In 2016, Arizona Governor Doug Ducey signed comprehensive pension reform legislation for public safety officers into law. This pension reform is notable not only for the positive fiscal impacts for taxpayers and the sustainability it brings to the pension system, but also for the process used to craft the legislation and the widespread, broad bipartisan support it garnered along the way.

[Two years earlier], Arizona public safety employees and their unions were becoming increasingly concerned about the fiscal state of the Public Safety Personnel Retirement System (PSPRS)-which covers all law enforcement personnel and firefighters statewide. The plan had been steadily deteriorating over a decade, with the funding ratio falling to around 50% and unfunded liabilities reaching into the billions. Legislation was passed in 2011 that sought to pay down unfunded liabilities by increasing employee contributions to the plan, but state courts rejected those changes as a violation of the Arizona constitution. Concern that their retirement security was jeopardy reached a point that, possibly for the first time in the nation, a coalition of public safety unions approached Republican state legislators in an effort to reform the pension system.

Senate President Andy Biggs and Senate Finance Committee Chairwoman Debbie Lesko welcomed the prospect of reform, but knew that any potential reform would need careful vetting in order to avoid the legal challenges that have vexed many previous reform efforts, both in Arizona and across the nation. With this in mind, Senator Lesko launched a year-long, collaborative stakeholder process to fully analyze the PSPRS system and potential reform options.

As of June 30, 2015, the plan had accumulated $6.6 billion in unfunded liabilities and dropped to just 48% funded. Arizona cities and towns are have been struggling to pay the soaring pension bills, facing a choice between cutting services or raising taxes as a result. A number of cities have run out of fiscal options and, for some, the threat of bankruptcy is looming.

In February 2015, Sen. Lesko organized the first of a series of monthly meetings for a broad range of stakeholders of the PSPRS system: employees, retirees, Gov. Ducey’s office, members of the legislature, PSPRS administrators, union leadership, the Arizona League of Cities and Towns, county representatives, and taxpayer advocates. From the beginning of the process, Sen. Lesko asked Reason Foundation’s Pension Integrity Team to assist with providing education, policy options, and actuarial analysis for the stakeholders. Any hope of stakeholder consensus on a reform package depended on overcoming personal preconceived opinions and putting all potential reform scenarios on the negotiation table for discussion, analysis and vetting.[…]

The scope of these proposals started far apart, leading to unproductive working group meetings. Multiple times individuals or stakeholder groups threatened to quit the process. Other times contentious topics polarized stakeholders, further threatening the reform’s progress. At times negotiations shifted to a “shuttle diplomacy” of stakeholder parties staying at the table and communicating primarily through the Pension Integrity Team, which parsed and refined individual concepts of reform to foster consensus.

Over time, the various stakeholders gained enough trust with each other, and enough appreciation of the reform’s intent, for all sides to grant concessions in order to keep the reform progressing. The public safety labor union’s key priority was maintaining a 2.5% defined benefit multiplier for members who worked a full career; the legislature prioritized reducing taxpayer risks and avoiding added substantial near-term cost to the plan. The final reform legislation was able to achieve both of these priorities.

In the end, the collaborative stakeholder process crafted pension reform legislation that was comprehensive in scope, meaningful in fiscal effect-and agreed upon by Republicans and Democrats, employees and employers, business organizations and labor unions, and taxpayers and legislators. As the final piece of the reform legislation goes to voters for approval, key stakeholders-the Professional Fire Fighters of Arizona, Phoenix Law Enforcement Association, Arizona Fraternal Order of Police, League of Arizona Cities and Towns, and The Arizona Chamber of Commerce and Industry-have all endorsed the ballot measure. […]

Not everyone got exactly what they wanted. Some said the reform took away too many benefits; others said the reforms didn’t go far enough. Some stakeholders ultimately opposed the reform on these grounds. Yet, even the few who voiced opposition to the final legislation supported many individual concepts contained within the reform, despite opposing the final package.

The process that forged this reform is as significant as the reform itself. Senator Lesko deserves credit for her strong leadership and commitment to the process. All of the stakeholders deserve credit for their willingness to see the reform from all sides and their flexibility in yielding to achieve consensus.

The stakeholder process worked because building relationships builds trust, which shares the ownership of ideas. Consensus-based decision-making requires that individuals consider the needs of all the diverse groups affected, not personal or political interests.

Arizona’s ability to enact meaningful reform on the often-contentious issue of pension reform shows that in today’s bitterly divided political environment, we need more policymakers to welcome and encourage collaborative, consensus building to find solutions to the complex issues facing government agencies across the nation.

Read more about the Arizona Public Safety Personnel Retirement System reform effort here.
This article republishes selections from “A Collaborative Process for Pension Reform” by Pete Constant, Anthony Randazzo and Leonard Gilroy, a research article published by Reason Foundation in April 2016. The whole article is available here.