Report: Why Arizona's Pension Contribution Rates Keep Rising

Anthony Randazzo, Carol O’Neill, and Jonathan Moody
Publication Date: 
September 9, 2019

In Arizona, teachers as well as the state are paying a greater and greater share of salary each year into the Arizona State Retirement System (ASRS). As the cost of the pension system has increased, the value of the benefits has remained stagnant. In short, teachers and employers are paying more for the same retirement benefit.

To make matters worse, as employee and employer contribution rates to the pension fund have increased, so has the system’s debt. Normally that shouldn’t happen.

A new report from Equable analyzed ASRS and found that the usual suspects – overly generous benefits or inconsistent and inadequate state payments to the fund – are not to blame for this problem. Instead, the authors found that lower than anticipated return on investments are causing contribution rates to rise and debts to grow.

Just as with 401(k) plans, state pension funds are invested in the market. Pension plans establish a level of return on those investment that they expect to earn. The assumed rate of return influences how much states contribute to the system to maintain solvency. When their investments miss the mark, pension debt grows even if the state met its required contribution rate because they were relying on a greater level of return from their investment. Even falling short only 0.5 to 1 percent can have significant funding implications since these funds are investing billions of dollars.

Lowering the assumed rate of return will help Arizona get a better handle on growing pension debts and increasing teacher and state contribution rates. Moreover, the authors suggest the legislature explore ASRS’s oversight structure and consider how best to negotiate the trade-off between the short-term cost of lowering the return assumptions, with the long-term risk of the status quo.