Arizona’s About-Face on Pensions

A state with acute pension issues has passed pension reform legislation that could set an example for many, including Maryland.

According to Governing, bold new legislation enacted in Arizona holds the promise of putting their pension system back on track and serving as a national model for collaborative public-pension reform.

The reforms include:

  1. Caps on maximum annual salaries for purposes on pension calculations
  2. A change in the membership of the State’s Pension Board
  3. Defined-contribution options for new employees

From Governing,

The latest PSPRS reform takes a number of steps to address these problems, most of which will apply to employees hired on or after July 1, 2017. The maximum annual salary for purposes of pension calculation will be reduced from $265,000 to $110,000. Current and future pension costs will be split evenly between employers and employees. And the number of labor representatives on the PSPRS board will increase to recognize the equal risk and cost-sharing between employees and employers.

New employees will choose between a defined-contribution plan and a hybrid that combines defined-benefit and defined-contribution elements. Those employees can’t begin to collect until age 55 (up from 52-1/2), although they can retire at any time. This is an important change because it makes pensions portable, so employees wanting to move on no longer have an incentive to stick around until they vest in the retirement plan.

As far as defined contribution plans in Maryland, Montgomery County left the State of Maryland’s pension system and created a defined contribution option for their employees in 1994. State Senator Andrew Serafini of Washington County has introduced state legislation to create a defined contribution option in the state pension system but the idea has yet to take hold in the General Assembly.

For more information on Arizona’s reform, see Pension Reform That Gets the Job Done from Governing.

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