Initiative to change pension system could bankrupt city, Tucson official warns

Upfront costs generate worry; 410(k) plan only fair, say backers
2013-06-29T00:00:00Z Initiative to change pension system could bankrupt city, Tucson official warnsDarren DaRonco Arizona Daily Star Arizona Daily Star
June 29, 2013 12:00 am  • 

A planned citizens initiative that would force the city to put more money into funding employee pensions could bankrupt the city, officials say.

But backers of the initiative, who are expected to file about 20,000 petition signatures on Tuesday, say they just want to force the city to give employees the benefits they were promised years ago. They need 12,730 valid signatures to qualify for the November ballot.

At issue is whether the city should maintain its current guaranteed-benefit plan for non-public-safety employees, or switch to a 401(k)-type plan, in which how much an employee receives is based on what he or she contributes and how the market performs.

While the city would see substantial savings under the proposal 15 years down the road, Finance Director Kelly Gottschalk said, the increased cost leading up to that 15-year mark is so high it's unlikely the budget could hold out long enough to experience any benefit.

She estimates the change would cost taxpayers $24 million extra in the first year alone and tens of millions more each year for more than a decade, placing the city in line for potential financial ruin.

Proponents counter that all they're looking for is to ensure the city's retirement system won't collapse years from now. They want to do that by forcing the city to fund its obligations sooner, rather than later, and to create a sustainable, pay-as-you-go retirement system for new employees. The city currently has about $340 million in unfunded liabilities in its employee pension fund.

"They basically made promises and didn't put the money away," said Paul Jacob, president of Liberty Initiative Fund, a national group that provided money and assistance for the Tucson petition drive.

"These promises have already been made. An initiative … that stops a city from making promises it can't keep ... is not going to bankrupt any city. It's going to put a city on solid, financial footing. And to suggest otherwise is to kind of suggest you've been making bankrupting promises."

One of the biggest potential hits to the Tucson Supplemental Retirement System is that the initiative mandates all new hires be offered only the 401(k)-style plan. The city currently has about 2,700 active employees to 2,700 retirees.

With no new employees contributing to the current system, taxpayers would have to fill the gap, and closing the system would mean the city must hasten its payments to fully cover the approximately $340 million in unfunded liability.

But other problems could also emerge. Michael Hermanson, the city's pension and benefits manager, said there are currently 200 city employees eligible for retirement. If they retire immediately out of fear their benefits could suffer, it would reduce the ratio of working, contributing employees to retirees to less than 1-to-1.

Gottschalk said the city has made the appropriate changes over the years, such as increasing contributions and lowering benefits, to maintain the current system, so she believes the fears are exaggerated.

"We've put the plan in a good position. It doesn't look like it, but that's because of the drop in the market," she said. "I think the plan in place is fine."

A better solution, she said, is passing an initiative to lock in the city's current funding levels.

Why Tucson?

A few weeks ago, Tucson became the first in a planned nationwide push from the Liberty Initiative Fund, a national organization dedicated to public-policy advocacy, to curb what it considers unsustainable public pension systems.

Jacob said the idea behind the movement is to give citizens a choice in how their governments confront ballooning pension costs.

The Liberty Initiative Fund got involved because it was contacted about five months ago by some Tucson residents concerned about the solvency of a pension system.

"People in Tucson looked at their pension problem and said we can't let this ride," Jacob said.

He said the amount the group spent on the Tucson petition drive will be on the campaign finance disclosure form the group files with the city some time in the future.

Fight looming

City Manager Richard Miranda has already created a Pension Education Committee to answer questions and concerns from city employees and the public.

The city is also preparing the best way to get its message out via public information campaigns and other mediums.

Unions are also preparing to enter the fray. They see the initiative as the first in a series of attacks on public pensions in the state and think this is the time to defeat it before it spreads to police and fire pensions and the Arizona State Retirement System.

That's why a broad coalition, from Tucson's police and fire unions to the local unions representing city employees, and potentially their statewide and national counterparts, is making plans right now on ways to fight the measure.

The details of what any counter effort would entail are still being worked out, Linda Hatfield, president of Communication Workers of America AFL-CIO Local 7000, told the city's pension board Thursday. However, she anticipates any endeavor will likely cost about $500,000.

On StarNet: Go to azstarnet.com/politics to read more about local and state government and political news.

Contact reporter Darren DaRonco at 573-4243 or ddaronco@azstarnet.com

Copyright 2014 Arizona Daily Star. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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