☆ Can San Jose de-risk its pension problem through attrition? (2/4)
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Len Gilroy says Reason Foundation’s choice plan helped about 200 public safety employers in Arizona nearly top off their pension funding. Pension reform happens “slowly, through attrition” as staff turns over and, thanks to spending habits, bigger cities make even slower progress. But encouraged by a prudent plan, Arizona employers threw in billions to help get out of debt. Part 2 of an Opp Now exclusive Q&A.
Opportunity Now: So even with a choice plan, where you offer employees both "chocolate and vanilla," defined benefit or defined contribution, won’t there still be what Mark Moses calls a long unwinding to fiscal sustainability? Or can the choice plan speed up pension reform?
Len Gilroy: Pensions are tricky. The solution actually comes slowly, through attrition. With every single new hire, you're de-risking the plan.
ON: How long does that take?
LG: Maybe 10 to 15 years. If you have 5–10% of your workforce turning over every year, it doesn’t take that long to have a complete shift. In pension nerd world, we would call it a “new tier” of pension benefit.
Typically, the first tier of benefit designed back in the 1940s, 1950s, 1960s, was designed in a way that kind of worked for the time. But then things changed in the economy, and exposed that there was all this risk sitting there that nobody really expected.
ON: You’ve helped cities implement the choice plan?
LG: Well, cities are hard to tease out because a lot of them participate in large, multi-employer pension plans that are administered by the state. Not every city is like San Jose, where they control their own destiny with their own pension systems.
But yes, one of the teams I manage at Reason Foundation is called the Pension Integrity Project; and for over a decade now, we have served as pro bono technical consultants to help policymakers and stakeholders troubleshoot and wrangle their pension underfunding situations to get them under control.
ON: Have you ever been able to get immediate savings from the choice option?
LG: We negotiated a choice plan with the public safety associations in Arizona. I think the associations actually brought up the idea of choice first, because police and fire chiefs are often hired from out of state; they come in with a pension, fully vested in some other place. These employees don’t really want to jump into a brand-new pension where they have to stay many years to get vested, before they’re eligible to get some of the employer dollars being saved.
So, instead, the idea was to create a new tier of sustainable pension benefit, but also offer them the choice of an alternative defined contribution plan where they get X percent set aside for every year they work.
The pension system had been crashing. It was sitting around 30–40% funded at the time. Today it’s up to about 70% funded.
ON: How did that happen?
LG: Once a sustainable design was put into place and it was working, it was kind of demonstrating that it’s going to work, the employers—cities, counties, statewide—put in over $5 billion dollars of supplemental, extra, “above what was needed” pension contributions to just pay down pension debt aggressively and avoid billions in compound interest over time.
ON: What cities does that system include?
LG: There’s about 200-something individual police and fire employers—like Phoenix Police, Phoenix Fire, Scottsdale Police, Scottsdale Fire—each are employer units in this plan. There’s about 200 of them. For the most part, I’d say about 180 of them are really well-funded, upwards of 80% funded.
They’ve gotten themselves pushed up to that point, while lowering their contribution rates and doing a sustainable job. The big ones, like Phoenix, Mesa, Scottsdale, and Tucson are still working to get themselves up to that funded status. Their budgets are bigger with more demands. They’re much more like San Jose.
ON: Why is it harder for big cities to fix their pensions?
LG: They’ve got a way bigger budget with a lot of priorities and a lot of spending. If you think of the budget as a cup of soda, all these straws are going into that from all these various departments and interests and constituencies to try to drink from that same budget, so it becomes a harder challenge
Those cities are making progress, but not as fast. But you’ve got dozens of cities and counties that have improved their fiscal picture immensely as a result of that kind of prudent stewardship.
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