Chip Howard for AZ Governor Campaign Committee

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Unfunded pension liabilities are about to decimate our economy.  Here is the problem, how it is impacting Arizona and how I will solve the problem.

With no doubt, my proudest moment as a citizen of Arizona was when television news showed the immediate aftermath of the tragic bombing in Oklahoma City.  Some of the professionals frantically trying to rescue survivors in the rubble were wearing Phoenix Fire Department shirts.  One need only visit a few foreign countries to appreciate the superior results delivered to us by our public employees, especially our public safety and emergency services professionals.

For 30 years, I was an employee and I expected to be fairly compensated for the service I provided to my employer.  Likewise, public employees should be paid fair compensation for their work along with a thankful handshake for a job well done.  I would not want to short-change a public employee any more that I wanted that done to me.

Unfunded pension liabilities are about to decimate our economy.  Here is the problem, how it is impacting Arizona and how I will solve the problem.

With no doubt, my proudest moment as a citizen of Arizona was when television news showed the immediate aftermath of the tragic bombing in Oklahoma City.  Some of the professionals frantically trying to rescue survivors in the rubble were wearing Phoenix Fire Department shirts.  One need only visit a few foreign countries to appreciate the superior results delivered to us by our public employees, especially our public safety and emergency services professionals.

For 30 years, I was an employee and I expected to be fairly compensated for the service I provided to my employer.  Likewise, public employees should be paid fair compensation for their work along with a thankful handshake for a job well done.  I would not want to short-change a public employee any more that I wanted that done to me.

THE PROBLEM

Even FDR, who was a socialist, was not in favor of collective bargaining in the public sector.  Why, because the relationship described above doesn’t transfer well to public employment.  There, free market forces do not apply because the government provides its product as the sole source in a non-competitive market.  Also, management has no incentive to hold compensation to market levels because the money supply is endless when they can raise taxes or take on more debt.

Even FDR, who was a socialist, was not in favor of collective bargaining in the public sector.  Why, because the relationship described above doesn’t transfer well to public employment.  There, free market forces do not apply because the government provides its product as the sole source in a non-competitive market.  Also, management has no incentive to hold compensation to market levels because the money supply is endless when they can raise taxes or take on more debt.

In the private sector, employers and employees understand that there is a relationship between the two in which employee compensation is a function of market forces.  A mutually-beneficial relationship is one in which the employee is fairly compensated relative to his/her industry peers and the employer gets fair value of service for the cost of the employee.  Of course, it is human nature that the employee would like to receive more and the employer would like to give less.  However, those situations come to an equilibrium or the relationship doesn’t last long.   If compensation is too low, the employee leaves for better opportunities.  If the compensation is too high, the employer goes broke and everyone looses.

In the private sector, employers and employees understand that there is a relationship between the two in which employee compensation is a function of market forces.  A mutually-beneficial relationship is one in which the employee is fairly compensated relative to his/her industry peers and the employer gets fair value of service for the cost of the employee.  Of course, it is human nature that the employee would like to receive more and the employer would like to give less.  However, those situations come to an equilibrium or the relationship doesn’t last long.   If compensation is too low, the employee leaves for better opportunities.  If the compensation is too high, the employer goes broke and everyone looses.

Politicians long ago realized that if you offer public-sector workers bigger retirement benefits, they vote for you today and the bill does not arrive for years.” The Economist

Politicians long ago realized that if you offer public-sector workers bigger retirement benefits, they vote for you today and the bill does not arrive for years.” The Economist

Nationwide, nearly every public entity from the federal government to the smallest city has a catastrophic problem on the horizon.  Some, like Detroit and Stockton have already gone over the cliff.  That problem is unfunded public employee pensions.  Everyone with eyes and ears knows it, some responsible leaders are trying to address it but most leaders don’t have the courage to fix it.  Rather, they kick the problem to a day down the road so that our children can pay for our mess.  However, the problem is too big to kick any further.  Most Arizona cities are facing an immediate pension-cost crisis and some are already in dire condition.

Pension reform is coming.  Whether we want it or not, it is coming because we have pushed the reckless and unsustainable unfunded liabilities to near the point of implosion.  First, let’s explore the problem and then my solution.

