pension liabilities that needs to be filled through additional pension debt payments.

Effectively, employers and members of ASRS are having to pay for both increases at once. This interaction, with pension debt amortization payments driving up pension costs, is ubiquitous among all Arizona governments, from Maricopa County with its 4,000,000 residents to the city of Bisbee with its population of just over 5,000. These amortization payments create significant difficulties for local governments, as they are required to allocate funds that are several multiples of what they used to be just a few years ago. Taxpayers and public employees also bear the brunt of this issue, via increased taxes and pension contributions, all with no improvement (or often a reduction) in services and benefits.

Conclusion

State and local policymakers owe it to their constituents to continue to build upon the reform efforts undertaken with PSPRS in recent years and expand them to ASRS. Through a multi-year effort, public safety employees and employers collaboratively made great strides in addressing the system’s most immediate needs through reform, while not sacrificing the value and attractiveness of the plan. There are still more reforms that could be considered, however, including improvements to funding and amortization policies. Likewise, several issues associated with ASRS continue to put the retirement security of Arizona workers at risk. Stakeholders for both systems need to foster a comprehensive and collaborative effort to manage the growing costs of the retirement plans, preferably one that is based on sound research and common understanding.

Notes on Methodology:

Contribution amounts for Globe are given in ASRS and PSPRS GASB 67 reports going back to 2016. Contributions before 2016 are calculated by applying the average contribution share from 2016-18 to total statewide contributions. Forecasted 2022 contributions use Pension Integrity Project actuarial modeling. Contributions for Globe use the city’s average share of the state’s total contributions from 2016-18 and apply this share to the forecasted total contribution under different return scenarios.

Pension Debt Drives Rising Costs for Arizona Municipal Governments: City of Globe

The post Examining the City of Globe and How Pension Debt Drives Rising Costs for Arizona Municipal Governments appeared first on Reason Foundation.

City of Sedona: A 15x Increase in Pension Costs 

The City of Sedona is no stranger to the increasing costs of public pensions. According to the Pension Integrity Project’s analysis of financial documents, the city’s total payments to ASRS and PSPRS have skyrocketed from about $179,000 per year in 2001 to almost $3 million in 2018, with $785,000  going to ASRS and $2 million going to PSPRS. This analysis does not account for additional costs derived from the Corrections Officers Retirement Plan (CORP) or the Elected Officials Retirement Plan (EORP), which means the costs have grown even more than displayed here (though at a much smaller scale for CORP and EORP relative to ASRS and PSPRS).

An increase in costs this large has far reaching effects in local governments—Sedona is paying more than 15 times more in aggregate ASRS and PSPRS contributions relative to what it used to less than two decades ago. This is reflective of the overall statewide trend. The total statewide annual contributions into ASRS and PSPRS have risen to nearly $2 billion, a big jump from the $128 million in payments in 2001. Though there are certainly varying degrees of severity—some municipalities like Prescott and Bisbee have explored bankruptcy in the recent past in large part due to the rising costs of servicing pension debt—governmental units across Arizona are facing similar challenges to Sedona, and local policymakers all across the state are weighing a range of options between reducing services, raising taxes or reprioritizing spending to keep up with the higher price tags attached to ASRS and PSPRS.

Why Pension Costs Are Growing 

To some degree, increased dollar values dedicated to these pension payments is expected—as the state’s population grows, state and local governments need more employees, which generates higher overall pension liabilities over time. But in this case—and the case with many underfunded pension systems in the US today—the disparate rates of growth between payroll and pension payments indicate that there is something outside of growing employment that is the main source of increased costs.

To illustrate this point, the total payrolls for ASRS and PSPRS have nearly doubled since 2001. Pension costs, on the other hand, are now 15 times the amount they were in 2001 for ASRS and 17 times the amount for PSPRS employers.

This trend is also visible in annual contribution rates, which are expressed as a percentage of covered payroll. [Note: For the purpose of this analysis, we will consider ASRS as an example since they represent the largest pool of pension liabilities and constitute the majority of overall public pension contributions statewide; however, a similar analysis can be performed for PSPRS.] Employers participating in ASRS have seen their required contributions to the pension plan—excluding contributions to the health and disability plans—go from just under 2 percent of payroll in 2002 to nearly 11 percent over the last sixteen years, a nearly six-fold increase. [Note that the total required contribution for all ASRS post-employment programs, including the health plan, was 11.5 percent of payroll in 2018]. This means that employers like school districts are having to dedicate a significantly larger portion of their budget to pension costs, diverting resources away from the classroom and making it increasingly difficult to adjust teacher salaries and fund other priorities like technology and student enrichment programs.

Notably, since 2001, there have been no major increases in retirement benefits for ASRS members and retirees that would prompt a commensurate ramp-up in costs. In other words, the overall benefits promised to teachers and state and local public employees has remained relatively static over the past two decades, but costs have gone up significantly.

So, what is driving up the costs of Arizona’s pension plans? A deeper analysis of ASRS and PSPRS contributions reveals that Arizona’s escalating pension debt is the primary culprit. Over the past two decades, ASRS has precipitously accumulated an unfunded liability of $15.6 billion, with most—but not all—of the shortfall stemming from underperforming investments. This growing shortfall requires greater annual payments into the fund, so the system can eventually get back to full funding.

Due to slow adjustments to assumptions and a forecast of lower overall returns when compared to previous decades, investment returns below expectations are likely to apply continued pressure in the form of more pension debt and, consequently, higher annual contributions. Using forecasts of future ASRS and PSPRS contributions under various one-year return scenarios, it is clear that investment underperformance can play a significant role in even more prohibitive costs for all Arizona municipalities.

Just one year of returns at 6.5 percent—about one percentage point below the assumed rate—would require an additional $2.4 million in 2022 contributions for both ASRS and PSPRS combined. Assuming contribution shares stay relatively similar, Sedona would be facing an additional $2,747 in 2022 pension expenses under this scenario, with over 35 percent of that ($973) coming from added ASRS costs.

Breaking Down the Pension Costs: Funding Benefits Earned Today v. Paying Pension Debt

Splitting annual pension contributions into the amount needed to prefund benefits (also known as the normal cost) and the amount needed to amortize (or pay off) pension debt demonstrates the influence unfunded liabilities are imposing on ASRS and PSPRS contributions. Where no pension debt amortization payments were necessary in 2001, debt payments now make up a third of the annual $1 billion cost for ASRS and two thirds of the annual $857 million contributed into PSPRS. Splitting contributions by these two categories shows that the main driver of increasing pension costs is, in fact, the significant amount of debt accrued by the system. The following charts illustrate how normal cost and amortization payments have each contributed to growing ASRS and PSPRS costs.

The rising contribution rates reflect that previous economic and demographic assumptions that influence pension math have not held, and that the pension promises made to public employees are going to be much more expensive going forward—hence, the rise in the “normal cost” of prefunding future benefits. What’s worse, it took the ASRS board of trustees many years to change outdated actuarial assumptions—primarily the assumed rate of return—creating a large fiscal hole related to current pension liabilities that needs to be filled through additional pension debt payments.

Effectively, employers and members of ASRS are having to pay for both increases at once. This interaction, with pension debt amortization payments driving up pension costs, is ubiquitous among all Arizona governments, from Maricopa County with its 4,000,000 residents to the city of Bisbee with its population of just over 5,000. These amortization payments create significant difficulties for local governments, as they are required to allocate funds that are several multiples of what they used to be just a few years ago. Taxpayers and public employees also bear the brunt of this issue, via increased taxes and pension contributions, all with no improvement (or often a reduction) in services and benefits.

Conclusion

State and local policymakers owe it to their constituents to continue to build upon the reform efforts undertaken with PSPRS in recent years and expand them to ASRS. Through a multi-year effort, public safety employees and employers collaboratively made great strides in addressing the system’s most immediate needs through reform, while not sacrificing the value and attractiveness of the plan. There are still more reforms that could be considered, however, including improvements to funding and amortization policies. Likewise, several issues associated with ASRS continue to put the retirement security of Arizona workers at risk. Stakeholders for both systems need to foster a comprehensive and collaborative effort to manage the growing costs of the retirement plans, preferably one that is based on sound research and common understanding.

Notes on Methodology:

Contribution amounts for Sedona are given in ASRS and PSPRS GASB 67 reports going back to 2016. Contributions before 2016 are calculated by applying the average contribution share from 2016-18 to total statewide contributions. Forecasted 2022 contributions use Pension Integrity Project actuarial modeling. Contributions for Sedona use the city’s average share of the state’s total contributions from 2016-18 and apply this share to the forecasted total contribution under different return scenarios.

