Officials: PSPRS sales tax measure would lead to $40M savings

PRESCOTT - Over the next 16 years or so, the City of Prescott is looking to pay upwards of $7.4 million per year toward its unfunded obligations with the Public Safety Personnel Retirement System (PSPRS).

That would be over and above the growing amount (from $4.3 million to about $6 million annually) that the system requires the city pay toward the unfunded liabilities in its public-safety pension system, say city officials, and it would help to pay off the debt about six years early - ultimately saving the city about a $40 million.

It also would relieve the continuing pressure that the PSPRS obligations have been putting on the general fund's other competing needs, such as the operations of the police and fire departments, the parks and recreation department, and the library.

All of that depends, however, on the outcome of a 0.55-percent sales tax measure that the Prescott City Council placed on the Aug. 25 primary ballot.

Although the PSPRS measure is just one of four measures on the ballot, it has generated by far the most interest and scrutiny in the community. From online queries, to telephone calls, to letters to the editor, local residents have raised a steady stream of concerns about the 0.55-percent sales tax increase.

A number of those questions have focused on the amount the sales tax would generate, how much the city would pay toward the pension obligations each year, and how that would affect the debt.

Early on, the city released a "projected reduction" of PSPRS liabilities, which was based on assumptions in the PSPRS actuarials.

The document included the estimated pay-off of the debt, based on sales tax increases of 0.55 percent, 0.58 percent, 0.60 percent, 0.65 percent, and 0.75 percent.

In April 2015, the City Council opted for the 0.55-percent increase option, which came with an estimated pay-off date of July 31, 2031.

The higher tax rates would have come with quicker pay-offs. For instance, a 0.75-percent increase would have had the liability paid off by 2025, and would have saved the city $61 million.

Budget and Finance Director Mark Woodfill pointed out that the 0.55-percent tax is estimated to generate about $7.4 million per year. For the next fiscal year, the city is obligated to pay about $4.3 million toward its PSPRS obligation. Therefore, the $7.4 million in extra tax revenue would allow the city to pay $3.1 million more than required.

Woodfill said his estimation of a 2031 pay-off factored in a 2.5-percent annual increase in city sales tax collections for the first five years, and zero percent after that, because of uncertainties about the economy and state legislative actions.

At the same time, the amount of the annual required PSPRS payment will rise - from about $5 million in 2018 to about $6 million in 2031.

The ballot language on the 0.55-percent PSPRS tax increase states that the tax would run until the unfunded obligation is "paid in full," or no later than Dec. 31, 2035. The tax would take effect on Jan. 1, 2016.

Although the unfunded PSPRS obligations and the rising pension costs have been issues for the city for years, the matter came to a head recently, when the PSPRS set a 22-year pay-off schedule. Under that schedule, the city's obligations would be paid off by 2037, and the existing $72 million unfunded liability would grow to a cost of about $165 million.

While making its decision to put the matter on the ballot, Prescott City Council members voiced concerns about the impact the rising costs would have on the city's ability to provide its other services.

City Manager Craig McConnell said Friday, Aug. 21 that the city would engage in a series of budget discussions after the Aug. 25 primary, regardless of the results of the ballot issues.

Should the 0.55-percent sales tax measure fail, the city has estimated that $1.8 million would have to be cut from the budget over the next two years. The possible impacts to the general-fund services: reduction of hours and/or closure of a fire station; reduction of personnel in the police department; more parks-and-recreation user fees and reduced services for sports tournaments; and a reduction in hours and personnel in the Prescott Public Library.

Other questions from the community have focused on:

How much will the sales tax cost Prescott residents?

The city projects the estimated additional annual cost per household at $126. That is based on the community's median income of $44,224, and estimated annual taxable spending at $22,973. It also assumes that Prescott residents do all of their taxable spending within Prescott city limits, which officials say is not likely.

Could the city have planned ahead for the unfunded liabilities and paid more toward the debt each year?

In response to this premise, which has circulated in the community, city officials say that Prescott is notified by the PSPRS each year of its actuarially-determined employer contribution rate.

"The amount we pay is calculated each payday by multiplying the rate (59.66 percent for fire, and 50.27 percent for police in fiscal year 2015)," stated Communications and Public Affairs Manager Catherine Sebold in a written response. "In fiscal year 2015, the amount the city paid to PSPRS was $4.13 million."

How did the unfunded liabilities accumulate?

During a May 2015 presentation on the plan, PFFA President Bryan Jeffries attributed the problems with the PSPRS, in part, to the system's investments in tech stocks in the late 1990s. When the tech bubble burst, the PRPRS administrator thought it was an anomaly, Jeffries said, and "doubled-down" on the investments. The PRPRS lost one-third of its assets between 1999 and 2001, Jeffries said, and it had not fully recovered in 2007, when the recession hit.

City officials say the investment issue is just one of the reasons for the accumulating debt. Others include: the design of the pension system, which guaranteed an annual 4-percent cost-of-living increase, among other aspects; the non-pooled configuration of the system, which requires each entity to stand on its own, with its own liabilities; and the age of Prescott's police and fire departments, which has resulted in more retirees collecting pensions, than employees on the job.