Very bad.

Getting worse.

But there’s hope.

That’s the shorthand summary of the impact of the underfunding of the state’s retirement system for police officers and firefighters, which remains in crisis despite recent reforms. That means almost every fire department, police force and sheriff’s office will need a big taxpayer bailout.

As a result, Gila County owes an extra $12.5 million to the retirement system — more than 10 percent of its annual operating budget.

Payson owes a whopping $13 million for the police department and $6.6 million for the fire department, according to figures from the Public Safety Personnel Retirement System (PSPRS).

Nearly every town and fire district in the region owes a similar debt — some much larger relative to their budgets. So the Pine-Strawberry Fire District owes $4.7 million; Hellsgate Fire owes $1.4 million; the Christopher Creek Fire District owes just $75,000.

Taxpayers will have to come up with the money — one way or the other. For most, current contributions cover maybe half of the cost of promised pensions. Towns and counties would have to double those current payments to pay down the underfunding. Courts have ruled counties and towns and fire districts can’t alter the benefits promised when an employee started work.

Some communities, like Payson and Prescott, raised taxes to make extra payments on the debt. The $3 million increase in the sales tax in Payson played a role in ousting the then-mayor and recall efforts that now affect the entire council. However, PSPRS figures show that as of 2018, Payson had paid just 34 percent of what it owes to the system for police and 53 percent of what it owes for the fire department.

Most agencies have simply made the minimum payments required by state law, letting the underfunded balance grow — like paying the minimum on a credit card debt.

The pension plan for elected officials — like judges, council members, supervisors, treasurers, assessors and others finds itself in similar shape. It’s also desperately underfunded — but covers many fewer employees, so it’s gotten less coverage.

But here’s the kicker: The separate state retirement system that covers far more, non-public safety employees is in relatively good shape — with minimal underfunding.

What the heck?

How did this happen?

If it was just the recession — why’s the state retirement system in better shape?

How did towns, counties and fire districts respond as the crisis developed?

How did elected judges paid by the system block initial efforts to respond?

What did the voters do?

What’s the trend now?

Will the system go broke?

Will small counties and cities remain lashed to the Great White Whale of Phoenix, which pays police officers an average of $94,000 and dominates the system — but has underfunded the system by $3 billion?

Weighty questions — with answers that will affect the financial stability of counties and towns for years to come. Equally important, can some 18,000 police officers and firefighters and 13,000 retirees look forward to a secure retirement?

The Roundup will try to answer those questions in this series, based on a deep dive into the complex world of retirement planning and investment — complicated by politics, court cases and the impact of two deep recessions within a decade. The PSPRS suffered nearly $2 billion in investment losses during the recession, which triggered the crisis. But the state retirement system suffered similar losses, without the same result.

So first, how did this happen?

You must understand two things: First, the unanticipated consequences of a decision made 30 years ago intended to bolster pensions and help retirees from rural police and fire departments. Second, the twin hammer blows of two recessions.

Good intentions gone badSo first, welcome to the well-intentioned root of the problem — the Permanent Benefit Increase (PBI).

Flash back 28 years and a case of “good intentions gone bad,” according to a PSPRS PowerPoint presentation on how the disaster unfolded.

The Arizona Legislature enacted the PBI in an effort to share the wealth generated by the steady rise in the value of the fund’s investments. Back in 1986, the investment gains looked steady. The stock market had consistently outpaced inflation for years and the fund had a healthy surplus.

Why just keep stashing money in the bank? Why not share the bounty with retirees — the officers and firefighters who risked their lives every day by showing up to work?

So here’s the idea: Distribute half of the investment gains above 9 percent to retirees. Do it as an across-the-board increase in the monthly payment regardless of pre-retirement salary. That means the PBI would have the most impact on the benefits of a firefighter from Payson or Pine, since salaries in Phoenix remain about 30 to 40 percent higher than in most rural departments. Currently, the average Phoenix police officer’s salary and overtime comes to $90,000 compared to $67,000 in Payson, $58,000 in Gila County and $59,000 in Globe. The Phoenix firefighter pulls down $94,000, compared to $71,000 in Payson, $84,000 in Pine and $66,000 in Hellsgate.

The Legislature put in a safety feature that capped the total amount of increases that could be distributed during a given year. Excess proceeds would be set aside for retirees in the following years — regardless of how trust investments performed.

Seemed like a great idea at the time.

And it resulted in steady increases in officer and firefighter pensions, especially in rural departments. Between 2000 and 2007, the formula produced an increase in the monthly benefit of between $87 and $127 every single year. The benefit even went up in 2001 and 2002 when the retirement fund’s portfolio dropped 15 to 17 percent each year. The accumulated returns from previous years kept the increases coming. So in seven years the monthly benefit went up by more than $800 per month.

Back in 2000 — the system had 125 percent of the money needed to pay all projected benefits, for both active members and retirees. The funding percentage rose to 130 percent in 2001, according to PSPRS.

And then it started.

The automatic increases began to take a toll, just as a deep recession hit in 2001 and 2002. The PSPRS investment portfolio declined in value by a whopping $1.7 billion. The funding percentages started an inexorable decline from 100 percent funded in 2003 to just 66 percent funded in 2007. That means counties and towns would have to come up with more money — a lot more money — unless investment returns went back up to that happy 10 or 15 percent annually.

