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Republican plan could save Arizona taxpayers millions of dollars

Republican plan could save Arizona taxpayers millions of dollars

By Craig Harris The Republic | Wed Jan 16, 2013 11:30 PM

A new legislative proposal could save taxpayers hundreds of millions of dollars by creating a less generous, 401(k)-style retirement plan for future Arizona elected officials, including Superior Court judges.

State Rep. Phil Lovas, R-Peoria, and Sen. Steven Yarbrough, R-Chandler, told The Arizona Republic on Wednesday that they would try to push the plan through their respective chambers in the Republican-controlled Legislature during the session that began this week.

Lovas, chairman of the House Insurance and Retirement Committee, said he expects to hold a hearing on the legislation within two weeks.

Both lawmakers said the Elected Officials’ Retirement Plan, the most generous of Arizona’s public pension systems, is financially unsustainable. They also called it a burden to taxpayers, who, for the past decade, have propped up the trust that funds elected officials’ retirement benefits.

Their proposal, called the Arizona Leadership Savings Account, is projected to save taxpayers more than $300 million over 30 years.

“We need to modernize it,” Lovas said. “And make it more in line with the private sector.”

But David Byers, director of the Administrative Office of the Courts, said Superior Court judges are concerned that changing the retirement system could discourage highly qualified lawyers from serving on the bench.

“If there is going to be something different, it has to be a sensible package to attract those lawyers,” Byers said. “We are engaged with the Legislature and will be at the table and talk with them.”

If the sponsors are successful, it would mark a seismic shift in one of Arizona’s public pension systems, turning a defined-benefit plan into a defined-contribution system, which is less costly. It would put the elected officials’ plan on par with most private employees.

Four statewide public pension systems and those in Phoenix and Tucson have defined-benefit plans that, in general, guarantee a retiree set lifetime payments based on a formula that takes into account their years of service and ending salary. All have become costly for taxpayers who, in large part, have covered investment losses incurred during the last decade by the trust funds paying for those pensions. The losses stemmed first from the dot-com bust and a subsequent recession.

A pension trust is considered healthy if it has a funding ratio of 80 percent — meaning its current assets are enough to pay 80 percent of all current and future liabilities on its books. The EORP is funded at 58.4 percent — the worst ratio among the four state systems. In addition, there are now 992 retirees in the system but only 845 active employees paying into it.

For the fiscal year that ended June 30, 2012, public funds paid into the trust for elected officials totaled $21.7 million, while contributions from the politicians themselves totaled just $6.8 million. Ten years ago, the public’s contribution was $3.75 million, while politicians contributed $4.3 million, according to records.

The contributions from taxpayers have increased because they have had to cover the system’s investment losses. In addition, the elected officials’ plan is the most generous public pension plan in the state because it has allowed members to work 20 years, then receive 80 percent of their ending salary. Until recently, retirees also received cost-of-living raises that allowed some to earn more in retirement than when they worked.

The proposed legislation is Yarbrough’s second attempt at public-pension reform. He pushed through changes in 2011 that required elected officials to pay more for their pension benefits and changed cost-of-living payments for retirees. As a result of those 2011 changes, current members of the elected-officials plan will begin paying 13 percent of their salary toward retirement starting July 1, compared with 7 percent in 2011.

Those reforms, and others to police and firefighter pensions, have been challenged in court. Plaintiffs claim state and federal contract law prohibits changes to pensions.

Yarbrough said the legal challenges caused him and Lovas to propose additional changes to the elected-officials plan based on future members who would have no legal standing with a contract claim against the state.

The pension reforms came after The Arizona Republic in November 2010 detailed the decade’s skyrocketing cost of the state’s four pension systems and those in Phoenix and Tucson to taxpayers.

The new proposal would have new elected officials contribute 8 percent of their pay toward their retirement fund. The city or state employer would contribute 5 percent of the official’s pay toward the retirement fund, which would grow or shrink based on market investments.

Employers also would contribute an amount equal to 18.5 percent of each official’s pay to fund pension benefits for those still in the old system. Taxpayers would save money compared with current contributions, which can range as high as 36.44 percent.

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