Official: To fix pensions, first change constitution

Voter-approved protection limits reform efforts

Proposition 443 would raise the City of Prescott’s portion of the sales tax .75 percent to pay for the unfunded contributions to the Public Safety Personnel Retirement System, which is $78 million. (Les Stukenberg/Courier)

Proposition 443 would raise the City of Prescott’s portion of the sales tax .75 percent to pay for the unfunded contributions to the Public Safety Personnel Retirement System, which is $78 million. (Les Stukenberg/Courier)

Editor’s note: This is the second in a series of articles looking into the financial woes of the Public Safety Personnel Retirement System (PSPRS), and Proposition 443, the City of Prescott’s sales-tax-increase measure that will be on the Aug. 29 primary ballot. A correction was made to this report on Monday, July 24. An explanation appears at the end.

With a statewide pension shortfall totaling $7.7 billion, the Public Safety Personnel Retirement System (PSPRS) has long been on the receiving end of reform measures.

And if a group of Arizona mayors is successful, more reforms will be coming.

From the 2011 attempt by the State Legislature to increase the employee contribution rate, to 2016’s elimination of the costly Permanent Benefit Increase (PBI) program, state and local officials have tried through the years to make the system more sustainable.

Now, support appears to be growing for elimination of the protection that public pension benefits have under the state constitution. While such a move would require voter approval, a number of state and local officials expressed support this past week for putting it on a future ballot.

Constitutional protection VOTE?

To date, pension reform attempts have had a relatively spotty success record. For instance, the 2011 effort to increase employees’ pension contribution rate faced legal challenges and ultimately was overturned by the courts. Among the reasons cited: The constitutional protection.

The constitutional clause, approved by voters in 1998, states: “Public retirement system benefits shall not be diminished or impaired.”

Although the discussion this past week was preliminary and consensus was not unanimous, several state legislators and Arizona mayors voiced support for putting a referendum measure on the ballot for elimination of the constitutional protection.

The discussion occurred during a Friday, July 21 gathering of about 25 Arizona mayors, vice mayors, council members, state representatives, and state staffers at the Prescott Valley Public Library. The meeting was the third in a series of mayors’ summit meetings spearheaded by Prescott Mayor Harry Oberg, with the purpose of looking into pension-reform possibilities.

State Rep. David Livingston, who serves on a State Legislative Ad Hoc Committee on the PSPRS, maintained that in order for the necessary reforms to occur, the constitutional clause preventing benefits from being diminished needs to be eliminated.

“I think the number one thing that we can do together – and the League (of Arizona Cities and Towns) needs to get behind it, or it won’t happen – is to fix the constitution,” Livingston, a Republican from Peoria, told the group.

“I think it’s critical, because without that one fix, it limits on us on what we want to do,” Livingston said, adding that he would be willing to introduce a bill in the legislature seeking a referendum on the clause.

State Rep. Noel Campbell and David Stringer, Republicans from Prescott who serve as the chair and vice chair, respectively, of the state ad hoc committee, added their support as well.

Campbell, who has referred to the elimination of the constitutional protection as the “nuclear option,” predicted that Livingston would face significant opposition from police and fire unions.

Stringer, who said he would sign on as a co-sponsor of such a bill, raised a question about the level of benefits that retirees receive through the PSPRS. “Have we over-promised pension benefits?” he asked, maintaining the public safety retirees receive “benefits that nobody else in our society” receives.

Still, others in the meeting expressed more caution.

Flagstaff Mayor Coral Evans said she would need to see more information on such a measure before offering her support. “I don’t want anybody to leave this room thinking that we’re 100-percent on board,” she said.

And Nick Ponder with the League of Arizona Cities and Towns stressed that court rulings dating back as far as the 1960s also protect pensions from being diminished, through contract law. He maintained that elimination of the constitutional protection would not affect that earlier protection.

Past reforms

Friday’s meeting started out with a report from Queen Creek Finance Director Scott McCarty, who serves on a League of Arizona Cities and Towns task force on pension reform.

McCarty emphasized that reforms approved in 2016 introduced a new tier of employees – Tier 3 – which will end up costing employers less in the future.

DROP allows employees in Tier 1 to agree to retire within five years and to keep working in the interim without paying retirement contributions to PSPRS. At the time of their retirement, the employees then receives a lump-sum payment of the retirement benefits they would have received during the DROP period.

Officials at Friday’s meeting appeared in agreement that DROP has been a financial drain on the system, although it was intended to be a cost-neutral program that would help departments transition between veteran employees and new employees.

Oberg said an evaluation of the program in Prescott indicates that “Basically, the DROP program hurts us. And he pointed out that a majority of Prescott’s police and fire employees are still eligible for the program because they are in Tiers 1.

(Tier 1 includes any police and fire employees hired before Jan. 1, 2012, and Tier 2 includes those hired between Jan. 1, 2012, and July 1, 2017).

State Rep. Karen Fann pointed out that the lump-sum payments that DROP participants receive represent an accumulation of retirement benefits that the employees earned. “These big chunks of money – this is money that they paid in,” she said.

Still, Fann and others acknowledged that among the issues with DROP is the guaranteed interest that the retirement benefits accrue during the DROP time period. The PSPRS website states that the interest rate is set at the system’s “assumed earnings rate,” which is currently at 7.4 percent.

Evolving benefits

Along with the elimination of DROP (for Tier 2 and 3 employees) and PBI (replaced with a cost-of-living increase, capped at 2 percent for all tiers), recent reform measures have changed the retirement ages and length of services for PSPRS retirees as well.

A matrix from PSPRS shows:

• Normal retirement for Tier 1 employees is after 20 years of service with no age requirement, or with 15 years of service at age 62.

• Normal retirement for Tier 2 employees is after 15 years of credited service or 25 years of service at age 52.

• Normal retirement for Tier 3 employees is after 15 years at age 55.

Numbers from PSPRS show that Tier 1 currently has 14,022 PSPRS members statewide, while Tier 2 has 5,347 members, and Tier 3, which began July 1, has no members.

The system is currently paying 10,342 regular and disability pensions, and 1,521 pensions to surviving spouses and children.

Who’s to blame?

While a number of local officials at Friday’s meeting placed much of the blame for PSPRS’s current financial problems with the state, Ponder and McCarty pointed out that local governments had some control over their own debt.

“I believe a lot of the blame sits with the legislative side, not the citizens,” said Bisbee Mayor David Smith.

But Ponder noted that the Town of Bisbee currently has a 29-percent disability-pension rate – much higher than the state average. “There shouldn’t be that much that differentiates your cities from others,” he said, noting that the local pension boards make the decisions on granting disability pensions.

McCarty suggested that municipalities adopt a policy on how to deal with its unfunded liability. He added that municipalities need to look at the liability as debt, and develop a plan for paying it down.

Evans emphasized the impacts that state actions have had on the municipalities’ budgets, however. She pointed especially to the state’s decision to sweep money from the Highway User Revenue Funds (HURF) to go toward the Arizona Department of Public Safety, which reportedly has an unfunded liability of $735 million.

To make up for the loss of its usual share of HURF money, Evan said Flagstaff had to go to its voters in 2012 for a sales tax increase to cover road-improvement costs. She pushed for the state to “pay its fair share” in the cost of PSPRS.

(Watch for future installments on: details of the Proposition 443 sales tax; opposition views; and what happens if the sales tax measure fails).

Correction: Tier 2 employees are not given the option to participate in DROP. This report has been corrected to reflect that.