PSPRS sales tax: Urgent revenue source or premature measure?

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PRESCOTT - For most of the candidates vying for seats on the Prescott City Council, the urgency of Prescott's obligation in its police and fire pensions justifies the 0.55-percent sales tax increase being proposed by the city.

Mayoral candidate Dan Fraijo calls the tax "an absolute must" for the city, because of the "enormity of the (debt's) impact."

Council candidate Billie Orr is equally adamant. "I'm a fiscal conservative, and I believe as a fiscal conservative, we should be paying our bills," she said, in support of the 0.55-percent tax.

For Council candidate Steve Sischka, a sales tax increase makes sense because it spreads the responsibility to Prescott's visitors. "Tourists definitely benefit from public safety," he said.

Mayoral candidate Harry Oberg differs from the field, however, by suggesting that the sales tax measure is "premature."

"What I'd like to see first is a significant attempt by the legislature to try to get a reform system," Oberg said, suggesting that revenue-generating efforts such as Prescott's could cause the State Legislature to "kick the can down the road" on reform of the Public Safety Personnel Retirement System (PSPRS).

Oberg maintains that reform could end up reducing Prescott's public-safety liability, which is currently estimated at about $72 million.

Council candidate Jim Lamerson - while he supports the tax - said he also would like to see the city's proposal improved upon by "working with the legislature."

Still, Lamerson and the other supporters of the tax maintain that it is best to get on the debt as soon as possible.

"If we don't do something, we're going to damaged next year," Lamerson said.

Widespread impacts

That is also the stance of city staffers, who say that if the 0.55-percent tax does not get voter approval, the city will have to cut $1.8 million in operating expenses over the next two years.

And although City Manager Craig McConnell has likened that to the amount the city spends each year on its library, officials say the city has never intended for the entire amount to come out of the library expenses.

Instead, Zelms said the cuts would be split among a number of departments, all of which are funded through the city's general fund. Fire, police, parks and recreation, and the library would all likely feel the brunt of the cuts, Zelms says.

For instance, the fire department could face a "brown out" of a fire station, which would involve a reduction in hours and/or staff - a step that the city says could eventually affect the city's ISO rating, leading to an ultimate impact on insurance-premium rates in the community.

The fire department also could see reduced staff of airport operations, and the elimination of staffing for one engine (effectively closing fire station).

In the police department, the impacts could involve a reduction of personnel, and reduced response, enforcement, community programs, and services.

In recreation services, the community could face closure of some facilities, increased user fees, and reduced service levels for tournaments.

Likewise, the library could face reductions in personnel, hours, and programs, along with increased wait times for library materials and services.

Zelms said the 0.55-percent sales tax gives voters a choice in "what they want for Prescott."

"We will pay the bill one way or another," she said of the city. "But we're trying not to erode what Prescott is."

The specifics of the cuts have yet to be worked out, Zelms said, and would be the topics of ongoing discussions - depending on the outcome of the Aug. 25 primary.

Increasing liability

For city officials, budget pie-charts offer an illuminating look at the City of Prescott's future.

A chart illustrating the division of the city's general fund shows large slices of costs for police and fire. For 2015, the numbers were significant: 33 percent of the general fund going toward police; 25 percent going toward fire; and 15 percent going toward pensions for the two public-safety departments.

In all, public safety absorbed about 73 percent of the city's general fund. By 2016 (the current fiscal year), the percentage was up to about 75.5 percent of the general fund's $32.9 million in revenues.

While significant, those numbers pale in comparison to the public safety percentages in coming years - expected to be 79 percent by 2018, and 90 percent by 2033.

"The pie just continues to be eaten by PSPRS," Zelms told the crowd during a candidate/sales tax forum at Las Fuentes Resort Village Friday, July 17.

The chart showing the 2033 breakdown indicates that zero percent would be available to go to other general-fund costs such as recreation services, the library, and economic initiatives, while 1 percent will be available for finance and community development. (Five percent would go to general government, and 3 percent would go to the Arizona State Retirement System, the pension system that cover the city's non-public-safety retirement system).

The city's unfunded liability currently stands at about $72 million (including the recent addition of survivor benefits for the families of three fallen seasonal Granite Mountain Hotshots), but the amount would grow to about $165 over the next 22 years, say city officials.

Those numbers prompted the city to propose the sales tax option in April 2015 as a way for the city to get in front of the debt.

For the current fiscal year, the city's PSPRS costs total about $4.5 million. That comes after years of steep increases in the city's pension costs, which were up about $863,000 last year, and $500,000 the year before.

Need for reform

On one aspect, everyone involved appears to agree: The need for reform of the PSPRS. Officials describe the system as "broken," "sick," and "unsustainable."

Zelms stressed that the Arizona Legislature took on comprehensive pension reform in 2011 (SB 1609). But two subsequent lawsuits have challenged the reform measures. In the first, which challenged the plan's elimination of the 4-percent automatic cost-of-living increases to retirees, a judge ruled in 2014 that the legislature's changes were unconstitutional.

Another lawsuit, which is still pending, is challenging SB 1609's change in the cap for employees' contributions - up from the previous 7.65 to 11.65 percent.

The results of the cost-of-living lawsuit escalated cost hikes for involved entities this past year. To deal with the increase from the retroactive cost-of-living benefits, Prescott opted for a three-year phase-in, which brought its anticipated increase down by nearly $1 million for the current fiscal year.

In recent months, several reform proposals have been released, including one from the Professional Fire Fighters of Arizona (PFFA), and another by the League of Arizona Cities and Towns.

Among other things, the PFFA plan would require employees to work six years longer or turn 60 to be eligible for benefits; would require a higher employee contribution to the system; and would cut the cost-of-living increases to a maximum of two percent.

During a May 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.

According to information from the "Yes on Question #3" effort, the PSPRS problems can be traced to "the economy, political decisions in Phoenix, and because the city (of Prescott) made minimum pension payments for many years."

Zelms maintains that the PFFA's plan is similar to the legislative reform, which has faced litigation. She questioned whether the PFFA measure would be immune to litigation, even if voters approved a change to the Arizona Constitution.

The reform plan that the League proposed would require no change to the state constitution, because it proposes leaving the existing pension system as it is, and starting a new program for employees hired after July 1, 2016.

Meanwhile, the various employing governments would be responsible for paying the pension obligations that have accumulated over the years - estimated at an "underfunded" amount of $6.6 billion.

Regardless of which reform measure the State Legislature ultimately chooses, Zelms and other city officials say Prescott will be responsible to pay its existing unfunded liability.

And even if reform would somehow reduce Prescott's costs, Zelms said, the wording of the city's 0.55-percent ballot issue states that the tax would continue only as long as required to pay off the liability. The ballot states that the tax would continue "until the unfunded obligations of the city to the systems are paid in full, including any associated financing of said obligations, but ending not later than December 31, 2035."

The city estimates that the 0.55-percent tax would cost each Prescott household about $126 per year.

Follow Cindy Barks on Twitter @Cindy_Barks. Reach her at 928-642-0951.