Taxpayer Cost = $8 Billion, Yes…Billion
More financial trouble for public-safety pension plan
The Public Safety Personnel Retirement System released new actuarial valuations for the pension funds for police and firefighters, elected officials and prison guards. All three funds have significantly dropped in value because of prior investment losses and benefit increases imposed by a state Supreme Court decision.
The state pension system for police officers and firefighters has less than half of the money it needs to fund current and future retirement payments, and both major candidates for governor say the problem must be addressed in 2015 regardless of who wins Tuesday’s election.
However, neither Republican Doug Ducey nor Democrat Fred DuVal, during interviews with The Arizona Republic, offered specific plans to fix the troubled Public Safety Personnel Retirement System.
But both said they would try to develop a consensus among employees, employers and lawmakers to find a solution for the $7.78 billion unfunded liability that has put a crimp on local communities’ ability to hire police officers and firefighters.
The Public Safety Personnel Retirement System last week released new actuarial valuations for the pension funds for police and firefighters, elected officials and prison guards. All three funds have significantly dropped in value because of prior investment losses and benefit increases imposed by a state Supreme Court decision.
The plan for elected officials, which includes judges, is in the worst shape. It has less than 40 percent of the money it needs to pay for current and future pension obligations. The fund may run out of money in 20 years if no significant changes are made. That plan is closed to newly elected politicians, and is expected to eventually cease, but additional public funds may be needed.
With the other two plans also in financial trouble, local and state governments will have to pay more to shore up the funds, leaving fewer dollars for other public services.
DuVal and Ducey say working with all groups involved in the pension systems is the only way to avoid litigation, which thwarted pension reforms the 2011 Legislature enacted.
The Legislature suspended cost-of-living increases for PSPRS retirees, but the state’s high court ruled that was unconstitutional. Repayments began this summer, and additional funds were set aside, costing the system a one-time hit of at least $233 million.
Pension officials say the situation could get worse if the courts rule that legislative changes that caused PSPRS members to pay more into the system also are unconstitutional.
DuVal said PSPRS is financially unsustainable, but court rulings have made it clear that state constitutional changes, which would require voter approval, may be needed for reform.
“We want to approach this in a way that has long-term solutions,” DuVal said. “We need to make sure everyone is involved. We are looking at broad participation to avoid litigation.”
Ducey said basically the same thing.
“The biggest concern is to look at the unfunded liabilities,” Ducey said. “There are a number of reforms, and lot of different options. I want to talk to leaders of all the organizations.”
Ducey also said he would embrace recommendations by a pension-reform task force he led as state treasurer, including limiting retirement benefits to base-salary compensation. That proposal would prevent using lump-sum payouts of vacation and sick time and prevent the artificial inflation, or “spiking,” of pensions.
Randie Stein, a PSPRS board member, said she’s glad both candidates realize there is a problem. She said any reform must deal with benefits and payments made by employees and employers.
“There is no magic to it, but it’s a very significant problem,” said Stein, a public-finance investment banker. “Stability is vital. No one will get any benefits unless we secure long-term viability to the fund.”
Public-safety officers this summer pushed Gov. Jan Brewer to call a special session to deal with pension-funding issues. But the governor took no action and the outlook has since gotten worse.
Stein and the other six board members last week were told the pension system for police officers and firefighters has a $6.2 billion unfunded liability.
The average lifetime annual pension for a public-safety retiree is $53,236 — nearly three times what an average retiree receives in the more financially-stable Arizona State Retirement System for teachers and government workers.
Retirees in ASRS have not seen a cost-of-living adjustment since 2005, and it is much harder for those members to artificially inflate their pension benefits.
The funding ratio — a measure of the amount needed to pay current and future pension liabilities — for ASRS is about 77 percent.
A funding ratio of 80 percent is considered “healthy” in public retirement systems.
At PSPRS, its board was told that the funding ratio for the police and fire pension fund dropped from 58.7 percent to 49.2 percent for the fiscal year that ended June 30, 2014.
The funding ratio for the Corrections Officer Retirement Plan dropped from 69.7 percent to 57.3 percent, and there are $1.1 billion in unfunded liabilities. The average pension is $26,299.
The funding ratio for the Elected Officials’ Retirement Plan dropped from 56.5 percent to 39.4 percent and there is a $482 million unfunded liability. The average pension is $50,338.
ON THE BEAT
Craig Harris covers state pension systems and agencies, with an emphasis on government accountability and public money.