Public Pension Plans consume large parts of city budgets.
Presently, public safety, including contributions to The Public Safety Pension Retirement System (PSPRS), consumes nearly 75% of the Prescott city budget. No municipality can survive, let alone thrive with this kind of crushing expense. Yet in this hotly debated issue on how to pay for Prescott's $72 million PSPRS debt, it is important to separate the pension system from the brave firefighters and police officers who respond to the call of duty every day. They did not create this problem. And no one with a rational mind suggests that taking away or reducing their hard-earned pensions is the solution. But a hard look at the inherent deficiencies of the PSPRS -- along with a willingness to compromise -- is what's needed so both Prescott and the retirement system can prosper.
The Arizona legislature created the PSPRS in 1968 to provide a uniform retirement system for all public safety workers. In 1998, the voters passed Proposition 100 which codified a pension clause into the state constitution under Article 29 Section 1(c). The Arizona Supreme Court in Fields v. EORP then held this pension clause confers additional protection for public retirement benefits separate and above the protection already offered by the contracts clause in the state and U.S. Constitutions. As a result, the 2011 legislative attempt to remedy the deficiencies in the current PSPRS pension program failed, and any future attempts will not pass judicial scrutiny unless the state constitution is amended and the pension clause removed by the legislators and voters.
But Prescott's skyrocketing PSPRS costs come not only from the 2014 state Supreme Court decision, but also from the very nature of a defined benefit (DB) retirement plan. With a DB plan, benefits are guaranteed and the employer/taxpayer bears the risk of poor investments and management decisions. By contrast, in the private sector, defined contribution (DC) plans are the norm where the account is owned and managed by the individual worker. Another weakness with the current PSPRS is only the assets are pooled, not the liabilities. That is why Prescott, responsible for its own approximate 143 retirees, has a PSPRS debt of $72M while the town of Queen Creek, a much newer municipality, has a “mere” $2M debt.
Some other well documented problems with Arizona's public pension plan range from faulty actuarial valuations, over investment in high tech stocks, and the stock market crash of 2008, to illegal raises to paid PSPRS staffers and millions of dollars paid to private law firms for administrative and legal matters. Therefore, although the City of Prescott has faithfully paid the annual required PSPRS contribution each year, the citizens are, in essence, being asked to fund it a second time as a result of these poor management and financial decisions with ever higher mandatory contributions. (Case in Point: Prescott's annual firefighter PSPRS contribution soared from $152,262 in 2003 to approximately $2M in FY 2015; contributions for police increased from $363,813 to approximately $2.1M during the same time period).
Other factors contribute to Prescott's ballooning PSPRS debt as well, including an overly generous Cost of Living Adjustment (COLA) to retirees and the Deferred Retirement Option Plan (DROP). Retirees in the PSPRS have received 4% annual COLAs for the past 29 consecutive years. And with the average age of retirement for a Prescott police officer and firefighter at 48.6 years and 49.9 years respectfully, this lavish benefit simply isn't sustainable. The DROP program is even more egregious. For example, an officer participating in DROP works 20 years and “retires on paper” while, for a period not to exceed 5 years, is still employed in his same position. During this time his pension is frozen at 20 years, contributions to PSPRS cease, and the uncollected monthly pension checks accrue 7.85% interest. (Case in Point: A Prescott firefighter participating in the DROP program walks away with, on average, over $200,000.)
Solutions are complex because so is the issue. Here is a cursory look at a few suggestions:
1) The state constitution must be amended to remove the pension clause.
As previously stated, so long as the pension clause remains in the constitution, any legislative reform to PSPRS will fail because a single officer or retiree could file a lawsuit -- even if the unions themselves agreed to reform. Without the power to impair these contracts, the only other available remedies for the PSPRS debt are to raise taxes, slash services, or declare bankruptcy. But without the shackles of a pension clause, in times of emergency, an Arizona Court of Appeals in Phelps Dodge Corp. v. Arizona Electric Power as well as the U.S. Supreme Court in Home Building and Loan Assn. v. Blaisdall, held a state can invoke police powers to repair contracts to “safeguard the vital interests of its people.” Saving Prescott from financial ruin -- and protecting public safety pensions already earned -- certainly constitute an economic emergency worthy of modifying the PSPRS contract.
2) Pressure our state representatives for REAL reform this legislative session.
Passing the PSPRS ballot measure at this time would be a mistake as it will never solve the problem of a future open ended pension debt. Moreover, it would remove all incentive for our state representatives to enact any significant pension reform and place an initiative on the ballot in 2016 to amend our state constitution. You can be assured the police and firefighter unions are already lobbying our state representatives. Therefore, taxpayers in dozens of cities across the state with unsustainable PSPRS debt must demand reforms so all their municipalities remain solvent. The ultimate remedy is, of course a 401(k) style DC plan to ensure this crisis never happens again. But it will take a bold legislature to enact such a sweeping reform.
3) At the very least, reform must begin with the elimination of the DROP program and change to the current COLA calculation.
The financial benefit to the PSPRS program by eliminating the DROP program is obvious. But there are other changes to PSPRS that can be done. The current COLA formula (actually the Permanent Benefit Increase, PBI) is structured so that half of all returns to the fund in excess of 9% are distributed to eligible retirees rather than reinvested into the fund itself. In reality, any investment gains over 9% actually harm the PSPRS's financial condition because the PBI serves as permanent payments to retirees resulting in even greater unfunded liabilities. Therefore, the PBI formula must be modified so the PSPRS can retain and reinvest all its gains and reduce Prescott's unfunded pension debt.
4) The state and Prescott's local PSPRS boards must become truly independent.
The state PSPRS Board of Trustees consists of 7 members appointed by the governor, three of whom are union representatives. This Board is responsible for the operations, administration, and investment of all the trust monies. (Prescott's PSPRS boards consist of both police and fire union representatives as well as the mayor. And while it has no investment duties, the members can recommend benefit changes to the state Board.) As has happened in the past, the state Board will be pressed to take greater risk in hopes of earning a higher rate of return on the investments if the current $6.3 billion pension liability increases. Because taxpayers remain as the ultimate guarantor of the pension debt no matter the poor decisions, future recessions, or volatility of the markets, truly independent oversight is needed to best protect their hard earned tax dollars. As we learned through Detroit's financial mess, federal bankruptcy code trumps state law; let's hope the PSPRS unions are willing to compromise before they find out their pensions are no longer sacrosanct.
So before you vote this election, ask yourself which candidates and politicians support the PSPRS ballot measure and which ones have the courage to tackle pension reform head on and save our city. Then you'll find out if they support “we the people” or the present unsustainable PSPRS entitlement program. Cast your vote wisely.
- Mary Beth Hrin