(Bloomberg) –Voters in Arizona could throw the state another lifeline for two of its underfunded retirement plans.
A measure on the ballot Nov. 6 would save the state $275 million over the next two decades by changing a method that allowed public employee retirees to see big bumps in benefits during years of strong investment returns.
Proposition 125 would require the pension plans to use a more traditional cost-of-living adjustment when determining pension benefit levels.
The Arizona measure is one of a few state ballot questions in November to deal with what is an estimated $4 trillion in unfunded liabilities at state and local pension funds nationwide.
Arizona’s targets the fund for the state’s elected officials, which is 33 percent funded, and the pension for correctional officers, which is about 52 percent funded, according to Public Safety Personnel Retirement System spokesman Christian Palmer.
Under the current system, the two retirement plans share half or all of the investment returns above 9 percent with retirees to pay for benefit increases.
Instead of keeping that money invested the pensions must siphon off some of the gains for the payments, which slows down progress building up funding, said Will Buividas, vice chairman of the system’s board of trustees.
The proposal “takes the handcuffs off our investment staff,” he said.
Under the proposal, cost of living adjustments would be tied to a consumer price index for the Phoenix area and payment increases capped at 2 percent per year, whereas the current system, known as a permanent benefit increase formula, grants retirees benefit increases of as much as 4 percent, according to the system.
Still, Arizona may need to make further changes to win the approval of credit-ratings companies.
S&P Global Ratings, which rates Arizona AA, warned in August that the state’s pensions might be relying on too-rosy investment return assumptions that are above 7 percent, which can hurt the funding of the plans further if they miss their targets.
“If the state is not proactive, in our view, in better aligning actuarial assumptions to recent trends or there is no commitment to improve its funding levels, we could view this as a pressure on the rating,” S&P analysts said in August. The rating has a stable outlook, implying there’s no risk of downgrades.
Pension changes can be a hard-fought battle for states to implement. But only one person submitted an argument against the measure to the secretary of state’s office for its voter guide, while a bipartisan group of lawmakers submitted comments in support of the measure.
In 2016, a similar measure for the police and firefighters’ pension plan was approved by 70 percent of voters, according to the Arizona secretary of state’s office. Proponents of that measure estimated it would save the state $1.5 billion over 30 years.
“Everybody realizes this is a more sustainable method to keep the plan healthy,” Buividas said.