Big hole.

Saw it coming.

And it’s going to take a while to dig out of.

Welcome to the worrisome state of the Elected Officials Retirement Plan (EORP), which covers 1,800 state and county elected officials as well as judges.

It’s got $300 million in the bank, but owes $900 million to existing and future retirees. The counties and the state now have to pay 62 percent of every official’s salary into the fund — just trying to keep the hole from getting deeper. That means the bill could rise again for taxpayers, if recent reforms and investment gains can’t make up the deficit. Currently, the system’s only 31 percent funded.

The situation got so bad that the pension fund essentially slammed the door on new members. Judges, county elected officials, state lawmakers, statewide elected officials and others elected after 2014 now instead can pay into a 401(k) system. They contribute half; the employer contributes half and they get the funds earned on that money by the time they retire.

The pension shortfall has hit counties the hardest.

Gila County has 15 active officials and 21 retirees.

Pension plan officials did not have a breakdown on which officials are in the system and what their pensions will likely total.

However, the ratio between active and retired officials spells trouble. The contributions for each active official must support an even larger number of retirees — whose contributions when they were working proved too low to fully fund their retirement. Since investment gains can’t make up such a huge shortfall, the stability of the system remains at risk. That could mean much bigger county payments in the future — money counties say they don’t have.

What went wrong?So what happened? How did we end up with a two-tiered system — far more generous to some officials than to others? EORP’S problems mirror the difficulties of the much larger pension plan for police officers, firefighters and corrections officers, for many of the same reasons — but with its own twist.

The Public Safety Personnel Retirement System (PSPRS) covers 35,000 officers, firefighters and retirees and has a deficit of closer to $12 billion. EORP has a much smaller deficit, but far fewer members. Nonetheless, it has flown under the radar.

The problem goes back to what proved an arbitrary legislative decision to set the employers match at about 24 percent of salary, according to actuarial studies conducted by the PSPRS Board of Trustees, which also manages EORP.

The match proved woefully inadequate.

“The PSPRS Board of Trustees warned about this for years and when our studies showed the whole system could go broke in 10 years people took notice,” said Christian Palmer, the system’s communications director. “This was a huge problem that threatened our retirees, active members and the entire state. You’re going to have a hard time pulling talent into public service when people think the state retirement plan is on life support and will probably die.”

Legislature tripled employer contributionsThe Arizona Legislature eventually nearly tripled employer contributions, to 62 percent of salary and added money from the general fund.

The system covers 579 active elected officials statewide, with an average salary of $88,000 — which reflects the relatively high salaries paid to judges. The average elected official is 58 years old and has 11 years of service, according to figures released by EORP.

But here’s the rub: The system also supports 1,203 retirees, with an average age of 73 and an average pension of $53,000 annually. The system also provides lifetime health care eligibility and benefits for more than 216 surviving spouses and children under 18.

Retirees strain

system financesThe system supports three retirees for every active member and has just $283 million of the estimated $900 million it needs to pay promised benefits. And that’s assuming contributions will continue to rise at 3.5 percent annually and the investments will yield an average of 7.3 percent annually, according to an audit by an outside firm hired by the pension fund’s board of trustees in 2018.

State lawmakers tried to fix the system in 2011, but the state Supreme Court declared those changes unconstitutional. The state and county governments can’t change the terms of the pension system after someone pays into the system. So most of the people in the system can still collect a lifetime pension amounting to 20 percent of salary after just five years in office. After 20 years of service, they can get 80 percent of their salary.

Some can collect Social Security, depending on whether the system they worked for allowed them to pay into that system. On the police and fire side of things, about 60 percent of the retirees also collect Social Security.

Voters imposed reformsVoters imposed big changes on the system as a result of two different ballot initiatives in 2018.

“When you’re dealing with a system designed to look 20 or 30 years into the future, any reform will take time to produce a result that you can see and feel,” Palmer said.

The employer contributions could rise again if a fresh recession results in more investment losses, despite the system’s increased investment caution. In 2018, investments and dividends added $23 million to the fund. Employees contributed $5 million and the state and county governments $34 million.

But what happens if there’s another recession? Even the softening of the markets cut the investment gains of the fund from $32 million in 2017 to $23 million in 2018.

In contrast to the public safety pension, EORP is a cost-sharing plan in which employers all pay the same rates. Therefore, it’s harder to track the individual debt facing each county, said Palmer.

Moreover, the publicly posted county budget summaries for Gila County doesn’t break out the salaries of elected officials, including the board of supervisors, county attorney, county treasurer, county recorder, county assessor and sheriff.

So it’s difficult to estimate how much each county pays into the system and how much of a shortfall each county faces.

Reforms cut back

on benefitsBut one thing’s clear: Elected officials going forward will collect smaller pensions.

Previously, the system included the now-controversial Permanent Benefit Increase (PBI). For 30 years, this formula converted investment returns above 9 percent into a boost in benefits. Even when recessions in 2000 and 2008 resulted in big investment losses, the PBI formula continued to drain money from the system. The average pension for elected officials rose from $40,000 in 2009 to $53,000 in 2018 — a 32 percent increase in nine years.

By contrast, for members of the Arizona State Retirement System (ASRS), cost of living increases are few and rare, which helps the system remain in balance.

Moreover, the recession caught the public safety and elected officials plan with a vulnerable investment portfolio. So the three funds for public safety, corrections and elected officials lost billions in value, dramatically deepening the shortfall.

Fund managers since the last recession have shifted to a more conservative approach, which also means the fund didn’t cash in as much during the recent bull markets.

“What you essentially have with our plans is an investment portfolio that’s about two to three times safer than the average 401(k) plan,” Palmer said. “But we’re not a 401(k). We have to pay out about a billion dollars every year to tens of thousands of retirees and if we’re holding nothing but a bunch of stocks when the next recession hits, it could be a doomsday for local governments.”

The state has agreed to pay $15 million annually into the general fund as part of a deal to settle an employee lawsuit challenging the 2014 reforms ultimately overturned by the state Supreme Court.

Here’s what changedThe system still allows officials to collect a full pension benefit after 20 years of service. The system also allows retirement at age 62 after 10 years of service and at age 65 after five years of service. The system also still offers a 50 percent benefit for a surviving spouse after two years of marriage and a surviving child less than 18 years old.

Changes made by the 2018 ballot measure include:

• Replaced the PBI with a capped inflation adjustment.

• Capped the retirement benefit at 75 percent of salary rather than 80 percent.

• Set the pension at 3 percent of salary per year of service rather than 4 percent. So someone making $100,000 a year would get a pension of $60,000 per year after 20 years. The old system would have provided a pension of $80,000.

• Raised the employee contribution from 7 percent to 13 percent of salary.

• Raised the employer contribution from 24 percent to 62 percent.

The changes will stabilize the plan and whittle away at the $600 million shortfall — eventually, according to projections. But that’s assuming salaries keep rising and investment returns remain steady. If those assumptions don’t work out — taxpayers will have to increase contributions to the pension plan once again.

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