Tracking the fall of Arizona's public service retirement plan
PRESCOTT - The Arizona Public Safety Retirement System (PSPRS), formed in 1968, pays pensions to firefighters and police officers. It's funded primarily through investment income, as well as employer contributions and employee pay deductions.
The PSPRS is in dire straits, with the plan only 49 percent funded in June 2014.
Professional Fire Fighters of Arizona President Bryan Jeffries laid the start of the problems in 1999 squarely at the feet of the 19-year administrator of the fund, Jack M. Cross.
"At that time, that administrator who was running our pension system was a staunch believer in the tech phenomenon," he said.
Jeffries said Cross invested "heavily" in tech stocks, which were riding high at the time.
The annual letter from the members of the PSPRS governing board to the governor in 2000 said the system was "in outstanding financial and actuarial condition," being funded at a level of 124 percent. The letter called the PSPRS "one of the best-funded plans in the country."
The 2001 report was even better: funding was at a level of 126 percent.
But, with the decline of the tech stocks, the PSPRS began to slip. In 2002, the report to then-Governor Jane Dee Hull referred to a "volatile stock market" in noting a 113 percent funding level.
"The losses were a combined result of the heavy reliance on IT stocks and significant losses in the stock market," according to a 2011 report by the state office of the Auditor General, which said, "By the end of fiscal year 2002, these losses reduced the System's stock portfolio to about $2.7 billion, or 60 percent of the overall $4.5 billion investment portfolio value."
Cross was still the fund administrator in 2003, when the report said the system was "still in good condition" at 93.6 percent. That was the year Jeffries said Cross lost his job-officially, he retired-and in 2004 there was also a new PSPRS board, As a result of the losses, he said, new investment rules were put in place to diversify the fund.
The 2004 report, under Interim Director James A. Nielsen, showed a drop in the funding to 92.4 percent and noted the "difficult investing environment."
By 2005, the letter had grown from a single page to three as it tried to explain why the fund continued to hemorrhage money, dropping to 82.1 percent.
(It noted as well that "as the system has moved from a position of surplus assets to one of asset deficiency, the required aggregate employer contribution rate has increased.")
By 2006, just before the recession hit, the letter, now four pages, didn't even break the bad news to Gov. Janet Napolitano until midway through the second page.
"It should come as no surprise...that the PSPRS funding ratio has declined to 77.0 percent," it said, pointing to an 8.3 percent rate of return on investments.
Then the recession hit in 2007, Jeffries said. "Two radical diminishments to our funding in a 10-year cycle was far more than our fund could take."
The 2012 letter to Gov. Jan Brewer put the numbers right at the top:
"As of fiscal year-end, the financial status of the PSPRS Plan, as reflected in its funding ratio, decreased from 61.9% at June 30, 2011 to 58.6% at June 30, 2012.
"The continuing funding ratio decline that began in FY'02 is due primarily to the asset value losses and negative rates of return that the Plan experienced in FY'01 and FY'02 ($1.3 billion) coupled with the additional losses and negative rates of return the Plan experienced in FY'08 and FY'09 and now again in FY'12.
"The losses in FY'01 and FY'02 were largely the result of a lack of investment diversification and an over-concentration in high technology and telecommunication stocks and bonds at a time when the 'tech-telecom bubble' was deflating. The FY'08 and FY'09 losses were the result of the impact on the financial markets of the collapse of the U.S. housing market and the intense global recession that followed."
But PSPRS spokesman Christian Palmer said that report doesn't tell the whole story, because until a change in the law in 2008, the fund was limited in the funds into which it could invest, and many domestic stocks took serious losses as a result of the tech bubble bursting.
"PSPRS was almost completely shackled to domestic stocks and bonds" until the change, which "allowed PSPRS to invest internationally and into a much broader category of asset classes," he said.
Follow Scott Orr on Twitter @AZNewsguy. Reach him at 928-445-3333 ext. 2038, or 928-642-7705.