Debating 443 PRO: Backers say tax will cover PSPRS debt

About 200 people listen to PSPRS Deputy Chief Investment Officer Mark Steed during a PSPRS town hall meeting in Prescott Wednesday, July 26. (Les Stukenberg/Courier)

About 200 people listen to PSPRS Deputy Chief Investment Officer Mark Steed during a PSPRS town hall meeting in Prescott Wednesday, July 26. (Les Stukenberg/Courier)

See Prop. 443 opponents' position

CON: Solve long-term issues before taxing public

Over the next 10 years, the City of Prescott predicts that a 0.75-percent sales tax increase would generate upwards of $11 million annually.

Officials say that should be more than enough to pay down Prescott’s $78.4 million in debt to the Public Safety Personnel Retirement System (PSPRS).

City Budget and Finance Director Mark Woodfill explains that the city is estimating that the three-fourths-cent tax would generate between $11 million and $12 million per year. And over the course of the tax, the city is projecting annual growth of 2 percent, he said.

While noting that a number of variables exist that could affect the final numbers — a possible economic downturn, for instance, or future moves by the state legislature that would hinder the city’s sale tax receipts – Woodfill said he is confident that the 0.75-percent tax would be sufficient to cover the city’s PSPRS unfunded liability within its 10-year timeframe.

Proposition 443

In February 2017, the Prescott City Council approved taking a measure to the voters on Aug. 29, seeking a 0.75-percent sales tax increase, with all of the revenue going toward paying down the PSPRS debt.

The ballot measure states that Proposition 443 would take effect on Jan. 1, 2018, and end “the earlier of” Dec. 31, 2027, or when the city’s PSPRS unfunded liability is $1.5 million or less, as determined by actuarial valuation.

Based on that wording, the city would stop collecting the sales tax when its PSPRS debt becomes nearly paid off (within $1.5 million).

That leads some city officials to predict that the tax could go away in less than 10 years – especially if the City Council opts to continue to pay all or much of the money that would typically have to go toward PSPRS from the general fund.

Officials explain that the city currently has an annual required contribution to PSPRS, which includes the normal amount that goes to pay for pension costs, along with the additional amount that goes to pay for the shortfall in the cost of future pensions (the unfunded liability).

For the 2018 fiscal year, which began on July 1, Prescott’s PSPRS payment amount stands at $7.8 million, according to information from the city.

The question facing current and future councils will be whether the city should continue to make its required annual payments from the general fund, along with the $11 million to $12 million it would be raising through the sales tax.

Council members have already answered that question for this fiscal year: They say the city will pay its required annual payment of $7.8 million, along with the estimated $5.5 million to $6 million that would be raised between Jan. 1, 2018, and June 30, 2018 (the end of the fiscal year).

In addition, the council approved the budgetary option of paying as much as $11 million more from its unassigned reserve fund.

Future fiscal years are less certain, however, with a majority of council members maintaining that the decision about the general fund payments should be made on a year-by-year basis, depending on city needs.

For instance, they note that the SAFER (Staffing for Adequate Fire and Emergency Response) grant that the Prescott Fire Department received this past year is paying for seven firefighter positions, including three that had been frozen in past city budget-cutting measures, and others that were vacant or soon-to-be-vacant.

The SAFER grant will run for just two years, however, and officials say the city will face a critical decision at its conclusion – whether to continue paying for those positions out of its general fund, or cut the positions altogether, which would likely result in more “browning out” (temporary closures) of fire stations.

Rising liability

While opponents of the 443 tax maintain that changing actuarial factors make paying off the PSPRS in 10 years a virtual impossibility, Woodfill says the impacts of those factors are being overstated.

For instance, he referred to the predictions from the opponents on the impacts of pending PSPRS reductions in the system’s assumed earnings rate.

Currently, the system assumes that it will earn 7.5 percent in interest. PSPRS officials have pointed out that the actual rate of return fluctuates; in the 2016 fiscal year, the fund earned less than 1 percent, but had jumped to more than 12 percent in the recently concluded fiscal-year 2017.

John Lamerson, treasurer of the Citizens Tax Committee and opponent of Proposition 443, says the 7.5-percent projected earned rate of return is significantly higher than the industry standard, and artificially reduces the projected unfunded liability. “It makes the debt look smaller,” he said.

Scott McCarty, chair of the League of Arizona Cities and Towns Pension Reform Task Force, told a group of mayors and state officials this past week that the interest rate assumption was likely too high, and PSPRS has plans to reduce it to 7.4 percent.

Experts agree that reducing the projected rate of return will cause the PSPRS unfunded liability to increase. But the level of the impacts is a point of contention.

Lamerson says that “For every tenth of a percent you reduce your (rate of return), you increase your unfunded liability by 10 percent.”

But Woodfill says recent decreases in the investment return assumptions have shown that the impact would actually be much lower than that – in the tenths of 1 percent, rather than 10 percent.

Using the Prescott Police Department’s unfunded liability between 2015 and 2016 as an example, Woodfill said the impact of reducing the investment return assumption from 7.85 percent to 7.5 percent resulted in an unfunded liability increase of about 0.25 percent.

Woodfill says the impacts are not a matter of opinion; rather, he said, they are proven facts from the actuarial reports.

State solutions?

While Proposition 443 opponents have held that the state should fix the PSPRS pension system before the city moves forward with a new tax, city officials question whether statewide reform is feasible, and whether it would affect the city’s unfunded liability.

Indeed, McCarty told the group of mayors this past week that the unfunded liability is a debt, for which individual municipalities are responsible, regardless of future pension reform.

City Council member Billie Orr and Steve Sischka – both proponents of 443 – have supported a two-pronged approach: A sales tax to allow the city pay down its debt; and continued support for reform at the state level.

Prescott City Manager Michael Lamar notes that the city’s annual payments to PSPRS continue to grow each year, which dramatically affects the general fund.

With a general-fund budget of about $33 million, he said, the city’s PSPRS payment grew from about $6.5 million in fiscal-year 2017 to $7.8 million in fiscal-year 2018.

“That’s significant,” Lamer said, noting that without additional revenue, the city would have to continue to cut other general-fund services (police and fire, parks and recreation, library, and community development).

The “yes on 443” presentation that Orr and Sischka have made questions the wisdom of putting off the debt any longer. “Why wait?” it asks, pointing that a 10-year payoff through the sales tax would save the city $53 million vs. a 20-year payoff (without the additional sales tax revenue).

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