Two years after Phoenix voters approved an overhaul of the city’s pension system for thousands of civil workers, the city could ask voters to go back and clean up some weak spots and unintended consequences.
City Council members will decide Wednesday whether to refer another pension initiative to voters in August — the third pension ballot question put to city residents in as many years.
The city estimates the measure would save $38.8 million over 20 years by changing some of its rules for new hires coming into the pension system as non-public-safety workers. Existing retirees or employees in the system now would not see an impact to their pension benefits.
Proposed changes aim to cap the size of future high earners’ retirements and combat the practice of pension spiking, or the artificial inflation of an employee’s income toward the end of a career to boost retirement benefits.
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Pension spiking has been widespread at City Hall and became a target after former City Manager David Cavazos cashed in sick and vacation leave and other perks to boost his annual retirement check by about $88,000, to $234,500.
Mayor Greg Stanton said if the changes are approved, “you will never see a David Cavazos-like pension ever again” with new employees coming into the system.
“We’ve heard that message loud and clear from the people of Phoenix and we’ve taken responsible steps to address it,” Stanton said. “The executives of the city will only have pensions up to a certain dollar amount.”
The proposed ballot initiative would cap the portion of future employees’ compensation used to determine pensions at $125,000, and require the city to contribute to a 401(k)-style retirement plan for any portion of salary above that amount. That move and changes to the retirement formula would reduce costs to the system, officials said.
Voters would need to decide the proposal’s fate because it includes changes to the city charter, Phoenix’s establishing document.
Members of the Civilian Retirement Security Ad Hoc Committee, a group of business and political leaders appointed by Stanton, suggested potential changes. The mayor created the committee last year after voters rejected a ballot measure pushed by conservative advocates to dismantle the pension system.
Although the city estimates the new initiative cuts costs overall, it includes some changes that critics fear could increase pension expenses.
The committee’s recommended plan would reduce and cap the amount of money that new employees must contribute to their pensions at 11 percent of pay. City workers will soon pay more than 15.5 percent of their paychecks into the pension system, on top of the 6.2 percent they must put into Social Security — and their pension payment could climb to 17 percent in the next several years.
Officials said the high contribution rate has caused an exodus of new employees and made recruiting high-quality workers a struggle.
Those soaring contribution rates are a consequence of the previous pension initiative that voters approved in 2013, at the urging of Stanton and a majority of the council. The changes required that municipal workers hired after July 1, 2013, split pension-fund contributions 50-50 with the city. Contribution amounts fluctuate based on the system’s investment performance and financial liabilities.
Phoenix leaders said they didn’t anticipate that new-employee contributions would skyrocket, but changes to the pension system’s investment projections caused a jump. Employees hired before the 2013 changes are still only required to contribute 5 percent of their paychecks, as Arizona judges have blocked changes to the pensions of existing government workers.
Scot Mussi, director of the Arizona Free Enterprise Club, an advocacy group that spearheaded the unsuccessful ballot measure to close the pension system, said he’s concerned that the new proposal will end up bleeding taxpayers because the city will be paying more for new workers.
“They’re basically saying they’re going to cap employee contributions and save money at the same time,” he said. “If you believe that, then I’ve got some magic beans to sell you. Somebody has to pay the unfunded liability, and taxpayers at this point have done enough.”
However, some union leaders, who had bristled that Stanton didn’t include them on the ad hoc committee, are greeting the proposal with optimism. They said it will relieve some of the unfair burden put on new workers.
“They’re getting their first paycheck and they can’t afford to work here,” said Luis Schmidt, president of the American Federation of State, County and Municipal Employees Local 2384. “It’s a good solution for now.”
The largest source of Phoenix’s increasing retirement costs has been its contributions to the state pension system for police officers and firefighters, but the city doesn’t control that system and has called for state lawmakers to make changes.