Pension costs are a challenge for local governments all over the country. When looking across the United States, the actuarial funded ratio for public pension plans dropped from around 90% at the beginning of the century to just over 70% in 2012. It has remained at about this level since. The effect of this sustained underfunding of pension liabilities is that local governments’ contributions to pension plans, both as a percent of payroll and total revenue, have been steadily increasing: rising to 17.4% and 3.2%, respectively, as of 2018.
This pension underfunding problem represents a collective action problem of the kind addressed by GFOA’s Financial Foundations for Thriving Communities. A local government budget is a collective action problem because a local government must reach a financially sustainable budget over the long term, despite the incentives that all stakeholders have to get as much as possible from the budget for themselves each year. A pension plan presents an even more challenging dynamic. Both public employees and elected officials have an incentive to increase pension benefits and underfund their costs. The people who have the strongest interest in responsibly managing today’s pension plans are future officials, employees, and taxpayers—and they don’t have a voice in today’s decisions.
In this paper, we will share the experience of Queen Creek, Arizona—a community of about 50,000 that solved its pension problem and, in the process, transformed the entire state of Arizona. We’ll see that Queen Creek’s solution reflects many of the strategies described in the Financial Foundations Framework.