Pension Debt Drives Rising Costs for Arizona Municipal Governments: City of Sedona

The post Examining the City of Sedona and How Pension Debt Drives Rising Costs for Arizona Municipal Governments appeared first on Reason Foundation.

Town of Gilbert: A 15x Increase in Pension Costs 

The Town of Gilbert is no stranger to the increasing costs of public pensions. According to the Pension Integrity Project’s analysis of financial documents, the town’s total payments to ASRS and PSPRS have skyrocketed from about $1 million per year in 2001 to almost $18 million in 2018, with $5.2 million going to ASRS and $12.6 million going to PSPRS. This analysis does not account for additional costs derived from the Corrections Officers Retirement Plan (CORP) or the Elected Officials Retirement Plan (EORP), which means the costs have grown even more than displayed here (though at a much smaller scale for CORP and EORP relative to ASRS and PSPRS).

An increase in costs this large has far-reaching effects in local governments—Gilbert is paying more than 15 times more in aggregate ASRS and PSPRS contributions relative to what it used to less than two decades ago. This is reflective of the overall statewide trend. The total combined annual contributions into ASRS and PSPRS have risen to nearly $2 billion, a big jump from the $128 million in payments in 2001. Though there are certainly varying degrees of severity—some municipalities like Prescott and Bisbee have explored bankruptcy in the recent past in large part due to the rising costs of servicing pension debt—governmental units across Arizona are facing similar challenges to the Town of Gilbert, and local policymakers all across the state are weighing a range of options between reducing services, raising taxes or reprioritizing spending to keep up with the higher price tags attached to ASRS and PSPRS.

Why Pension Costs are Growing 

To some degree, increased dollar values dedicated to these pension payments is expected—as the state’s population grows, state and local governments need more employees, which generates higher overall pension liabilities over time. But in this case—and the case with many underfunded pension systems in the US today—the disparate rates of growth between payroll and pension payments indicate that there is something outside of growing employment that is the main source of increased costs.

To illustrate this point, the total payrolls for ASRS and PSPRS have nearly doubled since 2001. Pension costs, on the other hand, are now 14 times the amount they were in 2001 for ASRS and 17 times the amount for PSPRS employers.

This trend is also visible in annual contribution rates, which are expressed as a percentage of covered payroll. [Note: For the purpose of this analysis, we will consider ASRS as an example since they represent the largest pool of pension liabilities and constitute the majority of overall public pension contributions statewide; however, a similar analysis can be performed for PSPRS.]

Employers participating in ASRS have seen their required contributions to the pension plan—excluding contributions to the health and disability plans—go from just under 2 percent of payroll in 2002 to nearly 11 percent over the last sixteen years, a nearly six-fold increase. [Note that the total required contribution for all ASRS post-employment programs, including the health plan, was 11.5 percent of payroll in 2018].

This means that employers like school districts are having to dedicate a significantly larger portion of their budget to pension costs, diverting resources away from the classroom and making it increasingly difficult to adjust teacher salaries and fund other priorities like technology and student enrichment programs.

Notably, since 2001, there have been no major increases in retirement benefits for ASRS members and retirees that would prompt a commensurate ramp-up in costs. In other words, the overall benefits promised to teachers and state and local public employees has remained relatively static over the past two decades, but costs have gone up significantly.

So, what is driving up the costs of Arizona’s pension plans? A deeper analysis of ASRS and PSPRS contributions reveals that Arizona’s escalating pension debt is the primary culprit. Over the past two decades, ASRS has precipitously accumulated an unfunded liability of $15.6 billion, with most—but not all—of the shortfall stemming from underperforming investments. This growing shortfall requires greater annual payments into the fund, so the system can eventually get back to full funding.

Due to slow adjustments to assumptions and a forecast of lower overall returns when compared to previous decades, investment returns below expectations are likely to apply continued pressure in the form of more pension debt and, consequently, higher annual contributions. Using forecasts of future ASRS and PSPRS contributions under various one-year return scenarios, it is clear that investment underperformance can play a significant role in even more prohibitive costs for all Arizona municipalities.

Just one year of returns at 6.5 percent—about one percentage point below the assumed rate—would require an additional $2.4 million in 2022 contributions for both ASRS and PSPRS combined. Assuming contribution shares stay relatively similar, Gilbert would be facing an additional $19,305 in 2022 pension expenses under this scenario, with nearly 43 percent of that ($8,221) coming from added ASRS costs.

Breaking Down the Pension Costs: Funding Benefits Earned Today vs. Paying Pension Debt

Splitting annual pension contributions into the amount needed to prefund benefits (also known as the normal cost) and the amount needed to amortize (or pay off) pension debt demonstrates the influence unfunded liabilities are imposing on ASRS and PSPRS contributions. Where no pension debt amortization payments were necessary in 2001, debt payments now make up a third of the annual $1 billion cost for ASRS and two thirds of the annual $857 million contributed into PSPRS. Splitting contributions by these two categories shows that the main driver of increasing pension costs is, in fact, the significant amount of debt accrued by the system. The following charts illustrate how normal cost and amortization payments have each contributed to growing ASRS and PSPRS costs.

The rising contribution rates reflect that previous economic and demographic assumptions that influence pension math have not held, and that the pension promises made to public employees are going to be much more expensive going forward—hence, the rise in the “normal cost” of prefunding future benefits. What’s worse, it took the ASRS board of trustees many years to change outdated actuarial assumptions—primarily the assumed rate of return—creating a large fiscal hole related to current pension liabilities that needs to be filled through additional pension debt payments.

Effectively, employers and members of ASRS are having to pay for both increases at once. This interaction, with pension debt amortization payments driving up pension costs, is ubiquitous among all Arizona governments, from Maricopa County with its 4,000,000 residents to the city of Bisbee with its population of just over 5,000. These amortization payments create significant difficulties for local governments, as they are required to allocate funds that are several multiples of what they used to be just a few years ago. Taxpayers and public employees also bear the brunt of this issue, via increased taxes and pension contributions, all with no improvement (or often a reduction) in services and benefits.

Conclusion

State and local policymakers owe it to their constituents to continue to build upon the reform efforts undertaken with PSPRS in recent years and expand them to ASRS. Through a multi-year effort, public safety employees and employers collaboratively made great strides in addressing the system’s most immediate needs through reform, while not sacrificing the value and attractiveness of the plan. There are still more reforms that could be considered, however, including improvements to funding and amortization policies. Likewise, several issues associated with ASRS continue to put the retirement security of Arizona workers at risk. Stakeholders for both systems need to foster a comprehensive and collaborative effort to manage the growing costs of the retirement plans, preferably one that is based on sound research and common understanding.

Notes on Methodology:

Contribution amounts for Gilbert are given in ASRS and PSPRS GASB 67 reports going back to 2016. Contributions before 2016 are calculated by applying the average contribution share from 2016-18 to total statewide contributions. Forecasted 2022 contributions use Pension Integrity Project actuarial modeling. Contributions for Gilbert use the town’s average share of the state’s total contributions from 2016-18 and apply this share to the forecasted total contribution under different return scenarios.

Pension Debt Drives Rising Costs for Arizona Municipal Governments: Town of Gilbert

The post The Town of Gilbert and How Pension Debt Drives Rising Costs for Arizona Municipal Governments appeared first on Reason Foundation.

An analysis of public financial records reveals that significant growth in pension debt is the primary driver behind the increase in overall costs for Arizona taxpayers. Recognizing this problem, policymakers have implemented some significant reforms for PSPRS over the past few years, though more can be done to improve pension solvency. Even more crucially—judging by the important, and perhaps underappreciated, role it has played in driving costs—policymakers need to consider several areas of reform for ASRS.

City of Prescott: A 15x Increase in Pension Costs 

Prescott is no stranger to the increasing costs of public pensions. According to the Pension Integrity Project’s analysis of financial documents, the city’s total payments to ASRS and PSPRS have skyrocketed from about half a million dollars per year in 2001 to more than $7 million in 2018, with $2.1 million going to ASRS and $5.4 million going to PSPRS. This analysis does not account for additional costs derived from the Corrections Officers Retirement Plan (CORP) or the Elected Officials Retirement Plan (EORP), which means the costs have grown even more than displayed here (though at a much smaller scale for CORP and EORP relative to ASRS and PSPRS).

