Modernizing Arizona’s Pension Policy

Submitted to the Arizona Senate Finance Committee on January 29, 2020.

Chairman Mesnard and members of the Committee, thank you for the opportunity to submit testimony on Senate Bill 1280. 

My name is Leonard Gilroy, and I am the Senior Managing Director of the Pension Integrity Project at Reason Foundation, a 501(c)3 nonprofit, think tank. The Pension Integrity Project works with policymakers, labor associations, and other interested stakeholders around the country by offering data-driven analysis and policy concepts designed to improve the overall solvency of public sector retirement systems.

SB 1280 would clearly define unfunded public pension liabilities held by Arizona’s governments in ASRS, PSPRS, CORP, EORP and other plans as being long-term obligations of those employers, and thus treated similar to other types of formalized, traditional types of debt under the law, specifically in terms of how local governments are allowed to address it with debt defeasement strategies. This is both consistent with national government accounting standards and reflects the fiscal reality of pension funding.

One way to understand unfunded liabilities is as high-interest, intra-government debt. It is money owed to a pension system from government employers; both are public chartered entities. While they may not resemble the traditional kinds of debt owed by the government to outside entities (like traditional bonded debt), unfunded pension liabilities are ironclad benefit promises to retirees protected by our federal and state constitutions—and are thus guaranteed to be paid regardless of impacts on other public budgeting priorities—so for all intents and purposes, they effectively function as a formal, long-term obligation of the government. 

And like any form of debt, the faster a government is able to pay down and pay off unfunded liabilities, the better. Pension debt throughout Arizona is accruing interest at between 7.0-7.5 percent annually, depending on the plan. Allowing those local government units in the enviable position of being able to make contributions over and above their typical actuarially determined annual payments will only help them get back into a stronger, fully funded position in a more timely manner, which will ultimately help the systems weather future market downturns and help the employers return to pension contribution rate stability.

Overall, SB 1280 is also consistent with Arizona’s pattern of being a bipartisan trendsetter in modernizing pension policy and tackling underfunding through substantive reform designed to strengthen the ability of all types of public sector retirement systems to deliver promised retirement benefits over the long term.

Thank you again for the opportunity to comment on this important work. Please do not hesitate to reach out if we can provide additional information or insights on this subject.