Nationwide, nearly every public entity from the federal government to the smallest city has a catastrophic problem on the horizon.  Some, like Detroit and Stockton have already gone over the cliff.  That problem is unfunded public employee pensions.  Everyone with eyes and ears knows it, some responsible leaders are trying to address it but most leaders don’t have the courage to fix it.  Rather, they kick the problem to a day down the road so that our children can pay for our mess.  However, the problem is too big to kick any further.  Most Arizona cities are facing an immediate pension-cost crisis and some are already in dire condition.

Pension reform is coming.  Whether we want it or not, it is coming because we have pushed the reckless and unsustainable unfunded liabilities to near the point of implosion.  First, let’s explore the problem and then my solution.

HOW IT’S IMPACTING ARIZONA

The City of Phoenix provides an excellent illustration of the pension problem.  A few years ago, Phoenix City Manager David Cavazos retired after 27 years as an employee, the last 4 years as manager.  His years of employment enabled him to retire at age 53 and receive $235,863 in pension payments every year for the rest of his life.  Now, let’s stop and think for a moment, who in the private sector these days can retire at age 53 let alone be paid for the rest of their life.  Being a relatively young man in the prime of life, David has taken a City Manager job in California where he will be compensated over $500,000.  Although he played by the rules, the public has vilified him.  But, given a choice between doing a job and receiving a salary or doing a similar job and receiving two salaries, who among us would not do the same thing?  If there is blame to be assigned, it is the generations of cowardly self-serving city guardians that created the rules.  We can lament that it isn’t fair, and that we lose the service of an employee like David when he is just becoming most valuable.  Stop and think, the ludicrous system that we have in place actually ensures that a guy like David will leave.  We have given him no other financially-sound option.

To make matters worse, David’s predecessor, Frank Fairbanks, retired in 2009.  Due to the indefensible (and illegal) practice of pension spiking which the City allowed, Fairbanks’ pension payment is actually larger than his final salary.  So now that we have hired a new city manager, we have one but are paying for three.  Neither retiree is an old man so it is conceivable given the recent trajectory that we may in some years be paying six to eight City Managers in order to get the work of one.

The City of Phoenix provides an excellent illustration of the pension problem.  A few years ago, Phoenix City Manager David Cavazos retired after 27 years as an employee, the last 4 years as manager.  His years of employment enabled him to retire at age 53 and receive $235,863 in pension payments every year for the rest of his life.  Now, let’s stop and think for a moment, who in the private sector these days can retire at age 53 let alone be paid for the rest of their life.  Being a relatively young man in the prime of life, David has taken a City Manager job in California where he will be compensated over $500,000.  Although he played by the rules, the public has vilified him.  But, given a choice between doing a job and receiving a salary or doing a similar job and receiving two salaries, who among us would not do the same thing?  If there is blame to be assigned, it is the generations of cowardly self-serving city guardians that created the rules.  We can lament that it isn’t fair, and that we lose the service of an employee like David when he is just becoming most valuable.  Stop and think, the ludicrous system that we have in place actually ensures that a guy like David will leave.  We have given him no other financially-sound option.

To make matters worse, David’s predecessor, Frank Fairbanks, retired in 2009.  Due to the indefensible (and illegal) practice of pension spiking which the City allowed, Fairbanks’ pension payment is actually larger than his final salary.  So now that we have hired a new city manager, we have one but are paying for three.  Neither retiree is an old man so it is conceivable given the recent trajectory that we may in some years be paying six to eight City Managers in order to get the work of one.

CONSIDER THESE STATISTICS
$294 MILLION
In 2017, Phoenix Taxpayers Are Spending $294 Million On Pensions
"

%

"
$5 Billion
Scarier Yet, Phoenix Owes $5 Billion To The Public-Safety Pension System

Because The City Went Into Debt Instead Of Paying Its Bills

"
So, today, a large portion of our expense goes to paying the unfunded debt from the past.
CONSIDER THESE STATISTICS
$294 MILLION
In 2017, Phoenix Taxpayers Are Spending $294 Million On Pensions
"

%

"
$5 Billion
Scarier Yet, Phoenix Owes $5 Billion To The Public-Safety Pension System

Because The City Went Into Debt Instead Of Paying Its Bills

"
So, today, a large portion of our expense goes to paying the unfunded debt from the past.

