Ted Simons: House speaker Kirk Adams has introduced legislation to reform Arizona's public employee pension system. Among other things, it would raise the retirement age, increase employees' payments and eliminate cost of living increases. Speaker Adams joins us now to talk about his legislation. Good to see you again. Thanks for joining us.
Kirk Adams: Good to be here.
Ted Simons: Why are these reforms needed?
Kirk Adams: Well, we reached a critical stage in our pension system. Really within state government. We have a pension system that is simply unsustainable. It is built upon a foundation that is no longer solid. If we want to protect those that have devoted their careers to state service or service in our school system, or service in our cities, our cops or firefighters, our teachers, we have to make hard choices now to protect their retirement benefits, but second, we also have to protect taxpayers from a huge unfunded liability. As much as $10 billion of deficit according to the Arizona chamber of commerce foundation.
Ted Simons: How did it get there, and did it get there recently quicker because of bad economic conditions, which would suggest when things turn around, maybe the problem won't be as big?
Kirk Adams: Yeah. A fair look at this would say that, yes, the current economic conditions certainly have had an impact on this. But we've also seen over the years a steady increase in a generosity of the politicians designing these programs towards the beneficiaries. For example, I don't think it should be too much of a surprise to too many people that the elected official retirement program is credibly generous. A program designed by politicians for politicians is generous. Those are the types of things over an extended period of time that have been built into the system that simply make it unaffordable for the taxpayers. And so if you want to bring stability where that classroom teacher can count on after a career of service in the classroom that she'll have a stable retirement, we have to make some of the changes, and root out some of the abuses of the system.
Ted Simons: Let's talk about some of these changes. Raising the age of retirement from what to what?
Kirk Adams: Currently you can retire after you accumulate a certain amount of points in the system. Effectively this means that someone who starts in their 20s, early -- mid- to late 20s can retire by age of 55 or 53, for example, I have a staffer on my staff who can retire with a full retirement package, paid for by the taxpayers at age 51. So what we're doing is saying, look. That is bad for the system. We need to make that retirement age at a later date, 62, you could quit work earlier than that, but you can't begin to collect retirement until age 62 and 10 years of service. That puts us in line with social security, for example, and has a dramatic impact on the health of the system and makes it more financially stable.
Ted Simons: Eliminating cost of living adjustments. Now is this eliminating them for a certain amount of time, is this getting rid of them all together? What's going on here?
Kirk Adams: Currently there are four systems, public pension systems in the state of Arizona. One of those systems, ASRS, is the largest and covers most of our employees, including most of our teachers. That does not have an automatic cola adjustment in there. The other systems however, do have automatic adjustments regardless of what the financial condition of the funds are. So, for example, in the elected official retirement system, it's a 5% annual increase. Cola increase. Regardless of the financial condition of the fund. When you know that according to the fund's own numbers they're about 65% funded, that means that assets to liabilities is only at 65%. So what we would do is eliminate cola adjustment for those other three funds and put them in the same spot as ASRS, where most rank and file state employees are. What that means is it's up to the legislature and the governor to through the appropriations process, grant those cola adjustments to the beneficiaries.
Ted Simons: OK. Another change, another idea is to increase employee contributions. And again, what are we talking about now, what are your ideas?
Kirk Adams: Another good question. So in the ASRS system, this system that is the largest and has most of the state employees, the employee pays one for one. They put in a dollar, the employer, i.e. the state, puts in a dollar. In other systems, it's almost a three-to-one match where the employer puts in three and the employee puts in one. So we would move the other three systems over a period of time, to the same system that currently exists within ASRS. We phase in a 50/50 match over a five-year period of time and that will have an impact in two areas. It will make the funds more financially stable, and two, it will lower the burden on the government entities that are paying into these plans, and thereby protecting taxpayer dollars.
Ted Simons: One more change here that I wanted to mention, the deferred retirement option plan. This is a biggie, because this is the lump sum deal where if you stay a certain amount -- mostly a fire and police, is that mostly what this involves?
