(The Center Square) – Arizona ranked 17th in the nation in unfunded pension liabilities, according to a new report from the Reason Foundation.
Arizona had a total of $27.3 billion in pension debt, according to the report. The foundation based its numbers on fiscal year 2024.
Arizona added approximately $10 billion in unfunded pension debt liabilities from 2014 to 2024
Leonard Gilroy, senior managing director of the Reason Foundation’s Pension Integrity Project, told The Center Square that Arizona added approximately $10 billion in unfunded pension debt liabilities from 2014 to 2024.
For the first 10 years of the new pension reforms, Arizona was expected to see a jump in its unfunded liabilities, Gilroy said.
Of the current total of $27.3 billion, taxpayers are responsible for about two-thirds, while active public employees are responsible for the remaining third, Gilroy explained. However, due to the pension fund reforms, the “taxpayers and new employees are sharing costs much more equally than in the past,” he added.
Gilroy said Arizona’s pension debt is on a “trajectory of improvement” after years of “difficult reforms and difficult decisions.”
Arizona has four major pension systems, according to Gilroy. These pension systems are the Arizona State Retirement System, the Arizona Public Safety Personnel Retirement System, the Arizona Correctional Officer Retirement Plan and the Arizona Elected Officials Retirement Plan.
The ASRS covers state employees and teachers, and the APSPRS takes care of law enforcement and first responders.
In addition, the CORP deals with correctional officers, and the EORP pertains to elected officials.
Gilroy, who helped reform Arizona’s pension program, said many reforms have been made over the years to the state’s pension programs. He noted these major reforms were made to APSPRS, CORP and EORP.
ASRS, Arizona’s largest pension fund, did not undergo major reforms, he stated.
To improve these three pension funds, Arizona paid down unfunded liabilities, lowered return assumptions and built new retirement options for new hires, Gilroy said.
In 2016, Arizona passed Senate Bill 1428, which stated any new government hires after July 1, 2017, could choose between a defined contribution plan and a defined benefit plan.
According to the Department of Labor, a defined contribution plan allows an “employee or the employer (or both) [to] contribute to the employee’s individual account under the plan.”
The DOL says a defined benefit plan guarantees a “specified monthly benefit at retirement.”
Before this law came into effect, Arizona law mandated public pension benefits be paid out exactly as stated in a contract, according to Gilroy.
He said Arizona’s new pension option for government workers was “built to be sustainable.”
The new generation of workers is less likely than the older generation to stay at one job for their whole careers, Gilroy told The Center Square.
Gilroy noted Arizona has improved its funded ratio for its pension plans, rising from 72% to 74.3% from 2014 to 2024.
According to Gilroy, this funded pension ratio indicates that Arizona has nearly three-fourths of the funds needed to cover its future pension obligations.
The 74.3% of the funded ratio is based on all of Arizona’s major pensions, including those for Phoenix and Tucson’s city employees. Gilroy said only local taxpayers in these two cities are responsible for these pension funds.
He added that when the funds’ total assets ($79.2 billion) are divided by their total liabilities ($106.6 billion), the result is 74.3%
Of Arizona’s pension liabilities, 70% are in the ASRS, he noted.
ASRS is the only major state-wide pension program that saw its funded ratio decline from 2014 to 2024. The three reformed pension plans saw increases in their funded ratios, Gilroy said.
Going forward, Gilroy said if the total fund percentage continues to go up and the state keeps hitting its return assumptions, then Arizona has a chance of getting its pension program funded at 100%.
“If you put in the money now, you save that money in the long run because you’re not trying to chase the problems of the past,” he said.
In 2022, the Arizona Legislature approved a one-time $1.1 billion payment in its 2023 budget to help pay down some of its unfunded pension liability.
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Gilroy said paying down pension debt as soon as possible allows governments to “free up money in their budgets to dedicate to other priorities like public safety or tax cuts.”
Arizona’s pension debt is on track to improve, Gilroy said. However, he added that the main challenge will be to make sure the “system post-reform is maintained.”