The City of Phoenix provides an excellent illustration of the pension problem.  A few years ago, Phoenix City Manager David Cavazos retired after 27 years as an employee, the last 4 years as manager.  His years of employment enabled him to retire at age 53 and receive $235,863 in pension payments every year for the rest of his life.  Now, let’s stop and think for a moment, who in the private sector these days can retire at age 53 let alone be paid for the rest of their life.  Being a relatively young man in the prime of life, David has taken a City Manager job in California where he will be compensated over $500,000.  Although he played by the rules, the public has vilified him.  But, given a choice between doing a job and receiving a salary or doing a similar job and receiving two salaries, who among us would not do the same thing?  If there is blame to be assigned, it is the generations of cowardly self-serving city guardians that created the rules.  We can lament that it isn’t fair, and that we lose the service of an employee like David when he is just becoming most valuable.  Stop and think, the ludicrous system that we have in place actually ensures that a guy like David will leave.  We have given him no other financially-sound option.

To make matters worse, David’s predecessor, Frank Fairbanks, retired in 2009.  Due to the indefensible (and illegal) practice of pension spiking which the City allowed, Fairbanks’ pension payment is actually larger than his final salary.  So now that we have hired a new city manager, we have one but are paying for three.  Neither retiree is an old man so it is conceivable given the recent trajectory that we may in some years be paying six to eight City Managers in order to get the work of one.

The City of Phoenix provides an excellent illustration of the pension problem.  A few years ago, Phoenix City Manager David Cavazos retired after 27 years as an employee, the last 4 years as manager.  His years of employment enabled him to retire at age 53 and receive $235,863 in pension payments every year for the rest of his life.  Now, let’s stop and think for a moment, who in the private sector these days can retire at age 53 let alone be paid for the rest of their life.  Being a relatively young man in the prime of life, David has taken a City Manager job in California where he will be compensated over $500,000.  Although he played by the rules, the public has vilified him.  But, given a choice between doing a job and receiving a salary or doing a similar job and receiving two salaries, who among us would not do the same thing?  If there is blame to be assigned, it is the generations of cowardly self-serving city guardians that created the rules.  We can lament that it isn’t fair, and that we lose the service of an employee like David when he is just becoming most valuable.  Stop and think, the ludicrous system that we have in place actually ensures that a guy like David will leave.  We have given him no other financially-sound option.

To make matters worse, David’s predecessor, Frank Fairbanks, retired in 2009.  Due to the indefensible (and illegal) practice of pension spiking which the City allowed, Fairbanks’ pension payment is actually larger than his final salary.  So now that we have hired a new city manager, we have one but are paying for three.  Neither retiree is an old man so it is conceivable given the recent trajectory that we may in some years be paying six to eight City Managers in order to get the work of one.

On paper, the State’s retirement system is in bad shape but not as bad.  The bigger problems are at the cities where past and current officials have given away the farm.  Why should the State be concerned about this when it is the cities’ business?  For two reasons.  One, most city’s pensions are operated through the Arizona State Retirement System so the statewide citizens have a financial stake.  Second, the wellbeing of our cities is critical to the wellbeing of the state economy.  The State cannot thrive if our cities are broke.  Thus, because of the cities’ unwillingness to exercise financial responsibility, the State will have to make their financial responsibility mandatory via legislation which will likely require an amendment to the State Constitution.
There have been some efforts in the last couple of years to put some pressure on the pension brake pedal.  In 2016, Arizona voters passed a proposition that gave some future relief to one of the State’s pension programs.  To their credit, a few legislators have taken up the cause and have made some progress.  However, the courts have ruled that the State can’t modify the pension programs of existing employees, as those programs are a contract.  We will pay dearly for past cowardice for a long time as any pension reform will not lower (or even stabilize) costs for many years.
As a baby step a few years ago, the Legislature passed a bill that eliminates pensions for future elected officials (people who can’t fight back because they don’t yet exist).  Their effort would have been a lot more impressive if they had applied the law to themselves and not just their successors.  That goes to show that few party politicians have the courage to fix the problems that they are paid to fix.  If the State fails to do its job, the responsibility for our salvation will fall to the last line of defense which is a statewide citizens initiative.  One way or another, pension reform will happen as we are already hitting the wall.