An increase in costs this large has far-reaching effects in local governments—Prescott is paying over 15 times more in aggregate ASRS and PSPRS contributions relative to what it used to less than two decades ago. This is reflective of the overall statewide trend. The total combined annual contributions into ASRS and PSPRS have risen to nearly $2 billion, a big jump from the $128 million in payments in 2001. Though there are certainly varying degrees of severity—some municipalities like Bisbee have explored bankruptcy in the recent past in large part due to the rising costs of servicing pension debt—governmental units across Arizona are facing similar challenges to Prescott, and local policymakers all across the state are weighing a range of options between reducing services, raising taxes or reprioritizing spending to keep up with the higher price tags attached to ASRS and PSPRS.

Why Pension Costs Are Growing 

To some degree, increased dollar values dedicated to these pension payments is expected—as the state’s population grows, state and local governments need more employees, which generates higher overall pension liabilities over time. But in this case—and the case with many underfunded pension systems in the US today—the disparate rates of growth between payroll and pension payments indicate that there is something outside of growing employment that is the main source of increased costs.

To illustrate this point, the total payrolls for ASRS and PSPRS have nearly doubled since 2001. Pension costs, on the other hand, are now 14 times the amount they were in 2001 for ASRS and 17 times the amount for PSPRS employers.

This trend is also visible in annual contribution rates, which are expressed as a percentage of covered payroll. [Note: For the purpose of this analysis, we will consider ASRS as an example since they represent the largest pool of pension liabilities and constitute the majority of overall public pension contributions statewide; however, a similar analysis can be performed for PSPRS.]

Employers participating in ASRS have seen their required contributions to the pension plan—excluding contributions to the health and disability plans—go from just under 2 percent of payroll in 2002 to nearly 11 percent over the last sixteen years, a nearly six-fold increase. [Note that the total required contribution for all ASRS post-employment programs, including the health plan, was 11.5 percent of payroll in 2018].

This means that employers like school districts are having to dedicate a significantly larger portion of their budget to pension costs, diverting resources away from the classroom and making it increasingly difficult to adjust teacher salaries and fund other priorities like technology and student enrichment programs.

Notably, since 2001, there have been no major increases in retirement benefits for ASRS members and retirees that would prompt a commensurate ramp-up in costs. In other words, the overall benefits promised to teachers and state and local public employees has remained relatively static over the past two decades, but costs have gone up significantly.

So, what is driving up the costs of Arizona’s pension plans? A deeper analysis of ASRS and PSPRS contributions reveals that Arizona’s escalating pension debt is the primary culprit. Over the past two decades, ASRS has precipitously accumulated an unfunded liability of $15.6 billion, with most—but not all—of the shortfall stemming from underperforming investments. This growing shortfall requires greater annual payments into the fund, so the system can eventually get back to full funding.

Due to slow adjustments to assumptions and a forecast of lower overall returns when compared to previous decades, investment returns below expectations are likely to apply continued pressure in the form of more pension debt and, consequently, higher annual contributions. Using forecasts of future ASRS and PSPRS contributions under various one-year return scenarios, it is clear that investment underperformance can play a significant role in even more prohibitive costs for all Arizona municipalities.

Just one year of returns at 6.5 percent—about one percentage point below the assumed rate—would require an additional $2.4 million in 2022 contributions for both ASRS and PSPRS combined. Assuming contribution shares stay relatively similar, Prescott would be facing an additional $8,126 in 2022 pension expenses under this scenario, with 41 percent of that ($3,359) coming from added ASRS costs.

Breaking Down the Pension Costs: Funding Benefits Earned Today vs. Paying Pension Debt

Splitting annual pension contributions into the amount needed to prefund benefits (also known as the normal cost) and the amount needed to amortize (or pay off) pension debt demonstrates the influence unfunded liabilities are imposing on ASRS and PSPRS contributions. Where no pension debt amortization payments were necessary in 2001, debt payments now make up a third of the annual $1 billion costs for ASRS and two-thirds of the annual $857 million contributed into PSPRS. Splitting contributions by these two categories shows that the main driver of increasing pension costs is, in fact, the significant amount of debt accrued by the system. The following charts illustrate how normal cost and amortization payments have each contributed to growing ASRS and PSPRS costs.

The rising contribution rates reflect that previous economic and demographic assumptions that influence pension math have not held and that the pension promises made to public employees are going to be much more expensive going forward—hence, the rise in the “normal cost” of prefunding future benefits. What’s worse, it took the ASRS board of trustees many years to change outdated actuarial assumptions—primarily the assumed rate of return—creating a large fiscal hole related to current pension liabilities that needs to be filled through additional pension debt payments.

Effectively, employers and members of ASRS are having to pay for both increases at once. This interaction, with pension debt amortization payments driving up pension costs, is ubiquitous among all Arizona governments, from Maricopa County with its 4,000,000 residents to the city of Bisbee with its population of just over 5,000. These amortization payments create significant difficulties for local governments, as they are required to allocate funds that are several multiples of what they used to be just a few years ago. Taxpayers and public employees also bear the brunt of this issue, via increased taxes and pension contributions, all with no improvement (or often a reduction) in services and benefits.

Conclusion

State and local policymakers owe it to their constituents to continue to build upon the reform efforts undertaken with PSPRS in recent years and expand them to ASRS. Through a multi-year effort, public safety employees and employers collaboratively made great strides in addressing the system’s most immediate needs through reform, while not sacrificing the value and attractiveness of the plan. There are still more reforms that could be considered, however, including improvements to funding and amortization policies. Likewise, several issues associated with ASRS continue to put the retirement security of Arizona workers at risk. Stakeholders for both systems need to foster a comprehensive and collaborative effort to manage the growing costs of the retirement plans, preferably one that is based on sound research and common understanding.

Notes on Methodology:

Contribution amounts for the City of Prescott are given in ASRS and PSPRS GASB 67 reports going back to 2016. Contributions before 2016 are calculated by applying the average contribution share from 2016-18 to total statewide contributions. Forecasted 2022 contributions use Pension Integrity Project actuarial modeling. Contributions for Prescott use the city’s average share of the state’s total contributions from 2016-18 and apply this share to the forecasted total contribution under different return scenarios.

Pension Debt Drives Rising Costs for Arizona Municipal Governments: City of Prescott

The post Examining the City of Prescott and How Pension Debt Drives Rising Costs for Arizona Municipal Governments appeared first on Reason Foundation.

In This Issue:

• Articles, Research & Spotlights 
  • New Mexico Enacts Bipartisan Pension Reform
  • Pension Fund Challenges with Alternative Investments
  • Arizona Municipal Pension Debt Driving Rising Costs
  • Coronavirus Compounds California’s Local Debt Issues
  • Kansas at Risk of Avoiding Payments and Growing Debt Levels
  • Massachusetts Considers Move to Bolster Pension Funding
• News in Brief
• Quotable Quotes on Pension Reform
• Featured Graph
• Contact the Pension Reform Help Desk

Articles, Research & Spotlights

New Mexico Enacts Bipartisan Pension Reform to Improve PERA Solvency

Earlier this month New Mexico Gov. Michelle Lujan Grisham signed into law Senate Bill 72, bipartisan legislation designed to begin tackling the Public Employees Retirement Association’s (PERA’s) solvency challenges through benefit design changes and increased annual contributions. Facing over $6.7 billion in pension debt, state lawmakers found a way to build a bipartisan consensus between labor associations, PERA’s governing board, local governments, and other stakeholders. In this analysis, members of the Pension Integrity Project evaluate the changes and use actuarial modeling to forecast the long-term results of the reform. The analysis suggests that SB 72 represents a giant leap forward in reducing the risk of rising costs in the future, but additional work remains to get the pension plan fully on track to meet what appears to be a darkening market forecast. Additionally, Reason Foundation’s Anil Niraula examines why Moody’s recently found New Mexico’s pension reform bill “will reduce state and participating local governments’ unfunded pension liabilities and susceptibility to investment return volatility.”

Opaque Alternative Investments Add Uncertainty to Public Pension Fund Reporting

As they’ve chased increasingly unrealistic assumed rates of return, many public pension funds have transitioned their investment strategy over the past decade, swapping relatively stable and transparent public equity and fixed income investments for less transparent and more volatile so-called “alternative” assets in search of higher yields. This trend is most apparent in the increased allocation in alternative investments, such as private equity. In this commentary, Reason’s Marc Joffe warns that some “private equity fund managers exaggerate the reported net asset value of their funds” and that crises like the coronavirus pandemic could cause additional instability for public pension funds that are too reliant on private equity.