Impact of recessionsEnter the Great Recession.

Flush with cash from all those retirement funds and freed from meaningful federal regulation, the banking sector went crazy. Hoping to cash in on the wild increases in housing prices, banks and investment funds bundled up mortgages and sold them as investments — like government bonds. Turns out, those mortgage bundles included lots of junk — mortgages owed by people whose houses were wildly overvalued who didn’t have the money to keep up with the payments.

The bubble burst. Owners couldn’t pay their mortgages. Faced with a $400,000 mortgage on a home now worth $200,000, they walked away. The economy crashed along with property values.

The PSPRS portfolio’s value dropped 7 percent in 2008 and 18 percent in 2009.

But wait: It gets worse.

The state’s income dropped by about a third, thanks to its heavy reliance on the recession-sensitive sales tax.

And yet, the PBI formula continued to drain the pension fund. Between 2010 and 2014, the formula produced a steady increase in the monthly benefits averaging about $140 per month each year. In aggregate, the formula produced a monthly benefit increase of $1,400 per month between 2010 and 2015 before the fund had finally distributed all of the investment gains greater than 9 percent accumulated in the past 30 years.

“The intention behind the pension increase formula was good. It raised the pension for the retired rural cop or firefighter or widow faster than it did in Phoenix or Tucson,” said PSPRS Communications Director Christian Palmer. “But you can’t imagine that anyone would have foreseen the pure mathematical destruction that the PBI would bring if the world’s economy were to crash not once but twice in a decade.”

The same formula applied to the separate retirement system for elected officials.

But the state retirement system never adopted that formula. And that largely accounts for the difference between PSPRS and the state retirement fund, according to Palmer.

Now add one final twist: The big increase in ratio between retirees and active members.

Faced with plunging property tax and sales tax revenues, what did the towns and counties and fire districts do?

They cut staff.

That balanced the budget for the year, but it made the problems of the retirement system that much worse.

An active employee contributes about 10 percent of his or her salary to the system. If the system’s fully funded, the employer pays a similar share. But when the system’s underfunded, the employer’s share goes up while the employee contributions stay the same. So most counties and towns are now paying more like 50 or 60 percent of an officer’s or firefighter’s salary into the system — dramatically increasing the cost of police and fire protection.

Faced with the threat of layoffs, many officers and firefighters simply retired.

But wait — that should help? Right?

Nope. Active members pay into the system but don’t collect. Retirees pay nothing, but collect checks every month.

So now the Gila County Sheriff’s Office has 33 active members and 33 retirees. Payson police have 23 active members and 21 retirees, according to PSPRS based on 2018 figures. On the other hand, Payson Fire has 27 active members and 11 retirees — which is why it’s unfunded liability amounts to 53 percent while the police department’s stands at 34 percent.

Younger fire departments with more turnover actually don’t have nearly as big a hole. Christopher Fire has five active employees and one retiree — which means it’s 90 percent funded. Blue Ridge has five active employees and no retires and is 73 percent funded — owing just $73,000.

PSPRS and the state retirement system generally remains one of the few surviving “defined benefit” pension plans, as union-based, private-sector pension plans have declined. A “defined benefit” plan promises a monthly check for life. These days, most private businesses have shifted to some version of a 401K, where both the employee and the employer contribute to an investment account. When the employee retires, he or she starts drawing money out of the account. The employer is off the hook forever.

The public safety plan maintained that promised lifetime benefit, sweetened by the PBI. Moreover, the plan allows people to retire and start collecting benefits after 20 years. The formula doesn’t provide the full benefit after 20 years — but will pay the reduced benefit indefinitely even if the retiree takes another full-time job. Some officers and firefighters who remain in the field can end up with several pensions, each collected after 20 years on the job. They don’t have to wait until they’re of retirement age. The system also has remained relatively generous in paying benefits to members who become disabled, since they work a dangerous, stressful, physically demanding job.

And that’s how we got here.

Granted, PSPRS has come under fire for its investment portfolio and the fees it pays for financial advice and a host of other issues. But the gains and losses in the fund have remained in the ballpark of retirement funds nationally, said Palmer. The big difference remains the impact of the PBI — a formula almost unique to PSPRS.

So where does that leave us?

The total system has about 18,000 active members and 13,000 retirees.

It has 46 percent of the money it needs to pay the promised benefits for those 30,000 police officers and firefighters. The system has about $10 billion in assets, which sounds reassuring. Except the system needs to come up with another $8.8 billion to keep its promises to retirees.

Every Rim Country community with police or fire protection owes a share of that debt.

However, Gila County is paying just 36 percent of its debt, falling a little further behind each year. It owes $12.5 million and the debt grows bigger each year. Payson owes nearly $20 million — although the sales tax increase has enabled the town to pay down that debt by an extra $600,000 annually — on top of paying about 66 percent of each officer’s salary into the system every month.

So what will become of us?

What has the state, PSPRS and counties and towns done to put the system back on solid ground?

Stay tuned for Part II.

Contact the writer at

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