No one likes to think about this stuff.
Many Arizona small towns and counties owe a huge debt to the firefighters and police officers vested in the statewide pension plan. Separate pension plans for detention officers, dispatchers and even elected officials, like judges, county supervisors and others face similar deficits.
Payson owes almost $20 million, Gila County $12 million and the Pine Fire District nearly $5 million — and that’s just for police and firefighter pensions, according to PSPRS actuarial reports. Many counties, towns and fire districts don’t have the money to catch up — so their debt grows every year.
But wait, you say; didn’t we fix this whole problem by approving several cost-cutting pension reforms?
Well. Yes. The Arizona Legislature created new employee tiers in 2011 and 2016 that required new first responders to work longer and contribute more toward their retirements.
Voters in 2016 and 2018 also changed how public safety, corrections officers and elected officials and judges receive increases to their pensions.
The state Supreme Court rebuffed earlier efforts to reform the system that impacted the benefits of those already retired and first responders who were already on the job. This made the hole even deeper, as cities and counties and PSPRS had to refund $250 million to officers and firefighters. It also made inevitable the three-tier system, so officers working side by side will find themselves with very different retirement checks.
So in today’s installment, we’ll look at the failure of initial efforts to reform the system and the changes put in place to restore stability to the system in the future.
But here’s the catch. About 70 percent of the workers in the system will continue to go by the old rules, since the courts ruled counties, towns and the state can’t alter the retirement system once someone’s hired. That means the hole continues to get deeper every year, despite the voter-approved reforms.
The long roadSome 30 years ago, the three jointly managed pension plans adopted a disastrous reform.
The plans boosted monthly benefits with any investment returns above 9 percent. This produced steadily rising pension checks, but it also slowly drained the pension’s investment fund. As a result, the Public Safety Personnel Retirement System (PSPRS) now has an estimated half of the money it needs to pay promised benefits — a deficit of nearly $9 billion. That could change if investment income soars, officers stay on the job longer or a variety of other changes take place — but it’s the best guess at the moment.
The slow bleed turned into a hemorrhage in recessions of 2001 and 2008 — with caused billions in losses to investments. Despite those loses, the benefit increases continued to mount, thanks to the effects of the Permanent Benefit Increase formula at the heart of the disaster.
The pension plans have come under criticism for the investments made, with some critics maintaining the plans got lower rates of return and paid higher fees on its investments than the state’s civilian retirement fund. Plan officials vigorously contest those criticism, saying returns have remained in the general range for pension plans, which generally adopt a more conservative strategy when it comes to taking risks than many other plans, said spokesman Christian Palmer. That shift has limited returns during the bull market in the past 10 years.
to reform the systemIn the meantime, lawmakers attempted to enact reforms in 2011.
Those changes boosted the employee contribution from 7.65 percent of salary to 11.65 percent. In addition, the changes did away with the PBI and reduced retirement benefits.
However, a group of employees sued to block the imposition of the changes. The State Supreme Court in a split decision in 2016 ruled the counties, towns and state could not change the promised benefits once an employee starts work.
Judge Randall Howe wrote, “We acknowledge that devising measures to guarantee the plan’s financial stability is difficult and fraught with unpleasant policy choices. But whatever measures the Legislature enacts still must comport with the Arizona Constitution.”
In a blistering dissent, Justice Clint Bolick called the majority’s decision “a work of legal fiction to which the likes of John Grisham could only aspire.” He said state workers have no contract that could bind towns for decades.
As a result of the ruling, the cities and counties had to repay some $250 million in contributions and benefit cuts accumulated between 2011 and 2016.
The pension fund quickly resumed bleeding out.
Now, the only solution lay in a voter-approved ballot measure to change the constitution.
Voters step in
to make changesVoters overwhelmingly approved Proposition 124 in 2018.
This had the effect of finally driving a stake through the heart of the Permanent Benefit Increase, which has boosted pensions for thousands of officers, firefighters and local officials while destabilizing the pension fund.
The reforms now specify that the town will contribute half and the employee the other half — with contributions rising or falling depending on investment returns. The new system will include cost-of-living increase but won’t hand out the excess gains in investments.
The changes also reduce benefits and increase the retirement age. Officers hired before 2012 can still retire with full benefits after 20 years — even if they get other jobs. Officers hired after 2012 can’t collect full benefits until they’re 52 or 55.
The PSPRS board estimates the changes will save the system about $475 million.
The system now allows the fund to rely on a seven-year “smooth out” of investment gains and losses in making its calculations, softening the boom-bust cycles of a pension fund that relies heavily on the stock market — as well as bond funds.
The investment fund provides about 45 percent of the fund’s revenue, with employees contributing about 17 percent and employers about 38 percent.