Fiscal Implications of Rising Pension Debt for Arizona’s Local Governments

While some of Arizona municipalities are having difficulties budgeting for public services and others are seeking ways to pay down pension debt faster, a common theme uniting them all is the dramatic increase in pension costs over the past two decades. In a series of briefs, Reason’s Zachary Christensen examines the primary drivers behind rising pension costs and the fiscal impacts of pension plan underperformance for a subset of Arizona’s cities and counties, including Maricopa County, Scottsdale, Tempe, Mesa, and more.

COVID-19 and the Economic Impacts on California’s Pension Systems and School Districts

Market volatility associated with COVID-19 developments is likely to put even more budget pressures on school districts, many of which are already facing significant increases in pension costs. A recent report from California’s Legislative Analyst’s Office, as summarized by Reason’s Alix Ollivier, suggests that the state should dedicate some of its budget surplus to alleviate CalSTRS unfunded liabilities to help reduce costs imposed on school districts. The report also proposes a restructuring of health benefits to slow the growth of pension debt.

Kansas Shouldn’t Push Pension Debt into Future So It Can Spend More Today

The Kansas Public Employee’s Retirement System (KPERS) has only 64 cents saved for every dollar needed to pay for retirement benefit promises. This relatively low funded ratio makes Gov. Laura Kelly’s recent proposal to reduce state contributions to KPERS problematic. In order to fund the budget, Gov. Kelly would like to refinance the pension plan’s debt and allow the state to extend payments out further into the future in exchange for smaller pension contributions in the short run. Reason’s Ryan Frost and Michael Austin from the Kansas Policy Institute examine the potential downsides of pension debt re-amortization, warning the legislature to cautiously approach this element of the budget proposal.

Massachusetts’ Legislature Should Help Gov. Baker Make Good on Pension Promises

In response to growing concerns associated with long-term pension security, Massachusetts Gov. Charlie Baker has proposed a prudent increase in annual employer contributions into the state’s Public Employee Retirement Administration Commission (PERAC). As Reason’s Raheem Williams explains, the proposed payment increases are much needed to help the severely underfunded pension plan, but reforms would need to reach beyond contributions to fully pull PERAC out of its current funding challenges.

News in Brief

Pension Integrity Project Seeking Quantitative Analyst

The quantitative analyst will work with the Pension Integrity Project team to develop actuarially-driven analysis of public sector pension plans. For more details on the position, please see the job posting here.

Variance in Private Equity Fees Across Public Pension Plans:

While the primary focus of pension funds usually gravitates around maintaining adequate funding levels and ensuring responsible investments, one often overlooked, yet important, element of pension management are the fees applied to private equity investments. These fees can vary greatly and make a significant difference in overall costs for a fund. In a new paper, Juliane Begenau of Stanford’s Graduate School of Business and Emil Siriwardane of Harvard Business School examine fees paid by pension investors into various private equity funds. They find that fees are at most modestly affected by systemic factors such as pension total liabilities or governance structure. The authors conclude that the differences between the fees paid by pension plans could vary by up to 15 percent, even among similar plans investing in the same private equity funds.

Evaluating the Retirement Benefits of New York City Teachers:

Several pension reform efforts in New York have generally preserved the benefits of existing teachers while adjusting the benefits of new workers. This has resulted in multiple tiers of workers, all with varying levels of retirement benefits. In this new report, TeacherPensions.org uses benefit modeling to examine the adequacy of New York’s various pension tiers. They find that some tiers are falling short in providing adequate retirement benefits and that this shortcoming can be mitigated with increased contributions to the tax-deferred annuity program.

Quotable Quotes on Pension Reform

“By paying out more than it was taking in, PERA was on a path to eventual bankruptcy. Now we’ve reversed course, and I’m confident New Mexico can keep its promises to current and future retirees. […] Legislators from both parties recognized the dire need for this reform, and I thank them for their leadership.”
—Michelle Lujan Grisham, governor of New Mexico, quoted in “Gov. Lujan Grisham signs retirement security measure into law”, March 2, 2020.

“The solutions in this bill will go far to get our retirement system back on track while protecting our most vulnerable retirees from any hardship. […] It’s never easy making changes. A downturn is inevitable and we’ve taken the right steps to guard against it. We’re watching after everyone’s future and safeguarding the state’s bond rating.”
—George Muñoz, New Mexico state senator, quoted in “Gov. Lujan Grisham signs retirement security measure into law”, March 2, 2020.

“The Office of Retirement Services’ failure to follow state law would have resulted in chronic underfunding of the retirement system. Failing to address a broken pension system is no different than robbing the next generation of its wealth and spending it today. This is both unsustainable and unfair to our kids who will eventually foot the bill.”
—Thomas Albert, Michigan state representative, quoted in “State representative spars with Whitmer administration over school pension assumptions”, The Center Square, Feb. 25, 2020.

Featured Graph

Each month, we feature a pension-related chart or infographic of interest curated by one of our Pension Integrity Project analysts. This month, Reason’s Truong Bui displays assumed rates of return for state pension plans over time. The full chart, featuring all 50 states, is here.

Contact the Pension Reform Help Desk

Reason Foundation’s Pension Reform Help Desk provides information on Reason’s work on pension reform and resources for those wishing to pursue pension reform in their states, counties and cities. Feel free to contact the Reason Pension Reform Help Desk by e-mail at pensionhelpdesk@reason.org.

Follow the discussion on pensions and other governmental reforms at Reason Foundation’s website and on Twitter @ReasonPensions. As we continually strive to improve the publication, please feel free to send your questions, comments and suggestions to alix.ollivier@reason.org

The post Pension Reform Newsletter: New Mexico Enacts Pension Reform, Coronavirus Compounds Pension Debt, and More appeared first on Reason Foundation.

Arizona’s cities and counties are finding it harder and harder to budget for all of the public services they provide to their taxpayers, and a major culprit is the dramatic growth in pension costs associated both with the Arizona State Retirement System (ASRS) and the state’s Public Safety Personnel Retirement System (PSPRS). An analysis of public financial records reveals that significant growth in pension debt is the primary driver behind the increase in overall costs for Arizona taxpayers. Recognizing this problem, policymakers have implemented some significant reforms for PSPRS over the past few years, though more can be done to improve pension solvency. Even more crucially—judging by the important, and perhaps underappreciated, role it has played in driving costs—policymakers need to consider several areas of reform for ASRS.

City of Scottsdale: A 15x Increase in Pension Costs 

Scottsdale is no stranger to the increasing costs of public pensions. According to the Pension Integrity Project’s analysis of financial documents, the city’s total payments to ASRS and PSPRS have skyrocketed from $1.6 million per year in 2001 to around $25 million in 2018, with $11 million going to ASRS and $14 million going to PSPRS.

This analysis does not account for additional costs derived from the Corrections Officers Retirement Plan (CORP) or the Elected Officials Retirement Plan (EORP), which means the costs have grown even more than displayed here (though at a much smaller scale for CORP and EORP relative to ASRS and PSPRS).

An increase in costs this large has far reaching effects in local governments—Scottsdale is paying over 15 times more in aggregate ASRS and PSPRS contributions relative to what it used to less than two decades ago. This is reflective of the overall statewide trend. The total combined annual contributions into ASRS and PSPRS have risen to nearly $2 billion, a big jump from the $128 million in payments in 2001. Though there are certainly varying degrees of severity—some municipalities like Prescott and Bisbee have explored bankruptcy in the recent past in large part due to the rising costs of servicing pension debt—governmental units across Arizona are facing similar challenges to Scottsdale, and local policymakers all across the state are weighing a range of options between reducing services, raising taxes or reprioritizing spending to keep up with the higher price tags attached to ASRS and PSPRS.

Why Pension Costs Are Growing 

To some degree, increased dollar values dedicated to these pension payments is expected—as the state’s population grows, state and local governments need more employees, which generates higher overall pension liabilities over time. But in this case—and the case with many underfunded pension systems in the US today—the disparate rates of growth between payroll and pension payments indicate that there is something outside of growing employment that is the main source of increased costs.

To illustrate this point, the total payrolls for ASRS and PSPRS have nearly doubled since 2001. Pension costs, on the other hand, are now 14 times the amount they were in 2001 for ASRS and 17 times the amount for PSPRS employers.

This trend is also visible in annual contribution rates, which are expressed as a percentage of covered payroll.

Employers participating in ASRS have seen their required contributions to the pension plan—excluding contributions to the health and disability plans—go from just under 2 percent of payroll in 2002 to nearly 11 percent over the last 16 years, a nearly six-fold increase.

This means that employers like school districts are having to dedicate a significantly larger portion of their budget to pension costs, diverting resources away from the classroom and making it increasingly difficult to adjust teacher salaries and fund other priorities like technology and student enrichment programs.