On paper, the State’s retirement system is in bad shape but not as bad.  The bigger problems are at the cities where past and current officials have given away the farm.  Why should the State be concerned about this when it is the cities’ business?  For two reasons.  One, most city’s pensions are operated through the Arizona State Retirement System so the statewide citizens have a financial stake.  Second, the wellbeing of our cities is critical to the wellbeing of the state economy.  The State cannot thrive if our cities are broke.  Thus, because of the cities’ unwillingness to exercise financial responsibility, the State will have to make their financial responsibility mandatory via legislation which will likely require an amendment to the State Constitution.

There have been some efforts in the last couple of years to put some pressure on the pension brake pedal.  In 2016, Arizona voters passed a proposition that gave some future relief to one of the State’s pension programs.  To their credit, a few legislators have taken up the cause and have made some progress.  However, the courts have ruled that the State can’t modify the pension programs of existing employees, as those programs are a contract.  We will pay dearly for past cowardice for a long time as any pension reform will not lower (or even stabilize) costs for many years.

As a baby step a few years ago, the Legislature passed a bill that eliminates pensions for future elected officials (people who can’t fight back because they don’t yet exist).  Their effort would have been a lot more impressive if they had applied the law to themselves and not just their successors.  That goes to show that few party politicians have the courage to fix the problems that they are paid to fix.  If the State fails to do its job, the responsibility for our salvation will fall to the last line of defense which is a statewide citizens initiative.  One way or another, pension reform will happen as we are already hitting the wall.

A STRONG SOLUTION

Society has deemed that a reasonable age to exit the workforce and enjoy the post-career fruits of one’s labor is 65.  That is approximately the current target of Social Security, although that age will certainly rise in the near future.  Why will it rise?  Because Social Security can not afford to pay benefits to people for so many non-working years.  Now, take the case of a public employee that starts work at age 20 and retires at 50.  Assuming that the person lives to 82, they will be paid longer while not working than while working.  From the employer’s perspective, they would likely pay far more to people not working than working as late-career wages are much higher than entry wages.  Whether or not you consider the current system to be fair is a matter of perspective, but regardless, it can not continue as we are broke.  Employees simply must not begin collecting pension benefits at such young ages.  The only way that it has worked until now is by passing the burden of yesterday’s extravagance on to the future.  But, that future has now arrived.

My solution is mere financial responsibility.  This is not a complicated matter.  The solution is obvious to anyone that devotes a little thought to the issue.  However, nobody affiliated with a political party will have the courage to propose it.

A STRONG SOLUTION

Society has deemed that a reasonable age to exit the workforce and enjoy the post-career fruits of one’s labor is 65.  That is approximately the current target of Social Security, although that age will certainly rise in the near future.  Why will it rise?  Because Social Security can not afford to pay benefits to people for so many non-working years.  Now, take the case of a public employee that starts work at age 20 and retires at 50.  Assuming that the person lives to 82, they will be paid longer while not working than while working.  From the employer’s perspective, they would likely pay far more to people not working than working as late-career wages are much higher than entry wages.  Whether or not you consider the current system to be fair is a matter of perspective, but regardless, it can not continue as we are broke.  Employees simply must not begin collecting pension benefits at such young ages.  The only way that it has worked until now is by passing the burden of yesterday’s extravagance on to the future.  But, that future has now arrived.

My solution is mere financial responsibility.  This is not a complicated matter.  The solution is obvious to anyone that devotes a little thought to the issue.  However, nobody affiliated with a political party will have the courage to propose it.

THE ARIZONA PENSION REFORM PLAN

IRA FOR NEW HIRES

New hires will not be given a defined-benefit pension program. Rather, the state will create an IRA-type program for each employee which the employee will contribute to and direct his/her self.  Those employees will be paid a higher wage which they may save in their retirement program.  The cost of that higher wage will be offset by the savings from not funding a defined pension plan.

PENSION PAYMENTS BEGIN AT AGE 65

If we choose to retain a defined pension plan for new hires, the employee will receive his/her first pension check at age 65.  So, if they want to retire at age 40 and work at another profession or just lay on the beach, they will be free to do so within the structure of their program.  But, like the rest of the population, their first check won’t arrive until their 65th birthday.  Likely, most employees will choose to work until 65, thus keeping them in the workforce and reducing the number of replacement hires.

