Phoenix Vote Pits Pension Reform Against Public Safety

Proposition 487 tackles the troubled $2.2 billion city pension plan but has sparked strong opposition.

Office Delinquincies In Phoenix

Buildings dot the skyline of Phoenix, Arizona, U.S., on Tuesday, Aug. 18, 2009. The housing slump has spread to commercial real estate in the Phoenix area, where delinquencies on loans backed by office, industrial, retail and apartment properties have risen seven-fold since March, according to Bloomberg data. The real estate bust will stifle economic growth in Arizona and signal what may be a tepid U.S. economic rebound. Photographer: Joshua Lott/Bloomberg

Joshua Lott/Bloomberg

On Tuesday voters in Phoenix will take to the polls to decide the future of the city pension system. Proposition 487 would reform the $2.2 billion City of Phoenix Employees’ Retirement System (COPERS) by establishing a defined contribution fund for new public employees and clamping down on the practice of so-called pension spiking, in which employees convert benefits, such as unused vacation and sick time, to boost payouts.

The ballot measure, however, has sparked strong opposition, with detractors alleging that it will put public safety in Phoenix in jeopardy and that the amount saved by the bill is far less than its proponents allege.

Proposition 487 has also attracted the attention, and monetary support, of key pension reform interest groups, including Laura and John Arnold of Houston and the Woodbridge, Virginia–based not-for-profit Liberty Initiative Fund.

In this, the second of a three- part series on pensions and the 2014 election, Institutional Investor examines the pension controversy and referendum in Phoenix.

The Arizona capital has made several attempts in recent years to reduce the cost of its pension plan, which has a funding ratio of only 56 percent and a $1.5 billion unfunded liability. In March 2013 the city voted for Propositions 201 and 202, both resulting from recommendations by a city council pension reform task force. The reforms continued the defined benefit fund but split retirement contributions evenly between the city and employees and hiked the minimum retirement age some 3.5 years on average. In addition,the council passed a measure that tried to tackle the spiking problem.

Some felt that Proposition 201, Proposition 202 and the antispiking measure did not go far enough. In particular councilman Sal DiCiccio has been outspoken in his belief that more change is needed. “The public has yet to see the true financial crisis from these pensions. More cuts in services and higher taxes. The problem right now is that the public does not see the direct impact to themselves,” DiCiccio said in a recent statement. “Fixing it is simple: It’s math. One way is to require government and beneficiaries to pay down the unfunded amount without sticking it to the taxpayer. It’s not complicated. That money is owed, so those that benefit and those that administer it should pay it—not the taxpayer.”

Enter Proposition 487. In 2014 a group called Citizens for Phoenix Pension Reform started collecting signatures to put Proposition 487 on the ballot. The initiative would end pension spiking and transition new employees into a 401(k)-style retirement fund. The group is funded by the Action Now Initiative, the Liberty Initiative Fund, the Arizona Free Enterprise Club and the Jobs and Progress Fund. Based in West Chester, Ohio, the Jobs and Progress Fund previously backed a failed Cincinnati pension reform initiative.

The Action Now Initiative is a 501(c)(4) organization established with funding from the Arnolds. John Arnold made his fortune first as an energy trader for Enron, then as a hedge fund manager. Since 2010 the couple has devoted their efforts to philanthropy, with pension reform one of their three major public policy areas. Because of their wealth, activism and John Arnold’s history, they’ve become a target for pension reform opponents.

The in-state backer of Citizens for Phoenix Pension Reform is the Arizona Free Enterprise Club, a 501(c)(4) established in 2005 as “a free market, pro-growth advocacy group dedicated to Arizona issues and politics.” President and executive director Scot Mussi is also chairman of Citizens for Phoenix Pension Reform.

By mid-March, the committee had collected more than 54,000 signatures, enough to place Proposition 487 on the November 4 ballot. “The outpouring of support from Phoenix residents wanting real pension reform has been tremendous,” Mussi said in a press release from the group announcing the signatures. “The power brokers at City Hall have refused to fix our broken pension system, instead passing sham reforms thinking they can hide the problem from taxpayers.” At a June 2 meeting, the city council voted to continue exploring its pension reform options.

At the meeting, the council voted on language used to describe the proposition on the ballot. The minutes from that meeting show how contentious pensions had become. At issue was whether to include fire and police pensioners in the ballot’s 50-word summary. Eventually, the council voted seven to four against using language that would have made clear that, as the proposed summary stated, “the initiative would no longer allow the city to put money into [Arizona’s] Public Safety Personnel Retirement System for firefighters and police officers, and did not affect other employees in the police and fire departments.” Those who voted against the language, including DiCiccio and Vice Mayor Jim Waring, felt strongly that safety workers were not affected by the initiative.

Today others continue to insist that safety workers would be affected by the changes. As in San Jose, California, which Institutional Investor focused on in Part One of this series, such groups are pointing to a potential public safety crisis if benefits for these workers are cut. In an open letter to the police published on his Facebook page, DiCiccio argued that Phoenix Mayor Greg Stanton, with the support of the firefighters union, had added fire and police to the ballot “so they could get the sympathy of the public for our dedicated police officers” in order to “wage a campaign of disinformation” and “move the electorate” against the bill. In fact, as DiCiccio points out, the “initiative clearly states police and fire are excluded” from the reforms.

DiCiccio has a point: The preamble to the proposal states that “this Act is not intended to affect individuals who are members of, or are eligible to join, any other public retirement system in the State of Arizona, such as the Public Safety Employees’ Retirement System.” But a June 2 report from Phoenix deputy city manager Rick Naimark raised questions about the ability of Phoenix to pay into the defined benefit fund if the bill passed. According to Naimark’s analysis, “The initiative specifically states contributions can only be made to COPERS or the defined-contribution plan.” And despite the preamble, “the text of the charter amendment does not exclude police and fire employees.”

Also up for debate is how much, if anything, Phoenix would save under Proposition 487. The issue here is that, whereas over the long run the city would save money by switching to a defined contribution plan, the up-front costs will actually rise because there is less new money going into the defined benefit fund, the already-promised obligations still have to be met, and the city still needs to pay down $1.09 billion in unfunded pension obligations. A report from financial analysis firm Cheiron puts the up-front costs of the switch at $358 million over the first 20 years. Depending on how the reforms are implemented, however, they could save the city as much as $275 million over those 20 years.

Even if the proposition passes — public safety concerns do seem to have cut into initial support for the measure — Phoenix officials are bracing for a challenge through the courts. Phoenix’s pension wars are a long way from over.