Notably, since 2001, there have been no major increases in retirement benefits for ASRS members and retirees that would prompt a commensurate ramp-up in costs. In other words, the overall benefits promised to teachers and state and local public employees has remained relatively static over the past two decades, but costs have gone up significantly.

So, what is driving up the costs of Arizona’s pension plans?

A deeper analysis of ASRS and PSPRS contributions reveals that Arizona’s escalating pension debt is the primary culprit. Over the past two decades, ASRS has precipitously accumulated an unfunded liability of $15.6 billion, with most—but not all—of the shortfall stemming from underperforming investments. This growing shortfall requires greater annual payments into the fund, so the system can eventually get back to full funding.

Due to slow adjustments to assumptions and a forecast of lower overall returns when compared to previous decades, investment returns below expectations are likely to apply continued pressure in the form of more pension debt and, consequently, higher annual contributions. Using forecasts of future ASRS and PSPRS contributions under various one-year return scenarios, it is clear that investment underperformance can play a significant role in even more prohibitive costs for all Arizona municipalities.

Just one year of returns at 6.5 percent—about one percentage point below the assumed rate—would require an additional $2.4 million in 2022 contributions for both ASRS and PSPRS combined. Assuming contribution shares stay relatively similar, Scottsdale would be facing an additional $29,809 in 2022 pension expenses under this scenario, with nearly 60 percent of that ($17,786) coming from added ASRS costs.

Breaking Down the Pension Costs: Funding Benefits Earned Today v. Paying Pension Debt

Splitting annual pension contributions into the amount needed to prefund benefits (also known as the normal cost) and the amount needed to amortize (or pay off) pension debt demonstrates the influence unfunded liabilities are imposing on ASRS and PSPRS contributions. Where no pension debt amortization payments were necessary in 2001, debt payments now make up a third of the annual $1 billion cost for ASRS and two thirds of the annual $857 million contributed into PSPRS. Splitting contributions by these two categories shows that the main driver of increasing pension costs is, in fact, the significant amount of debt accrued by the system. The following charts illustrate how normal cost and amortization payments have each contributed to growing ASRS and PSPRS costs.

The rising contribution rates reflect that previous economic and demographic assumptions that influence pension math have not held, and that the pension promises made to public employees are going to be much more expensive going forward—hence, the rise in the “normal cost” of prefunding future benefits. What’s worse, it took the ASRS board of trustees many years to change outdated actuarial assumptions—primarily the assumed rate of return—creating a large fiscal hole related to current pension liabilities that needs to be filled through additional pension debt payments.

Effectively, employers and members of ASRS are having to pay for both increases at once. This interaction, with pension debt amortization payments driving up pension costs, is ubiquitous among all Arizona governments, from Maricopa County with its 4,000,000 residents to the city of Bisbee with its population of just over 5,000. These amortization payments create significant difficulties for local governments, as they are required to allocate funds that are several multiples of what they used to be just a few years ago. Taxpayers and public employees also bear the brunt of this issue, via increased taxes and pension contributions, all with no improvement (or often a reduction) in services and benefits.

Conclusion

State and local policymakers owe it to their constituents to continue to build upon the reform efforts undertaken with PSPRS in recent years and expand them to ASRS. Through a multi-year effort, public safety employees and employers collaboratively made great strides in addressing the system’s most immediate needs through reform, while not sacrificing the value and attractiveness of the plan. There are still more reforms that could be considered, however, including improvements to funding and amortization policies. Likewise, several issues associated with ASRS continue to put the retirement security of Arizona workers at risk. Stakeholders for both systems need to foster a comprehensive and collaborative effort to manage the growing costs of the retirement plans, preferably one that is based on sound research and common understanding.

Notes on Methodology:

Contribution amounts for the City of Scottsdale are given in ASRS and PSPRS GASB 67 reports going back to 2016. Contributions before 2016 are calculated by applying the average contribution share from 2016-18 to total statewide contributions. Forecasted 2022 contributions use Pension Integrity Project actuarial modeling. Contributions for Scottsdale use the city’s average share of the state’s total contributions from 2016-18 and apply this share to the forecasted total contribution under different return scenarios.

Pension Debt Drives Rising Costs for Arizona Municipal Governments: City of Scottsdale

The post Examining the City of Scottsdale and How Pension Debt Drives Rising Costs for Arizona Municipal Governments appeared first on Reason Foundation.

Arizona cities and counties are finding it harder and harder to budget for all of the public services they provide to their taxpayers, and a major culprit is the dramatic growth in pension costs associated both with the Arizona State Retirement System (ASRS) and the state’s Public Safety Personnel Retirement System (PSPRS).

An analysis of public financial records reveals that significant growth in pension debt is the primary driver behind the increase in overall costs for Arizona taxpayers. Recognizing this problem, policymakers have implemented some significant reforms for PSPRS over the past few years, though more can be done to improve pension solvency. Even more crucially—judging by the important, and perhaps underappreciated, the role it has played in driving costs—policymakers need to consider several areas of reform for ASRS.

City of Chandler: Over a 15x Increase in Pension Costs 

Chandler is no stranger to the increasing costs of public pensions. According to the Pension Integrity Project’s analysis of financial documents, Chandler’s total payments to ASRS and PSPRS have skyrocketed from about $1.4 million per year in 2001 to around $23 million in 2018, with $8 million going to ASRS and $15 million going to PSPRS. This analysis does not account for additional costs derived from the Corrections Officers Retirement Plan (CORP) or the Elected Officials Retirement Plan (EORP), which means the costs have grown even more than displayed here (though at a much smaller scale for CORP and EORP relative to ASRS and PSPRS).

An increase in costs this large has far-reaching effects in local governments— the city of Chandler is paying more than 15 times more in aggregate ASRS and PSPRS contributions relative to what it used to less than two decades ago. This is reflective of the overall statewide trend. The total combined annual contributions into ASRS and PSPRS have risen to nearly $2 billion, a big jump from the $128 million in payments in 2001. Though there are certainly varying degrees of severity—some municipalities like Prescott and Bisbee have explored bankruptcy in the recent past in large part due to the rising costs of servicing pension debt—governmental units across Arizona are facing similar challenges to Chandler, and local policymakers all across the state are weighing a range of options between reducing services, raising taxes or reprioritizing spending to keep up with the higher price tags attached to ASRS and PSPRS.

Why Pension Costs Are Growing 

To some degree, increased dollar values dedicated to these pension payments is expected—as the state’s population grows, state and local governments need more employees, which generates higher overall pension liabilities over time. But in this case—and the case with many underfunded pension systems in the US today—the disparate rates of growth between payroll and pension payments indicate that there is something outside of growing employment that is the main source of increased costs.

To illustrate this point, the total payrolls for ASRS and PSPRS have nearly doubled since 2001. Pension costs, on the other hand, are now 14 times the amount they were in 2001 for ASRS and 17 times the amount for PSPRS employers.

This trend is also visible in annual contribution rates, which are expressed as a percentage of covered payroll.

Employers participating in ASRS have seen their required contributions to the pension plan—excluding contributions to the health and disability plans—go from just under 2 percent of payroll in 2002 to nearly 11 percent over the last sixteen years, a nearly six-fold increase. [Note that the total required contribution for all ASRS post-employment programs, including the health plan, was 11.5 percent of payroll in 2018]. This means that employers like school districts are having to dedicate a significantly larger portion of their budget to pension costs, diverting resources away from the classroom and making it increasingly difficult to adjust teacher salaries and fund other priorities like technology and student enrichment programs.

Notably, since 2001, there have been no major increases in retirement benefits for ASRS members and retirees that would prompt a commensurate ramp-up in costs. In other words, the overall benefits promised to teachers and state and local public employees has remained relatively static over the past two decades, but costs have gone up significantly.

So, what is driving up the costs of Arizona’s pension plans? A deeper analysis of ASRS and PSPRS contributions reveals that Arizona’s escalating pension debt is the primary culprit. Over the past two decades, ASRS has precipitously accumulated an unfunded liability of $15.6 billion, with most—but not all—of the shortfall stemming from underperforming investments. This growing shortfall requires greater annual payments into the fund, so the system can eventually get back to full funding.

Due to slow adjustments to assumptions and a forecast of lower overall returns when compared to previous decades, investment returns below expectations are likely to apply continued pressure in the form of more pension debt and, consequently, higher annual contributions. Using forecasts of future ASRS and PSPRS contributions under various one-year return scenarios, it is clear that investment underperformance can play a significant role in even more prohibitive costs for all Arizona municipalities.

