ALEC in The Center Square: Arizona lawmakers eyeing budget surplus to pay pension debt
The report, published by the American Legislative Exchange Council (ALEC), estimates Arizona’s public pension funds have $133,128,569,668.52 in unfunded pension liabilities – meaning more expected retirement payouts coming than assets.
The Center Square
Jun 10, 2022
By: Cole Lauterbach
Arizona lawmakers are in the final weeks of budget negotiations where they’ll decide how much of the state’s more than $5 billion surplus they want to contribute to what a new report estimates is more than $133 billion in unfunded pension liabilities.
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The report, published by the American Legislative Exchange Council (ALEC), estimates Arizona’s public pension funds have $133,128,569,668.52 in unfunded pension liabilities – meaning more expected retirement payouts coming than assets – as of fiscal year 2020. ALEC lists Arizona’s funded level at 26%, better than 15 other states.
Public pensions estimate their funding levels differently than ALEC did in its report. The nonprofit uses “risk-free” rates of return as an estimate of how much a pension’s investments will get back from market growth, while funds typically use a percentage that assumes much higher earnings.
According to U.S. Census Bureau data from 2020, Arizona’s state and local pension systems paid $4.8 billion into pension plans. Amid budget talks, lawmakers say they’re prepared to include more than $1 billion in additional pension funding.
“Unfunded liabilities are unappropriated and unauthorized expenses for taxpayers, but it is debt because the State must eventually pay them one way or another,” said Senate President Karen Fann, a Prescott Republican who also chairs ALEC.
On Friday, she told The Center Square that “Arizona is making great strides to make sure we don’t need to increase taxes in the future to pay for benefits authorized in the past, by using one-time surpluses to pay down unfunded liabilities.”
Fann said via email that lawmakers expect a one-time $1.1 billion payment that would pay down “all the state agency public safety unfunded liability.”
Rep. David Cook, R-Globe, said lawmakers are eyeing a $1.3 billion one-time payment on top of annual contributions.
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In the June 8 report, ALEC pushes states to abandon defined-benefit retirement plans in favor of 401(k)-style plans more common in the private sector.
“States are obligated to pay pension promises, often by state constitution or statute. There are important reforms that can prevent unfunded liabilities from growing in the future,” the report said. “By offering new employees sustainable plans, such as hybrid and defined contribution plans—similar to how 401(k) plans work in the private sector – states can prevent the rapid growth of unfunded liabilities.”
The states with the highest level of unfunded pension debt are California ($1.53 trillion), Illinois ($533.72 billion), Texas ($529.70 billion), New York ($508.70 billion) and Ohio ($429.53 billion).