Originally Published: June 26, 2015 6 a.m.
Presently, public safety, including contributions to the Public Safety Pension Retirement System (PSPRS), consumes nearly 75 percent of the Prescott city budget. No municipality can survive, let alone thrive with this kind of crushing debt.
Yet, in this hotly debated issue on how to pay for Prescott's $72 million PSPRS debt, it is important to separate the pension system from the brave firefighters and police officers who respond to the call of duty every day. They did not create this problem. And no one with a rational mind suggests that taking away or reducing their hard-earned pensions is the solution. But a hard look at the inherent deficiencies of the PSPRS - along with a willingness to compromise - is what's needed so both Prescott and the retirement system can prosper.
The Arizona legislature created the PSPRS in 1968 to provide a uniform retirement system for all public safety workers. In 1998, the voters passed Proposition 100, which codified a pension clause into the state constitution under Article 29 Section 1(c). The Arizona Supreme Court in Fields v. EORP then held this pension clause confers additional protection for public retirement benefits separate and above the protection already offered by the contracts clause in the state and U.S. Constitutions.
As a result, the 2011 legislative attempt to remedy the deficiencies in the current PSPRS pension program failed, and any future attempts will not pass judicial scrutiny unless the state constitution is amended and the pension clause removed by the legislators and voters.
But Prescott's skyrocketing PSPRS costs come not only from the 2014 U.S. Supreme Court decision, but also from the very nature of a defined benefit (DB) retirement plan. With a DB plan, benefits are guaranteed and the employer/taxpayer bears the risk of poor investments and management decisions. By contrast, in the private sector, defined contribution (DC) plans are the norm where the account is owned and managed by the individual worker. Another weakness with the current PSPRS is only the assets are pooled, not the liabilities. That is why Prescott, responsible for its own approximate 143 retirees has a PSPRS debt of $72M while the town of Queen Creek, a much newer municipality, has a "mere" $2M debt.
Some other well documented problems with Arizona's public pension plan range from faulty actuarial valuations, over investment in high tech stocks, and the stock market crash of 2008, to illegal raises to paid PSPRS staffers and millions of dollars paid to private law firms for administrative and legal matters. Therefore, although the City of Prescott has faithfully paid the annual required PSPRS contribution each year, the citizens are, in essence, being asked to fund it a second time as a result of these poor management and financial decisions with ever higher mandatory contributions. (Case in Point: Prescott's annual firefighter PSPRS contribution soared from $152,262 in 2003 to approximately $2M in FY 2015; contributions for police increased from $363,813 to approximately $2.1M during the same time period).
Other factors contribute to Prescott's ballooning PSPRS debt as well, including pension spiking and the Deferred Retirement Option Plan (DROP). With pension spiking, the highest consecutive 3 years of base salary are used to calculate the police officer or firefighter pension. However, the officer is then permitted to add in overtime pay, shift differential and accumulated vacation, sick and holiday time to further inflate the final pension tabulation. The DROP program is even more egregious. For example, an officer participating in DROP works 20 years and "retires on paper" while, for a period not to exceed 5 years, is still employed in his same position. During this time his pension is frozen at 20 years, contributions to PSPRS cease, and the uncollected monthly pension checks accrue 7.85 percent interest. (Case in Point: A Prescott firefighter participating in the DROP program walks away with, on average, over $200,000.)
Solutions are complex because so is the issue. Here is a cursory look at a few suggestions:
1.) The state constitution must be amended to remove the pension clause.
As previously stated, so long as the pension clause remains in the constitution, any legislative reform to PSPRS will fail. Without the power to impair these contracts, the only other available remedies for the PSPRS debt are to raise taxes, slash services, or declare bankruptcy. But without the shackles of a pension clause, in times of emergency, the U.S. Supreme Court held in Home Building and Loan Assn. v. Blaisdall, a state can invoke police powers to repair contracts to "safeguard the vital interests of its people." Saving Prescott from financial ruin -- and protecting public safety pensions already earned -- certainly constitute an economic emergency worthy of modifying the PSPRS contract.
2.) Pressure our state representatives for REAL reform this legislative session.
Passing the PSPRS ballot measure would be a mistake as it will never solve the problem of a future open ended liability. Moreover, it would remove all incentive for our state representatives to enact any significant pension reform and place an initiative on the ballot in 2016 to amend our state constitution. You can be assured the police and firefighter unions are already lobbying our state representatives. Therefore, taxpayers in dozens of cities across the state with unsustainable PSPRS debt must demand reforms so all these municipalities remain solvent. The ultimate remedy is, of course a 401(k) style DC plan to ensure this crisis never happens again. But it will take a bold legislature to enact such a sweeping reform.
3.) At the very least, reform must begin with the elimination of pension spiking, the DROP program, and change to the current COLA calculation.
The financial benefits to the PSPRS program by eliminating pension spiking and the DROP program are obvious. But there are other changes to PSPRS that can be done. The current COLA formula (actually the Permanent Benefit Increase, PBI) is structured so that half of all returns to the fund in excess of 9 percent are distributed to eligible retirees rather than reinvested into the fund itself. In reality, any investment gains over 9 percent actually harm the PSPRS' financial condition because the PBI serves as permanent payments to retirees resulting in even greater unfunded liabilities. Therefore, the PBI formula must be modified so the PSPRS can retain and reinvest all its gains and reduce Prescott's unfunded liabilities.
4.) Prescott is a charter city; it can enact its own reforms.
The Goldwater Institute in Wright v. Stanton successfully forced the City of Phoenix to end the practice of pension spiking as of May 2014. This practice is already prohibited under ARS 38-842(12), so it should no longer continue here. And our elected city officials and local PSPRS board should explore ending the DROP program as well. As we learned through Detroit's financial mess, federal bankruptcy code trumps state law; let's hope the PSPRS unions are willing to compromise before they find out their pensions are no longer sacrosanct.
So before you vote this election, ask yourself which candidates and politicians support the PSPRS ballot measure and which ones have the courage to tackle pension reform head on and save our city. Then you'll find out if they support "we the people" or the present unsustainable PSPRS entitlement program. Cast your vote wisely.
Mary Beth Hrin is a resident of Prescott, Arizona.