Just one year of returns at 6.5 percent—about one percentage point below the assumed rate—would require an additional $2.4 million in 2022 contributions for both ASRS and PSPRS combined. Assuming contribution shares stay relatively similar, Chandler would be facing an additional $25,434 in 2022 pension expenses under this scenario, with contributions almost split evenly between ASRS and PSPRS.

Breaking Down the Pension Costs: Funding Benefits Earned Today v. Paying Pension Debt

Splitting annual pension contributions into the amount needed to prefund benefits (also known as the normal cost) and the amount needed to amortize (or pay off) pension debt demonstrates the influence unfunded liabilities are imposing on ASRS and PSPRS contributions. Where no pension debt amortization payments were necessary in 2001, debt payments now make up a third of the annual $1 billion costs for ASRS and two-thirds of the annual $857 million contributed into PSPRS. Splitting contributions by these two categories shows that the main driver of increasing pension costs is, in fact, the significant amount of debt accrued by the system. The following charts illustrate how normal cost and amortization payments have each contributed to growing ASRS and PSPRS costs.

The rising contribution rates reflect that previous economic and demographic assumptions that influence pension math have not held, and that the pension promises made to public employees are going to be much more expensive going forward—hence, the rise in the “normal cost” of prefunding future benefits. What’s worse, it took the ASRS board of trustees many years to change outdated actuarial assumptions—primarily the assumed rate of return—creating a large fiscal hole related to current pension liabilities that needs to be filled through additional pension debt payments.

Effectively, employers and members of ASRS are having to pay for both increases at once. This interaction, with pension debt amortization payments driving up pension costs, is ubiquitous among all Arizona governments, from Maricopa County with its 4,000,000 residents to the city of Bisbee with its population of just over 5,000. These amortization payments create significant difficulties for local governments, as they are required to allocate funds that are several multiples of what they used to be just a few years ago. Taxpayers and public employees also bear the brunt of this issue, via increased taxes and pension contributions, all with no improvement (or often a reduction) in services and benefits.

Conclusion

State and local policymakers owe it to their constituents to continue to build upon the reform efforts undertaken with PSPRS in recent years and expand them to ASRS. Through a multi-year effort, public safety employees and employers collaboratively made great strides in addressing the system’s most immediate needs through reform, while not sacrificing the value and attractiveness of the plan. There are still more reforms that could be considered, however, including improvements to funding and amortization policies. Likewise, several issues associated with ASRS continue to put the retirement security of Arizona workers at risk. Stakeholders for both systems need to foster a comprehensive and collaborative effort to manage the growing costs of the retirement plans, preferably one that is based on sound research and common understanding.

Notes on Methodology:

Contribution amounts for the City of Chandler are given in ASRS and PSPRS GASB 67 reports going back to 2016. Contributions before 2016 are calculated by applying the average contribution share from 2016-18 to total statewide contributions. Forecasted 2022 contributions use Pension Integrity Project actuarial modeling. Contributions for Chandler use the city’s average share of the state’s total contributions from 2016-18 and apply this share to the forecasted total contribution under different return scenarios.

Pension Debt Drives Rising Costs for Arizona Municipal Governments: City of Chandler

The post Examining the City of Chandler and How Pension Debt Drives Rising Costs for Arizona Municipal Governments appeared first on Reason Foundation.

Arizona cities and counties are finding it harder and harder to budget for all of the public services they provide to their taxpayers, and a major culprit is the dramatic growth in pension costs associated both with the Arizona State Retirement System (ASRS) and the state’s Public Safety Personnel Retirement System (PSPRS). An analysis of public financial records reveals that significant growth in pension debt is the primary driver behind the increase in overall costs for Arizona taxpayers. Recognizing this problem, policymakers have implemented some significant reforms for PSPRS over the past few years, though more can be done to improve pension solvency. Even more crucially—judging by the important, and perhaps underappreciated, role it has played in driving costs—policymakers need to consider several areas of reform for ASRS.

City of Mesa: A 15x Increase in Pension Costs 

Mesa is no stranger to the increasing costs of public pensions. According to the Pension Integrity Project’s analysis of financial documents, the city’s total payments to ASRS and PSPRS have skyrocketed from less than $4 million per year in 2001 to more than $57 million in 2018, with $17 million going to ASRS and $40 million going to PSPRS. This analysis does not account for additional costs derived from the Corrections Officers Retirement Plan (CORP) or the Elected Officials Retirement Plan (EORP), which means the costs have grown even more than displayed here (though at a much smaller scale for CORP and EORP relative to ASRS and PSPRS).

An increase in costs this large has far-reaching effects in local governments—Mesa is paying more than 15 times more in aggregate ASRS and PSPRS contributions relative to what it used to less than two decades ago. This is reflective of the overall statewide trend. The total combined annual contributions into ASRS and PSPRS have risen to nearly $2 billion, a big jump from the $128 million in payments in 2001. Though there are certainly varying degrees of severity—some municipalities like Prescott and Bisbee have explored bankruptcy in the recent past in large part due to the rising costs of servicing pension debt—governmental units across Arizona are facing similar challenges to Mesa, and local policymakers all across the state are weighing a range of options between reducing services, raising taxes or reprioritizing spending to keep up with the higher price tags attached to ASRS and PSPRS.

Why Pension Costs Are Growing 

To some degree, increased dollar values dedicated to these pension payments is expected—as the state’s population grows, state and local governments need more employees, which generates higher overall pension liabilities over time. But in this case—and the case with many underfunded pension systems in the US today—the disparate rates of growth between payroll and pension payments indicate that there is something outside of growing employment that is the main source of increased costs.

To illustrate this point, the total payrolls for ASRS and PSPRS have nearly doubled since 2001. Pension costs, on the other hand, are now fourteen times the amount they were in 2001 for ASRS and seventeen times the amount for PSPRS employers.

This trend is also visible in annual contribution rates, which are expressed as a percentage of covered payroll.

Employers participating in ASRS have seen their required contributions to the pension plan—excluding contributions to the health and disability plans—go from just under 2 percent of payroll in 2002 to nearly 11 percent over the last sixteen years, a nearly six-fold increase. [Note that the total required contribution for all ASRS post-employment programs, including the health plan, was 11.5 percent of payroll in 2018]. This means that employers like school districts are having to dedicate a significantly larger portion of their budget to pension costs, diverting resources away from the classroom and making it increasingly difficult to adjust teacher salaries and fund other priorities like technology and student enrichment programs.

Notably, since 2001, there have been no major increases in retirement benefits for ASRS members and retirees that would prompt a commensurate ramp-up in costs. In other words, the overall benefits promised to teachers and state and local public employees has remained relatively static over the past two decades, but costs have gone up significantly.

So, what is driving up the costs of Arizona’s pension plans? A deeper analysis of ASRS and PSPRS contributions reveals that Arizona’s escalating pension debt is the primary culprit. Over the past two decades, ASRS has precipitously accumulated an unfunded liability of $15.6 billion, with most—but not all—of the shortfall stemming from underperforming investments. This growing shortfall requires greater annual payments into the fund, so the system can eventually get back to full funding.

Due to slow adjustments to assumptions and a forecast of lower overall returns when compared to previous decades, investment returns below expectations are likely to apply continued pressure in the form of more pension debt and, consequently, higher annual contributions. Using forecasts of future ASRS and PSPRS contributions under various one-year return scenarios, it is clear that investment underperformance can play a significant role in even more prohibitive costs for all Arizona municipalities.

Just one year of returns at 6.5 percent—about one percentage point below the assumed rate—would require an additional $2.4 million in 2022 contributions for both ASRS and PSPRS combined. Assuming contribution shares stay relatively similar, Mesa would be facing an additional $62,624 in 2022 pension expenses under this scenario, with 44 percent of that ($27,414) coming from added ASRS costs.

Breaking Down the Pension Costs: Funding Benefits Earned Today v. Paying Pension Debt

Splitting annual pension contributions into the amount needed to prefund benefits (also known as the normal cost) and the amount needed to amortize (or pay off) pension debt demonstrates the influence unfunded liabilities are imposing on ASRS and PSPRS contributions. Where no pension debt amortization payments were necessary in 2001, debt payments now make up a third of the annual $1 billion costs for ASRS and two-thirds of the annual $857 million contributed into PSPRS. Splitting contributions by these two categories shows that the main driver of increasing pension costs is, in fact, the significant amount of debt accrued by the system. The following charts illustrate how normal cost and amortization payments have each contributed to growing ASRS and PSPRS costs.

