Arizona public pensions underreport funding shortfalls

PHOENIX—Arizona’s three pension funds for government employees have predicted they will pay more in benefits to retirees over the next three decades than they will collect from worker paychecks and investments. But a new report from the Goldwater Institute says the size of that funding shortfall could be five times larger than the pension funds have previously reported.

The State of Arizona sponsors three pension funds that provide retirement benefits for most state employees as well as school teachers, police officers and firefighters. The state agencies that manage those funds have estimated they can pay only 77 percent of future retiree benefits for the next 30 years. The funds say they could face a combined $10 billion shortfall.

However, in “$50 Billion Tidal Wave: How Unfunded Pensions Could Overwhelm Arizona Taxpayers,” Andrew R. Biggs, a resident scholar at the American Enterprise Institute, explains the gap in funding could be far more serious. The three pension funds base their estimates on the assumption of constant annual growth in their investments. These predictions ignore the up-and-down fluctuations of stock markets.

Calculations that include market risk point to a combined potential shortfall of $50.74 billion over 30 years.

The Arizona Constitution and state law forbid any reduction in retirement benefits for employees currently enrolled in the pension plans, no matter how poorly those plans perform. The Legislature likely would be required to provide funding from other tax sources to cover any losses, which would cost $8,300 for every Arizonan.

“Taxpayers have an enormous stake in seeing the true picture of these pension funds and their future stability,” said Dr. Byron Schlomach, an economist with the Goldwater Institute. “Ultimately, taxpayers will be forced to make up the difference if the pensions can’t meet their obligations.”

Mr. Biggs suggests several steps that should be taken to better prepare for potential shortfalls in the pension funds:
• Require government pension funds to base their future projections on calculations that include the risks of investing in financial markets.
• Adjust what government employees contribute from their paychecks into the pension funds to reflect market-risk calculations. Employees would pay a more realistic share of the costs to provide their benefits when they retire.
• Change the pension plans for future state employees from a defined-benefits model to defined contributions. This approach is a standard practice in private businesses and is more likely to prevent large unfunded pension liabilities.

Read “$50 Billion Tidal Wave: How Unfunded Pensions Could Overwhelm Arizona Taxpayers” online or call (602) 462-5000 to have a copy mailed to you.

The Goldwater Institute is an independent government watchdog supported by people who are committed to expanding free enterprise and liberty.