Arizona’s public-safety pension system faces financial peril because of poor investments and generous retirement benefits. (Wochit)
Editor’s note: An earlier version of this story contained inaccurate information provided by the Public Safety Personnel Retirement System about its most recent fiscal year’s rate of return.
Mayors and lawmakers stung by rising pension costs for police officers and firefighters are calling for more changes to the financially troubled Public Safety Personnel Retirement System.
Their calls come just one year after voters approved the latest reforms.
Prescott Mayor Harry Oberg will host his third PSPRS Mayoral Summit on Friday. He and at least 18 other mayors have publicly called on Gov. Doug Ducey to use his political muscle to help fix a battered pension system they say is putting a few cities on the verge of bankruptcy because of high government contributions needed to bail out PSPRS.
The Governor’s Office, following questions from The Arizona Republic, said it planned to send a representative to Oberg’s summit, which will be in neighboring Prescott Valley.
“The governor agrees this is an area in need of reform. Our public-safety officials have dedicated their lives to protecting us, and we owe it to them to ensure this system is well administered and sustainable,” Ducey spokesman Patrick Ptak said.
Bisbee Mayor David Smith, who also signed the mayors’ letter, said his southern Arizona town is being crippled by its payments to PSPRS, noting that 22 percent of the town’s budget goes to cover public-safety retirement costs.
“People don’t get the big picture, thinking, ‘It doesn’t affect me.’ But if Bisbee, Arizona, has to file Chapter 9 (bankruptcy), and we owe $17 million in unfunded liabilities, that money isn’t going away by our bankruptcy. It will be divided up (and paid) by other cities,” Smith said.
The PSPRS trust has about half of the money it needs to pay all current and future pension obligations to its members. Trust officials have blamed collapses in the stock market in 2001 and 2008 as the major reasons for under-funding. A measure voters passed last year made modest changes that are not expected to provide significant savings for a generation.
Lawmakers in 2011 also tried to make significant changes to PSPRS by suspending cost-of-living raises for retirees and forcing public-safety personnel to pay more for their pensions. However, many of those reforms were thrown out in court battles, and many PSPRS employees now pay less for their benefits than previously.
While mayors are expressing concern to the governor, state Rep. Noel Campbell, R-Prescott, is barnstorming the state with other lawmakers and holding public hearings regarding the financial state of PSPRS.
Campbell hopes to convince his colleagues and Ducey to radically change the trust. His third hearing is scheduled for 5 p.m. July 26 at the Yavapai College Auditorium. Others are scheduled later this year in Yuma, Miami-Globe and Phoenix.
A call to move the fund to the state treasurer
Smith, Oberg and Campbell said the PSPRS board seems more interested in protecting benefits of public-safety workers than in solving the shortfall. They said management has done a poor job of investing the public contributions, and they questioned high management fees paid when meager earnings resulted during the past few years.
They propose the abolition of the PSPRS board and management, and suggest placing the fund’s operation under the state treasurer. For the past several years, the treasurer’s investment returns have outperformed PSPRS with a much smaller staff and minimal outside fees.
They also propose to ask voters to amend the state Constitution, which now dictates that a pension benefit given to a public employee cannot subsequently be taken away.
“The state needs to put out a referendum to have voters take another look at it,” Oberg said. “And we have to get a better PSPRS board who knows what it’s doing or get an administrative change.”
Treasurer Jeff DeWit’s office declined to comment on whether it would be willing to take over PSPRS.
Christian Palmer, a PSPRS spokesman, said elected officials have the right to make calls for policy changes, but he defended the trust’s performance.
Palmer said Proposition 124, which passed last year, created a nine-member board whose members are legally and ethically bound to make decisions in the best interest of the trust. The measure also changed the way permanent pension-benefit increases are paid to retirees.
“As of now, we are not aware of any voiced potential reforms, although some mayors are deliberating on seeking state relief to help offset their pension liabilities,” Palmer said. “The PSPRS investment strategy is based on the very goal of protecting local governments struggling with their budgets. The strategy in place sacrifices our ability to achieve very high investment return, potential in exchange for being able to prevent losses that could prove catastrophic for locales like like Bisbee and Prescott.”
PSPRS Chairman Brian Tobin, a Phoenix deputy fire chief, issued a statement saying that he has supported since 2011 legislation that would reform cost-of-living adjustments for retirees and have employees make higher contributions for their pensions.
Lower-than-projected investment returns at PSPRS, healthy pension benefits and court decisions that have lowered what police officers and firefighters have to pay for their pensions have contributed to an additional financial load for local communities, Oberg said.
“On its current trajectory, the system is an unsustainable burden to our hard-working taxpayers as well as an impediment to economic development,” Oberg and 18 other mayors wrote to Ducey in three-page letter on June 22. “In many cases, cities are raising taxes to stave off insolvency. But this cannot last much longer.”
The average annual PSPRS pension benefit is $52,344, and the average retirement age is 52. Thousands of PSPRS members also are eligible for another pension benefit known as the Deferred Option Retirement Plan. It gives retirees lump-sum payments on top of their annual pensions.
Palmer declined to disclose the most recent average DROP payment. Prior records show a typical DROP payment was around $250,000 per retiree, though it can exceed $900,000 per person.
PSPRS Chairman Tobin is a DROP enrollee. He is projected to receive an $817,398 lump-sum payment in addition to a projected retirement check of $133,968 a year, according to PSPRS records.
Payments weigh heavily on Prescott
The Phoenix council wants to have 30 years, instead of 20, to pay down the city’s debt for the retirement benefits of public-safety workers.
Prescott, a northern Arizona community of roughly 41,000 people with its historic downtown and Whiskey Row, has been one of the hardest hit by large PSPRS payments.
Prescott officials say this fiscal year’s $7.8 million payment to PSPRS accounts for more than 20 percent of the city’s $36 million general fund.
The city is asking voters to approve a sales tax increase of 3/4 of 1 percent to help pay its PSPRS debt. Results from the mail-in election will be tallied Aug. 29.
If voters reject the sales tax hike, Oberg said the city might be forced to take money from its rainy day fund, cut staff or services. He said the city has laid off 90 employees since 2008, and now has a workforce of about 490.
The office some would like to see manage PSPRS recorded an 11.25 net rate of return on investments for the $5.6 billion land trust this past fiscal year that ended June 30, Deputy State Treasurer Mark Swenson said Tuesday. The land trust generates funds for public education.
PSPRS, however, outperformed the Treasurer’s Office. It is projecting to make a 12.5 percent net rate of return on its investments this fiscal year for the roughly $9.3 billion trust.
The much larger Arizona State Retirement System, which provides retirement benefits for teachers and other public employees, is expected to post a 13.6 percent net return on its investments. The ASRS trust is valued at $37.4 billion.
PSPRS, which covers politicians and correctional guards as well as public-safety workers, is showing improvement on its investments compared to last year, when the trust earned less than 1 percent on its investments.
A national report on state retirement systems concluded that PSPRS has been among the worst-performing public retirement plans in the U.S. because of sub-par investment returns and high investment-management costs.
The Pew Charitable Trusts, a Philadelphia-based non-profit that has extensively researched public pensions, concluded PSPRS was the third-worst performing government trust fund as measured over a 10-year period that ended in 2015.
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