The rising contribution rates reflect that previous economic and demographic assumptions that influence pension math have not held, and that the pension promises made to public employees are going to be much more expensive going forward—hence, the rise in the “normal cost” of prefunding future benefits. What’s worse, it took the ASRS board of trustees many years to change outdated actuarial assumptions—primarily the assumed rate of return—creating a large fiscal hole related to current pension liabilities that needs to be filled through additional pension debt payments.

Effectively, employers and members of ASRS are having to pay for both increases at once. This interaction, with pension debt amortization payments driving up pension costs, is ubiquitous among all Arizona governments, from Maricopa County with its 4,000,000 residents to the city of Bisbee with its population of just over 5,000. These amortization payments create significant difficulties for local governments, as they are required to allocate funds that are several multiples of what they used to be just a few years ago. Taxpayers and public employees also bear the brunt of this issue, via increased taxes and pension contributions, all with no improvement (or often a reduction) in services and benefits.

Conclusion

State and local policymakers owe it to their constituents to continue to build upon the reform efforts undertaken with PSPRS in recent years and expand them to ASRS. Through a multi-year effort, public safety employees and employers collaboratively made great strides in addressing the system’s most immediate needs through reform, while not sacrificing the value and attractiveness of the plan. There are still more reforms that could be considered, however, including improvements to funding and amortization policies. Likewise, several issues associated with ASRS continue to put the retirement security of Arizona workers at risk. Stakeholders for both systems need to foster a comprehensive and collaborative effort to manage the growing costs of the retirement plans, preferably one that is based on sound research and common understanding.

Notes on Methodology:

Contribution amounts for the City of Mesa are given in ASRS and PSPRS GASB 67 reports going back to 2016. Contributions before 2016 are calculated by applying the average contribution share from 2016-18 to total statewide contributions. Forecasted 2022 contributions use Pension Integrity Project actuarial modeling. Contributions for Mesa use the city’s average share of the state’s total contributions from 2016-18 and apply this share to the forecasted total contribution under different return scenarios.

Pension Debt Drives Rising Costs for Arizona Municipal Governments: City of Mesa

The post Examining the City of Mesa and How Pension Debt Drives Rising Costs for Arizona Municipal Governments appeared first on Reason Foundation.

Arizona’s cities and counties are finding it harder and harder to budget for all of the public services they provide to their taxpayers, and a major culprit is a dramatic growth in pension costs associated both with the Arizona State Retirement System (ASRS) and the state’s Public Safety Personnel Retirement System (PSPRS).

An analysis of public financial records reveals that significant growth in pension debt is the primary driver behind the increase in overall costs for Arizona taxpayers. Recognizing this problem, policymakers have implemented some significant reforms for PSPRS over the past few years, though more can be done to improve pension solvency. Even more crucially—judging by the important, and perhaps underappreciated, role it has played in driving costs—policymakers need to consider several areas of reform for ASRS.

Coconino County: A 15x Increase in Pension Costs 

Coconino, the largest county in Arizona, is no stranger to the increasing costs of public pensions. According to the Pension Integrity Project’s analysis of financial documents, the county’s total payments to ASRS and PSPRS have skyrocketed from about $0.8 million per year in 2001 to more than $13 million in 2018, with $5 million going to ASRS and $8 million going to PSPRS. This analysis does not account for additional costs derived from the Corrections Officers Retirement Plan (CORP) or the Elected Officials Retirement Plan (EORP), which means the costs have grown even more than displayed here (though at a much smaller scale for CORP and EORP relative to ASRS and PSPRS).

An increase in costs this large has far-reaching effects in local governments— Coconino County is paying more than 15 times more in aggregate ASRS and PSPRS contributions relative to what it used to less than two decades ago. This is reflective of the overall statewide trend. The total combined annual contributions into ASRS and PSPRS have risen to nearly $2 billion, a big jump from the $128 million in payments in 2001. Though there are certainly varying degrees of severity—some municipalities like Prescott and Bisbee have explored bankruptcy in the recent past in large part due to the rising costs of servicing pension debt—governmental units across Arizona are facing similar challenges to Coconino County, and local policymakers all across the state are weighing a range of options between reducing services, raising taxes or reprioritizing spending to keep up with the higher price tags attached to ASRS and PSPRS.

Why Pension Costs Are Growing 

To some degree, increased dollar values dedicated to these pension payments are expected—as the state’s population grows, state and local governments need more employees, which generates higher overall pension liabilities over time. But in this case—and the case with many underfunded pension systems in the US today—the disparate rates of growth between payroll and pension payments indicate that there is something outside of growing employment that is the main source of increased costs.

To illustrate this point, the total payrolls for ASRS and PSPRS have nearly doubled since 2001. Pension costs, on the other hand, are now fourteen times the amount they were in 2001 for ASRS and seventeen times the amount for PSPRS employers.

This trend is also visible in annual contribution rates, which are expressed as a percentage of covered payroll.

Employers participating in ASRS have seen their required contributions to the pension plan—excluding contributions to the health and disability plans—go from just under 2 percent of payroll in 2002 to nearly 11 percent over the last 16 years, a nearly six-fold increase. [Note that the total required contribution for all ASRS post-employment programs, including the health plan, was 11.5 percent of payroll in 2018]. This means that employers like school districts are having to dedicate a significantly larger portion of their budget to pension costs, diverting resources away from the classroom and making it increasingly difficult to adjust teacher salaries and fund other priorities like technology and student enrichment programs.

Notably, since 2001, there have been no major increases in retirement benefits for ASRS members and retirees that would prompt a commensurate ramp-up in costs. In other words, the overall benefits promised to teachers and state and local public employees has remained relatively static over the past two decades, but costs have gone up significantly.

So, what is driving up the costs of Arizona’s pension plans?

A deeper analysis of ASRS and PSPRS contributions reveals that Arizona’s escalating pension debt is the primary culprit. Over the past two decades, ASRS has precipitously accumulated an unfunded liability of $15.6 billion, with most—but not all—of the shortfall stemming from underperforming investments. This growing shortfall requires greater annual payments into the fund, so the system can eventually get back to full funding.

Due to slow adjustments to assumptions and a forecast of lower overall returns when compared to previous decades, investment returns below expectations are likely to apply continued pressure in the form of more pension debt and, consequently, higher annual contributions. Using forecasts of future ASRS and PSPRS contributions under various one-year return scenarios, it is clear that investment underperformance can play a significant role in even more prohibitive costs for all Arizona municipalities.

Just one year of returns at 6.5 percent—about one percentage point below the assumed rate—would require an additional $2.4 million in 2022 contributions for both ASRS and PSPRS combined. Assuming contribution shares stay relatively similar, Coconino County would be facing an additional $15,415 in 2022 pension expenses under this scenario, with 53 percent of that ($8,209) coming from added ASRS costs.

Breaking Down the Pension Costs: Funding Benefits Earned Today vs. Paying Pension Debt

Splitting annual pension contributions into the amount needed to prefund benefits (also known as the normal cost) and the amount needed to amortize (or pay off) pension debt demonstrates the influence unfunded liabilities are imposing on ASRS and PSPRS contributions. Where no pension debt amortization payments were necessary in 2001, debt payments now make up a third of the annual $1 billion costs for ASRS and two-thirds of the annual $857 million contributed into PSPRS. Splitting contributions by these two categories shows that the main driver of increasing pension costs is, in fact, the significant amount of debt accrued by the system. The following charts illustrate how normal cost and amortization payments have each contributed to growing ASRS and PSPRS costs.

The rising contribution rates reflect that previous economic and demographic assumptions that influence pension math have not held and that the pension promises made to public employees are going to be much more expensive going forward—hence, the rise in the “normal cost” of prefunding future benefits. What’s worse, it took the ASRS board of trustees many years to change outdated actuarial assumptions—primarily the assumed rate of return—creating a large fiscal hole related to current pension liabilities that needs to be filled through additional pension debt payments.

Effectively, employers and members of ASRS are having to pay for both increases at once. This interaction, with pension debt amortization payments driving up pension costs, is ubiquitous among all Arizona governments, from Maricopa County with its 4,000,000 residents to the city of Bisbee with its population of just over 5,000. These amortization payments create significant difficulties for local governments, as they are required to allocate funds that are several multiples of what they used to be just a few years ago. Taxpayers and public employees also bear the brunt of this issue, via increased taxes and pension contributions, all with no improvement (or often a reduction) in services and benefits.

