Prescott's Mayor Oberg: Yes, the State’s PSPRS Debt Can Be Solved

28 July 2016
  Mayor Harry Oberg
Are Mayor Harry Oberg's suggestions for solving the PSPRS debt affecting so many Arizona communities achievable?

It is no secret. The Arizona Public Safety Personnel Retirement System (PSPRS) is in desperate circumstances, just as are so many pension systems across the nation. Overall, Arizona governmental units owe $6.3 B to the pension fund. The debt continues to grow due to several factors, primarily: poor investment decisions, a much less than expected rate of return on fund investments over many years, and a recent court decision (Fields case). A second pending court decision (Hall case) could further increase the debt if upheld against the taxpayer. By any reasonable measure, the current PSPRS program is simply unsustainable.

The entire Arizona PSPRS unfunded obligation (debt) must be addressed, and soon. Currently, 256 individual entities pay into the system–cities, towns, counties, fire districts, as well as the Arizona Department of Public Safety. (DPS's pension debt alone is approaching $700 million.) Each entity has been paying its contributions to the pension fund in full, and continues to do so based upon actuarial figures set by the governor-appointed PSPRS Board. While the contributions are pooled and become part of the state’s overall pension fund assets which are managed at the state level by this Board, the growing debt does not, instead being separately assigned to each member entity as a liability to be paid. This has created an untenable situation for each of the entities, especially those with a high number of public safety system retirees such as Prescott, Flagstaff, Bisbee, and Yavapai County. Our community cannot shoulder a growing debt burden beyond the present $72 million without extreme consequences for our citizens in higher taxes over a prolonged period of time and/or elimination of essential city services. And this debt will continue to increase irrespective of interest payments. We are not alone; many more Arizona communities will suffer the same consequences if the Hall decision is upheld and the fund continues to fall short of the expected (and necessary) rate of return.

While Prescott and the other PSPRS entities diligently made all required payments to the pension fund through the years, what we did not cause, nor are able to control, are the billions of dollars of accumulated PSPRS debt. The PSPRS, with its very generous benefits, was created by the AZ legislature and is controlled by an appointed state board. Therefore, further reform of the system and elimination of debt must be addressed at the state level. The Prescott City Council recently exercised wisdom and foresight in rejecting placing a measure on the November ballot to raise the city sales tax to pay down the debt. Rejection of the .55% sales tax increase ballot measure for this purpose last August demonstrated that voters will not tolerate tax increases without convincing reform and genuine commitments to overhaul and improve the system. We must continue to send this same message until the legislature accepts responsibility for addressing the PSPRS debt. It is important to point out that without a decision on the pending Hall case, Prescott’s total debt obligation remains unclear and likely will be significantly higher than today’s estimated $72 million. Lacking this information and a clear understanding of the voters’ tolerance for increased taxes, a ballot measure would have been premature.

So what are the possible options for the state legislature to address the overall PSPRS debt? Consider the following:

  1. Pool the assets and debt of all Tier 3 PSPRS employees. Tier 3 employees are those hired after July 1, 2017. Pooling will combine any gains/losses in the pension fund for Tier 3 employees and spread the unfunded obligation across all entities, as is currently done with the Arizona State Retirements System (ASRS) which covers all other employees not in the PSPRS.
  2. Add one cent to the state sales tax for a specified period of years until the state PSPRS debt is 80% funded. Doing so would place the entire system on the path to sustainability until the reforms from Prop. 124 can take full effect. It would also be a highly efficient way to quickly pay off the severe shortfall since the overall debt would be spread across all entities doing business in Arizona and likely spare our citizens any elimination of state/city services. Entities would continue to make debt payments to the PSPRS but likely at a lower rate as the 1% additional sales tax takes effect.
  3. Create a revolving fund similar to the state’s Water Infrastructure Finance Authority of Arizona (WIFA) to allow immediate payment of debt and establish a repayment bond at 2-3%. This is preferable to pension obligation bonds because all interest payments would stay within the state, but would require a source of funding to establish the authority.
  4. Obtain state legislative authority to increase the city property tax (with a cap) to a level which will sustain police and fire operations and pay. This funding will be “fenced” and only available for public safety. Recently, the legislature considered a proposal to allow cities to establish a property tax to pay for public safety obligations, but eliminated cities such as Prescott which already have a city property tax. The total City property tax on a Prescott home valued at $200K is presently $60 per year. At that level, is there any question of why the City's General Fund is so stressed?
  5. Specifically for Prescott, consider providing pension funding for all the families of the deceased Granite Mountain Hot Shots (GMHS) covered under PSPRS. The Arizona State Forestry Division called upon and directed the GMHS on state trust land during the 2013 Yarnell fire. The state granted $5.0 million against the pension obligation for the initial 6 affected families, but this does not begin to cover the full expenses of all these eligible beneficiaries over their lifetimes.

PSPRS is one of the state’s most troubling financial problems. It is extremely important for the state legislature to review all options and move towards a final solution for PSPRS. A tax of some sort is inevitable, but it must be carefully designed to achieve a sustainable program for our dedicated police and fire personnel. The city council and I will continue to work with other councils as well as press legislators to gain support for a solution at the state level. I ask our citizens and public safety union representatives to do the same with their state legislative representatives. Without a unified effort at reform, PSPRS will not protect those officers it was designed for into the future.