Between 2009 and 2015, the annual investment returns ranged from 3.4 percent to 5.1 percent. Since 2016, the investment returns have remained between 8.1 percent and 7.56 percent. However, some critics maintain the system’s portfolio’s returns remain too low, especially in a bull market. PSPRS officials counter that this stems from stressing safe investments, even if that sometimes means accepting lower yields.
“All public pensions and investors suffered enormous losses during the recessions, but PSPRS had a unique pension increase formula in state law that made its recovery extremely difficult,” Palmer said. “We can’t control the world economy, but we can play a ‘defense-first’ investment strategy to make sure that the next recession doesn’t bring severe consequences for local governments across the state. There’s a common misconception that PSPRS underperforms compared to other pensions,” Palmer said. “But what gets lost in the mix is there’s a trade-off to any strategy, whether it’s sacrificing returns for safety or accepting the risk of loss that comes with seeking really high returns.”
Where do we stand now?So what does that all add up to for cities and counties in Rim Country and the White Mountains.
There’s a light flickering at the end of the tunnel.
But it’s a long dark tunnel.
The situation facing cities and counties varies from dire to worrisome — mostly depending on how many officers, firefighters, detention officers, elected officials and retirees still qualify for benefits under the old system.
The counties are generally in the worst shape, since they employ sheriff’s departments, courts, jails and more elected officials. They not only have lagged further behind in their benefit payments, they have little control over their income.
Town’s like Payson can raise the sales tax to begin chipping away at their enormous debt to the pension system. Payson’s already paying about 60 percent of each officer’s salary into the system to keep up, it’s making an extra payment of about $600,000 annually from its recent increase in the sales tax. Even so, Payson owed about $20 million.
The PSPRS statistics show Payson Police officers make an average of $67,000 annually in salary and overtime. The Police Department has 23 active officers paying into the system and 21 retirees, with an average pension of $45,000 annually. Because of the high number of retirees, the department’s only paying about 34 percent of what it owes — which means taxpayers will have to somehow make up the $13-million difference.
The Payson Fire Department has 27 active members making an average of $70,000 annually in salary and overtime. But it has only 11 retirees, collecting a pension of about $50,000. So it has paid in 53 percent of what it owes. That still leaves a deficit for taxpayers to cover of $6.5 million. Most of the active employees are in their 40s with about 10 years of service.
That compares to a statewide average salary for police officers and firefighters of $81,000 and an average pension of about $54,000.
If you spread that debt out over the 16,000 Payson residents — it comes to $1,200 per taxpayer. Pension officials say that investment returns and employee and employer contributions will pay for those benefits. However, counties and towns still must make up the shortfall — and pass costs along to taxpayers.
Most counties are in worse shape than the towns.
For instance, Gila County has 33 active sheriff’s deputies making an average of $58,000 in salary and overtime. The 33 retirees collect an average pension benefit of $32,000. The pension plan is only 34 percent funded — with a deficit amounting to $12.5 million.
The county also has 59 detention officers making an average of $38,000. The county also has 12 detention officer retirees with an average pension of $17,000. The retirement fund is 76 percent funded, which means taxpayers will have to come up with an extra $1.6 million.
If you spread that debt out over the 52,000 county residents, it comes to more than $300 per person.
Unfortunately, despite the reforms the debt’s still growing for most towns and counties.
For instance, the $10.5 million Payson owed in 2014 has doubled even though the number of police and firefighters dropped from 56 to 50. The average salary and overtime for police officers went from $63,000 to $67,000 and for firefighters from $60,000 to $71,000.
Gila County’s debt to the system for the sheriff’s department also doubled between 2014 and 2018, rising from $6.4 million to $12.5 million. In that time, the number of deputies has grown from 30 to 33 and the number of retirees from 12 to 33. The average salary has grown from $51,000 to $58,000.
Still, that’s nothing compared to some smaller towns facing possible bankruptcy. For instance, Holbrook has only five police officers, making an average salary of $66,000. However, it has 15 retirees, with an average pension of $37,000. It’s paying in just 24 percent of what it owes — leaving a debt of $7.1 million. But the population is only 5,000 — whose debt to the pension fund now tops $1,400 per resident.
But Palmer says the change in investment strategy is paying off now, with steady gains that will bolster the fund, now that the voters have eliminated the Permanent Benefit Increase. Moreover, the increase in the retirement age, increased contributions and reductions in benefits will help stabilize the fund going forward.
“All three funds gained ground this year for the first time in a long time. When you have a long-term plan, the trends got to flatten out before it rises. It won’t turn like a jet ski, more like a battleship in a harbor,” said Palmer. “The costs are going to come down, but it’s going to take time.”
So yes, the voters did slash benefits for future retiring firefighters and police officers.
And that will save a lot of money for the 30 percent of the workforce affected.
But the challenges of paying up on promises made to some 56,000 workers and retirees will affect the bottom line of counties and towns for years to come.
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