Conclusion

State and local policymakers owe it to their constituents to continue to build upon the reform efforts undertaken with PSPRS in recent years and expand them to ASRS. Through a multi-year effort, public safety employees and employers collaboratively made great strides in addressing the system’s most immediate needs through reform, while not sacrificing the value and attractiveness of the plan. There are still more reforms that could be considered, however, including improvements to funding and amortization policies. Likewise, several issues associated with ASRS continue to put the retirement security of Arizona workers at risk. Stakeholders for both systems need to foster a comprehensive and collaborative effort to manage the growing costs of the retirement plans, preferably one that is based on sound research and common understanding.

Notes on Methodology:

Contribution amounts for Coconino County are given in ASRS and PSPRS GASB 67 reports going back to 2016. Contributions before 2016 are calculated by applying the average contribution share from 2016-18 to total statewide contributions. Forecasted 2022 contributions use Pension Integrity Project actuarial modeling. Coconino County contributions use the county’s average share of the state’s total contributions from 2016-18 and apply this share to the forecasted total contribution under different return scenarios.

Pension Debt Drives Rising Costs for Arizona Municipal Governments: Coconino County

The post Examining Coconino County and How Pension Debt Drives Rising Costs for Arizona Municipal Governments appeared first on Reason Foundation.

Arizona cities and counties are finding it harder and harder to budget for all of the public services they provide to their taxpayers, and a major culprit is the dramatic growth in pension costs associated both with the Arizona State Retirement System (ASRS) and the state’s Public Safety Personnel Retirement System (PSPRS). An analysis of public financial records reveals that significant growth in pension debt is the primary driver behind the increase in overall costs for Arizona taxpayers. Recognizing this problem, policymakers have implemented some significant reforms for PSPRS over the past few years, though more can be done to improve pension solvency. Even more crucially—judging by the important, and perhaps underappreciated, role it has played in driving costs—policymakers need to consider several areas of reform for ASRS.

Maricopa County: A 14x Increase in Pension Costs 

The state’s most populous county, Maricopa, is no stranger to the increasing costs of public pensions. According to the Pension Integrity Project’s analysis of financial documents, the county’s total payments to ASRS and PSPRS have skyrocketed from about $10 million per year in 2001 to more than $142 million in 2018, with $113 million going to ASRS and $29 million going to PSPRS. This analysis does not account for additional costs derived from the Corrections Officers Retirement Plan (CORP) or the Elected Officials Retirement Plan (EORP), which means the costs have grown even more than displayed here (though at a much smaller scale for CORP and EORP relative to ASRS and PSPRS).

An increase in costs this large has far-reaching effects in local governments—Maricopa County is paying more than 14 times more in aggregate ASRS and PSPRS contributions relative to what it used to less than two decades ago. This is reflective of the overall statewide trend. The total combined annual contributions into ASRS and PSPRS have risen to nearly $2 billion, a big jump from the $128 million in payments in 2001. Though there are certainly varying degrees of severity—some municipalities like Prescott and Bisbee have explored bankruptcy in the recent past in large part due to the rising costs of servicing pension debt—governmental units across Arizona are facing similar challenges to Maricopa County, and local policymakers all across the state are weighing a range of options between reducing services, raising taxes or reprioritizing spending to keep up with the higher price tags attached to ASRS and PSPRS.

Why Pension Costs Are Growing 

To some degree, increased dollar values dedicated to these pension payments is expected—as the state’s population grows, state and local governments need more employees, which generates higher overall pension liabilities over time. But in this case—and the case with many underfunded pension systems in the US today—the disparate rates of growth between payroll and pension payments indicate that there is something outside of growing employment that is the main source of increased costs.

To illustrate this point, the total payrolls for ASRS and PSPRS have nearly doubled since 2001. Pension costs, on the other hand, are now fourteen times the amount they were in 2001 for ASRS and seventeen times the amount for PSPRS employers.

This trend is also visible in annual contribution rates, which are expressed as a percentage of covered payroll. [Note: For the purpose of this analysis, we will consider ASRS as an example since they represent the largest pool of pension liabilities and constitute the majority of overall public pension contributions statewide; however, a similar analysis can be performed for PSPRS.] Employers participating in ASRS have seen their required contributions to the pension plan—excluding contributions to the health and disability plans—go from just under 2 percent of payroll in 2002 to nearly 11 percent over the last sixteen years, a nearly six-fold increase. [Note that the total required contribution for all ASRS post-employment programs, including the health plan, was 11.5 percent of payroll in 2018]. This means that employers like school districts are having to dedicate a significantly larger portion of their budget to pension costs, diverting resources away from the classroom and making it increasingly difficult to adjust teacher salaries and fund other priorities like technology and student enrichment programs.

Notably, since 2001, there have been no major increases in retirement benefits for ASRS members and retirees that would prompt a commensurate ramp-up in costs. In other words, the overall benefits promised to teachers and state and local public employees has remained relatively static over the past two decades, but costs have gone up significantly.

So, what is driving up the costs of Arizona’s pension plans? A deeper analysis of ASRS and PSPRS contributions reveals that Arizona’s escalating pension debt is the primary culprit. Over the past two decades, ASRS has precipitously accumulated an unfunded liability of $15.6 billion, with most—but not all—of the shortfall stemming from underperforming investments. This growing shortfall requires greater annual payments into the fund, so the system can eventually get back to full funding.

Due to slow adjustments to assumptions and a forecast of lower overall returns when compared to previous decades, investment returns below expectations are likely to apply continued pressure in the form of more pension debt and, consequently, higher annual contributions. Using forecasts of future ASRS and PSPRS contributions under various one-year return scenarios, it is clear that investment underperformance can play a significant role in even more prohibitive costs for all Arizona municipalities.

Just one year of returns at 6.5 percent—about one percentage point below the assumed rate—would require an additional $2.4 million in 2022 contributions for both ASRS and PSPRS combined. Assuming contribution shares stay relatively similar, Maricopa County would be facing an additional $204,370 in 2022 pension expenses under this scenario, with over 87 percent of that ($179,036) coming from added ASRS costs.

Breaking Down the Pension Costs: Funding Benefits Earned Today v. Paying Pension Debt

Splitting annual pension contributions into the amount needed to prefund benefits (also known as the normal cost) and the amount needed to amortize (or pay off) pension debt demonstrates the influence unfunded liabilities are imposing on ASRS and PSPRS contributions. Where no pension debt amortization payments were necessary in 2001, debt payments now make up a third of the annual $1 billion costs for ASRS and two-thirds of the annual $857 million contributed to PSPRS. Splitting contributions by these two categories shows that the main driver of increasing pension costs is, in fact, the significant amount of debt accrued by the system. The following charts illustrate how normal cost and amortization payments have each contributed to growing ASRS and PSPRS costs.

The rising contribution rates reflect that previous economic and demographic assumptions that influence pension math have not held and that the pension promises made to public employees are going to be much more expensive going forward—hence, the rise in the “normal cost” of prefunding future benefits. What’s worse, it took the ASRS board of trustees many years to change outdated actuarial assumptions—primarily the assumed rate of return—creating a large fiscal hole related to current pension liabilities that needs to be filled through additional pension debt payments.

Effectively, employers and members of ASRS are having to pay for both increases at once. This interaction, with pension debt amortization payments driving up pension costs, is ubiquitous among all Arizona governments, from Maricopa County with its 4,000,000 residents to the city of Bisbee with its population of just over 5,000. These amortization payments create significant difficulties for local governments, as they are required to allocate funds that are several multiples of what they used to be just a few years ago. Taxpayers and public employees also bear the brunt of this issue, via increased taxes and pension contributions, all with no improvement (or often a reduction) in services and benefits.

Conclusion

State and local policymakers owe it to their constituents to continue to build upon the reform efforts undertaken with PSPRS in recent years and expand them to ASRS. Through a multi-year effort, public safety employees and employers collaboratively made great strides in addressing the system’s most immediate needs through reform, while not sacrificing the value and attractiveness of the plan. There are still more reforms that could be considered, however, including improvements to funding and amortization policies. Likewise, several issues associated with ASRS continue to put the retirement security of Arizona workers at risk. Stakeholders for both systems need to foster a comprehensive and collaborative effort to manage the growing costs of the retirement plans, preferably one that is based on sound research and common understanding.

Notes on Methodology:

Contribution amounts for Globe are given in ASRS and PSPRS GASB 67 reports going back to 2016. Contributions before 2016 are calculated by applying the average contribution share from 2016-18 to total statewide contributions. Forecasted 2022 contributions use Pension Integrity Project actuarial modeling. Contributions for Globe use the city’s average share of the state’s total contributions from 2016-18 and apply this share to the forecasted total contribution under different return scenarios.

Pension Debt Drives Rising Costs for Arizona Municipal Governments: Maricopa County

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