VOLUNTARY PAY INCREASE FOR DEFERRING RETIREMENT

Current employees will be given the voluntary option of a substantial pay increase if they agree to defer their first pension check until 65.  Thus, we will retain those persons service rather than paying a new employee plus paying a pension.  As courts have ruled, such a modification of a current employee’s contract would be voluntary.

PENSION PROGRAM FULLY FUNDED

Each city utilizing a state-sponsored pension program (including the State) will be required to fully-fund each of its current employees’ pensions every year.  If the Cities (and State) are forced to pay today’s bills today instead of spending money that they don’t have, they will be forced to live within their means, just like we citizens have to.  All city politicians will viciously fight against this action as (for the first time) they will have to manage with financial responsibility.   This will require an amendment to the State constitution in order to force permanent discipline upon politicians who have no financial discipline but prefer to be everyone’s buddy by giving away what we don’t have.

ERASE FUND DEBT

Every city (and the State) that has utilized a state-sponsored pension program and is in debt to the program will pay on their account such that their debt will be erased within ten years.  The repayment will be linear and not back-end loaded.

REAL, NOT PHONY ACCOUNTING

Funding of the pension programs will not be avoided by creative accounting wizardry.  Funding will be based on the current fund status (and be fully funded each year) rather than the false promise of a future return on investment that is unrealistically optimistic (as we currently do).

THE ARIZONA PENSION REFORM PLAN

IRA FOR NEW HIRES

New hires will not be given a defined-benefit pension program. Rather, the state will create an IRA-type program for each employee which the employee will contribute to and direct his/her self.  Those employees will be paid a higher wage which they may save in their retirement program.  The cost of that higher wage will be offset by the savings from not funding a defined pension plan.

PENSION PAYMENTS BEGIN AT AGE 65

If we choose to retain a defined pension plan for new hires, the employee will receive his/her first pension check at age 65.  So, if they want to retire at age 40 and work at another profession or just lay on the beach, they will be free to do so within the structure of their program.  But, like the rest of the population, their first check won’t arrive until their 65th birthday.  Likely, most employees will choose to work until 65, thus keeping them in the workforce and reducing the number of replacement hires.

VOLUNTARY PAY INCREASE FOR DEFERRING RETIREMENT

Current employees will be given the voluntary option of a substantial pay increase if they agree to defer their first pension check until 65.  Thus, we will retain those persons service rather than paying a new employee plus paying a pension.  As courts have ruled, such a modification of a current employee’s contract would be voluntary.

PENSION PROGRAM FULLY FUNDED

Each city utilizing a state-sponsored pension program (including the State) will be required to fully-fund each of its current employees’ pensions every year.  If the Cities (and State) are forced to pay today’s bills today instead of spending money that they don’t have, they will be forced to live within their means, just like we citizens have to.  All city politicians will viciously fight against this action as (for the first time) they will have to manage with financial responsibility.   This will require an amendment to the State constitution in order to force permanent discipline upon politicians who have no financial discipline but prefer to be everyone’s buddy by giving away what we don’t have.

ERASE FUND DEBT

Every city (and the State) that has utilized a state-sponsored pension program and is in debt to the program will pay on their account such that their debt will be erased within ten years.  The repayment will be linear and not back-end loaded.

REAL, NOT PHONY ACCOUNTING

Funding of the pension programs will not be avoided by creative accounting wizardry.  Funding will be based on the current fund status (and be fully funded each year) rather than the false promise of a future return on investment that is unrealistically optimistic (as we currently do).
The pension reform plan described above will work well and any reasonable person knows it.  Such financial responsibility is not just a conservative attribute, it is essential for the future well-being of our citizens.  However, no party-affiliated politician will have the courage to propose such a responsible plan.  I will and I will make it happen.

The pension reform plan described above will work well and any reasonable person knows it.  Such financial responsibility is not just a conservative attribute, it is essential for the future well-being of our citizens.  However, no party-affiliated politician will have the courage to propose such a responsible plan.  I will and I will make it happen.

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