Kirk Adams: Yes.
Ted Simons: Stay past retirement age, and you're allowed a lump sum payment? How does that work?
Kirk Adams: Right now if you're a firefighter, for example, you can retire after 20 years of service. And you could then enter the drop program. Which means you stay on the job, you work an additional five years at your regular pay, and then at the end of the five years would you retire and collect your normal retirement plus a lump sum payment. And that lump sum payment, the drop payment, averages around $250,000 for that additional five years of service. What we are doing is actually raising the proposal actually raises the retirement age for public safety personnel from 20 years to 25 years, and it eliminates the drop program.
Ted Simons: OK. Highlighting that one, but going back to everything we've talked about, there are other changes, those seem like they’re the biggies.
Kirk Adams: Yes.
Ted Simons: Highlighting that one especially, the critics are saying that you're not going to get good folks, you're not going to -- especially when it comes to the double dippers, we should have mentioned that as well. Real quickly, how is that being addressed?
Kirk Adams: Well, I originally called for the elimination of double dipping, but as we got into the facts of this problem, I decided what we actually had to do was curtail it and set it up in a way that it would no longer do harm for the system. Say, for example, you have a master teacher who retires. Who may want to continue in the classrooms or maybe they're a good science teacher and that school needs them back in the classroom. You don't really want to prohibit that teacher from being able to come back to work and teach those students at the high degree -- high level she teaches them. So what we've done is said, if you're going to return back to work, you have to pay an alternative contribution rate that will be calculated by the actuaries to go towards the deficit in the plan. Therefore, that teacher who is just starting out or who is five or 10 years into her career will not be harmed by that other teacher who returns back to work.
Ted Simons: OK. Now we've got the biggies. As far as the criticism of the plan, the idea especially police and fire, because let's face it, those folks have a pretty dangerous position, and we want to make sure they're taken care of now and later in life, especially when they may not be able to do the things they do as a younger person. Teachers, other public employees will say we got into the public sector not necessarily to make money, but to do what we're doing, so we're get can paid less than the market rate. We hear this every once in a while. Some would disagree but in general that's the argument. Is this fair to folks who’ve said, I work for this amount of years at this amount of pay, knowing I would get these kinds of benefits.
Kirk Adams: First off, the proposal is for prospective employees.
Ted Simons: All of the changes?
Kirk Adams: Most of the changes would be for perspective employees only. Those who are currently in the system are not going to be impacted by these changes. On the most part. Here's what I would say to your question. We have to be able to keep our promises. We have said to them that when you commit a lifetime, a career of service to a city, fire department, or a teacher in a classroom, when you retire you're going to have retirement that you can count on. Right now we cannot say that with a straight face. Because the deficit in this system is so large, because of the abuses, because of the financial conditions, and because of the basic structure of the system that have made them financially unsustainable. So if we care about cops, firefighters, and teachers, we need to give them a program they can count on, and that means eliminate the abuses, put in the reforms so they can count on a stable retirement, and not tell them they're going to get something that taxpayers will not be able to afford. And Ted that's the other point there, are two parties in this. It's not just the public employees. It's the taxpayers who are ultimately on the hook for these pension systems. And they're not going to be able to afford, we are not going to be able to afford these liabilities unless we make major reforms.
Ted Simons: Real quickly, last question, for those who say we're not going to be able to get good folks if these changes go through, I'm already hearing that criticism as well. How do you respond?
Kirk Adams: This pension reform will still provide public employees with a more stable and more generous pension program than the average worker in the private sector will receive through a 401(k) and with no risk. Remember, when you contribute to your 401(k), you still have a risk. When you're in a defined benefit program you're guaranteed an outcome, you're guaranteed a return, nobody in the private sector can say that.
Ted Simons: Speaker, thanks for being here we appreciate it.
Kirk Adams: Thank you.