We are at a watershed moment here in Arizona. Prescott is the first municipality in the state to seek funding of its $72M PSPRS "debt" through a tax increase, a 0.55 percent sales tax. You can bet the state legislature is watching what we do. And the big boys down at the capitol would like nothing more than to have the 256 individual entities that comprise the PSPRS system fund their own pension debt -- again and again and again -- with tax increases. That way, the legislature never has to confront the unions or make the difficult decision to reform this bloated entitlement program once and for all.
Prescott's sales tax proposal to fund the "debt" is an extremely short-sighted answer to a legislative problem. Studies from the Tax Foundation show when a population is overly sales-taxed, avoidance of sales tax occurs and consumers do one of two things: they shop the next closest municipality with a lower tax rate or they shop on-line. Revenue losses then follow despite the higher tax rate. Sales tax revenue in Prescott today is basically flat already. So if a tax increase of this magnitude passes, the big winners will be Prescott Valley and the shareholders of Amazon.
But it is not just that a sales tax is a lazy man's way to govern, the public pension system itself is doomed to remain continually underfunded. For example, latest figures released from the PSPRS Board show the pension trust fund averaged 10.53 percent over the past three years -- not great in the middle of a bull market, but well above the 7.85 percent assumed rate of return for the fund investments. However, despite the three banner years of investment returns, the pension funded ratio (a figure used to measure a pension plan's overall funding health) actually FELL from 57 percent to 49.2 percent between 2013 and 2014. What this means, specifically, is the pension debt is actually growing, despite the fact the trust fund's investments far exceeded its projected rate of return. And since the PSPRS fund performed at an anemic 4.98 percent so far this year -- our pension debt will only further increase without an immediate legislative fix. Most perverse of all, our Prescott city officials, and municipal officials across the state, will only continue to return to the taxpayers to fund the difference with ever higher tax increases during the next economic downturn when revenues dive but pension costs remain high and growing.
With real legislative reform this session, however, the public pension system could be changed once and for all, and the $72M "debt" possibly reduced. But this will also take a genuine effort by the unions to come to the table and negotiate in good faith with the understanding that our entire state is under fiscal assault. For example, retirees in the PSPRS system have received compounded 4 percent cost-of-living-adjustments (COLAs) for the past 29 consecutive years. A union concession to reform the COLA formula to instead reflect the local Consumer Price Index (CPI) would be sufficient to reduce Prescott's debt somewhat. An immediate increase in employee contributions beyond the current 11.65 percent (to supplement the 74% contribution by the Prescott taxpayers) would also be helpful in reducing the overall debt.
Finally, not all options have been explored to reduce this pension debt other than a sales tax increase. Other alternatives exist, such as the sale or lease of city property (buildings, land, or enterprises) and the use of the proceeds to immediately pay down the existing debt, and reduce the amount of debt that time oriented interest would be applied to. Leveraging assets to alleviate pension debt has already been successfully accomplished in several cities in Pennsylvania and it should be explored here.
So let's see what our pension "debt" truly is after this legislative session, plus explore other available options, before we strap our citizens with a sales tax of this magnitude and duration. The legislature is actively soliciting reform with the unions, so let them do the job we elected them to do before we burden ourselves with additional taxes. Vote NO on Question 3, the 0.55 percent sales tax for PSPRS.
Joe Pendergast is the President of the Citizens Tax Committee, Prescott.