Editor’s note: This is the second of three articles regarding Pension Obligation Bonds (POB) being considered by the PTLS town council for the unfunded Public Safety Personnel Retirement System (PSPRS) and the funding of the construction of the Pinetop-Lakeside Police Department facility. Part I was an overview of the bond considerations. Part III will focus on the construction funding for the Police Department facility.
PINETOP-LAKESIDE – A work planning session in October 2020 opened the door for council and staff to explore the possibility of ways to deal with the underfunded Public Safety Personnel Retirement System (PSPRS) and funding for construction of the police department facility.
In two extensive presentations to council, Dec. 3 and Feb. 4, Piper/Sandler’s Managing Director Nick Dodd reviewed the 2017 tax exempt bond sale which funded the current town hall building and proposed Pledged Revenue Obligations (Excise Tax Revenue Bonds) Series 2021A, Tax Exempt, and Series 2021B (Taxable) as a consideration for the two debt issues before the council. The Feb. 4 presentation added a time-table which was not addressed in the Dec. 3 meeting.
The Town of Pinetop-Lakside was incorporated in 1984 and in 1985 the town became a member of the PSPRS, the state retirement system established in 1968 for Arizona’s public safety personnel.
There are two government retirement systems for Pinetop-Lakeside employees, the Arizona State Retirement System (ASRS) which covers teachers and government workers and the PSPRS.
The state also has an Elected Officials’ Retirement Plan (EORP) and a Corrections Officer Retirement Plan (CORP), neither of which are associated with the bond issue Pinetop-Lakeside is considering.
According to the PSPRS website, “PSPRS provides retirement benefits and programs to nearly 60,000 active members, retired members and surviving beneficiaries, and to more than 300 employers groups (municipalities, agencies and districts) throughout the state. The system maintains separate accounts for each employer that participates in PSPRS and CORP, and each employer establishes a local board that is responsible for determining membership and benefits eligibility in accordance with statutory provisions.”
Pinetop-Lakeside has a local PSPRS board which addresses all questions of eligibility, service, credits, and determines the amount, manner and time of payment of any benefits under PSPRS.
Though many fire departments across the state are also included in PSPRS, in PTLS the PSPRS is only the police department.
Unlike the ASRS which has been in existence over 65 years and has made good investment decisions, PSPRS has made some investment decisions which adversely affected the plan. Finance Manager Kevin Rodolph said one example is that PSPRS invested heavily in real estate and were severely impacted by the 2008 real estate crash; another is that they have had some heavy losses paid out over the years due to fires such as the Yarnell Hill Fire which occurred in Prescott.
Rodolph said, “All those factors mean it has not been stable and now that unfunded liability transcends to all agencies.”
Dodd, echoed by Rodolph, said there are essentially three tiers that the PSPRS is dealing with — two of which impact the fund. All long-servicing officers hired before Jan. 1, 2012 are in Tier 1 and have defined benefits only. Tier 2 are those hired on or after Jan. 1, 2012, also with only defined benefits, affected by the plan, and then Tier 3 are those officers hired after July 1, 2018, after the funding structure was changed. Tier 3 has both a defined benefit and a defined contribution plan and is not affected by the underfunded liability issue.
With Tier 1 tagged with all the bad investment decisions and unfunded liability, Tier 2 was actually created to help offset the Tier 1 issues.
Rodolph said Tier 1 is on the backs of all (PTLS) officers from 1985 until they are retired.
“There is a huge underfunded liability which stays with us until their retirement is gone or ended,” said Rodolph. “Even though they are not here any longer, we still have to pay their retirement.”
Rodolph said some cities and towns only hire new officers out of the academy because of the unfunded liability issue.
“It is a double-edge sword,” said Rodolph, “because they are inexperienced officers.”
Rodolph said a lot of officers have retired since 1985 meaning their retirement still has to be paid.
“We (the town) made a choice in 2017 that we were going amortize the unfunded liability for 20 years but we could not do it,” said Rodolph. “The unfunded liability kept growing and growing. Amortizing is how it gets to $17 million because we asked for 30 years because we couldn’t pay it off in 20. Now it is out of hand.”
“If we do not do something now,” said Rodolph, “I won’t be around, but there is no way the town can pay that off then.”
Based on the 30 years the town chose to go with, the total Unfunded Actuarial Accrued Liability (UAAL) paid out on July 1, 2047 would be $17,717,033. The UAAL is the difference between trust assets and the estimated future cost of pensions earned by employees.
Dodd said that that a number of Arizona cities and towns are considering selling debt in this low interest rate environment. They are essentially taking the debt away from PSPRS at 7.3% and saying they are going to go out and borrow from the capital markets and pay off that debt and then repay it to investors.
Pinetop-Lakeside is considering the issuance of approximately $6.0 million in Pledged Revenue Obligations (sales tax bonds) on a taxable basis to raise the funds needed to provide for the prepayment of the town’s unfunded liability with the PSPRS. That amount is estimated to be approximately $5.8 million and they would also pay for the issuance cost associated with selling those bonds.
The debt would be repaid over a period of approximately 27 years with a final maturity or payment coming due on July 1, 2047.
Dodd said it is estimated the town would pay approximately $365,000 annually. That amount includes approximately $3.2 million in interest over those 27 years.
Based on current market interest rates, the estimate for borrowing on the proposed Series 2021B Bonds (taxable) would be 3.37%.
Dodd said it is estimated that the town could save significant future payments owed to PSPRS as a result of the prepayment of the unfunded liability. The estimated saving to the town is around $8.5 million over 27 years.
Councilor Paul Watson asked Dodd for confirmation of his understanding regarding the debt to be paid off. “This part of the bond issue would not be looked at as a new debt but basically would be a wash with what we are paying now? Dodd confirmed that is correct.
The town will still be paying its annual contribution but it is the unfunded portion that would be paid off with the proceeds from the sale of the bonds.
The town will hold their first budget session for the year on Feb. 24.
Should the council choose to move forward with the sale of the taxable bonds to payoff the unfunded liability to PSPRS they will need to approve a resolution at the March 4 council meeting.