WHITE-MOUNTAINS — Bad. Very bad. And getting worse.
But there’s hope.
That’s the shorthand summary of the impact of the underfunding of the state’s retirement system for police officers and firefighters, (Public Safety Personnel Retirement Plan) which remains in crisis despite recent reforms. That means almost every fire department, police force and sheriff’s office will need a taxpayer bailout.
As a result, Navajo County owes an extra $12 million to the retirement system – more than 10 percent of its annual operating budget. Apache County – with a smaller budget – owes $11 million.
Nearly every town and fire district in the region owes a similar debt, some much larger relative to their budgets. Show Low owes $7.8 million. Snowflake owes $3 million. Pinetop $5 million from the town and another $6 million from the fire district. The Timber Mesa Fire District owes $4.8 million. And perhaps the prize for deepest hole in the region goes to Holbrook, with a $7 million debt over and above its current payments to cover the retirement benefits of its five active police officers and 15 retirees.
Taxpayers will have to come up with the money, one way or the other. Courts have ruled counties and towns and fire districts can’t alter the benefits promised when an employee started work.
Most agencies have simply made the minimum payments required by state law, letting the underfunded balance grow – like a credit card debt on which you pay only the interest.
But here’s the kicker: The separate state retirement system that covers far more, non-public safety employees is in relatively good shape – with minimal underfunding.
What the heck? How did this happen?
If it was just the recession – why’s the state retirement system in better shape?
Will the system go broke?
Will some 18,000 police officers and firefighters as well as 13,000 retirees enjoy a secure retirement?
The Independent will examine the pension plan meltdown in this series, starting with the long setup to the current crisis.
So first, how did this happen?
You must understand two things: First, the unanticipated consequences of a decision made 30 years ago intended to bolster pensions and second, the twin hammer blows of two recessions.
Permanent Benefit Increase: ‘Good intentions gone bad’
Welcome to the well-intentioned root of the problem – the Permanent Benefit Increase (PBI), a case of “good intentions gone bad,” according to a PSPRS Power Point Presentation on how the disaster unfolded.
The legislature enacted the PBI in an effort to share the wealth generated by the steady rise in the value of the investments in the retirement fund’s portfolio. Back in 1986, the investment gains looked steady. Why just keep stashing money in the bank?
So here’s the idea: Distribute half of the investment gains above 9 percent to retirees as an across the board increase in the monthly check. The PBI provided the biggest boost to lower-paid rural officers and firefighters, since salaries in Phoenix remain about 30 to 40 percent higher than in rural departments.
The legislature put in a safety feature that capped the total increase in a given year. Excess proceeds would be set aside for future increases, regardless of how the investments fared in the interim.
Seemed like a great idea at the time.
And it resulted in steady increases in officer and firefighter pensions, especially in rural departments. Between 2000 and 2007, the formula produced an increase in the monthly benefit of between $87 and $127 every single year. Even when the 2001 and 2002 recession resulted in a drop in the value of the investments, monthly pension checks still went up. In seven years, the monthly benefit went up by more than $800 per month.
This started to deplete the fund. Back in 2000, the system had 125 percent of the money it needed to pay all projected benefits, for both active members and retirees. The funding percentage rose to 130 percent in 2001, according to PSPRS.
And then it started.
The 2001-02 recession swallowed up $1.7 billion in portfolio value. By 2007, the fund had just 66 percent of the money it needed to pay promised benefits. That means counties and towns would have to come up with more money – a lot more money – unless the trend reversed itself and investment returns went back up to that happy 10 or 15 percent annually.
Enter the Great Recession.
Flush with cash from all those retirement funds and freed from meaningful federal regulation, the banking sector went crazy. Hoping to cash in on the wild increases in housing prices, banks and investment funds bundled up mortgages that proved wildly overvalued. The bubble burst. Owners couldn’t pay their mortgages. The economy crashed.
The PSPRS portfolio’s value dropped 7 percent in 2008 and 18 percent in 2009. But wait: It gets worse.
The state’s income dropped by about a third, as the sales tax dried up and construction ground to a halt.
And yet, the Permanent Benefit Increase formula continued to drain the pension fund. Between 2010 and 2014, the formula produced a steady increase in the monthly benefit – some $140 per month each year. I“The intention behind the pension increase formula was good,” said PSPRS Communications Director Christian Palmer. “It raised the pension for the retired rural cop or firefighter or widow faster than it did in Phoenix of Tucson. But you can’t image that anyone would have foreseen the pure mathematical destruction that the PBI would bring if the world’s economy were to crash not once but twice in a decade.”
The state retirement system never adopted that formula. And that largely accounts for the difference between PSPRS and the state retirement fund, according to Christian.
Now add one final twist: The big increase in the number of retirees as the number of members paying into the system declined.
Rocked by the decline in tax revenue, towns and counties started cutting staff. That balanced the budget for the year. But it made the problems of the retirement system that much worse.
An active employee contributes about 10 percent of his or her salary to the system.
If the system’s fully funded, the employer pays a similar share. But when the system’s underfunded, the employer’s share goes up while the employee’s contribution stays the same. So most counties and towns are now paying more like 50 or 60 percent of an officer or firefighter’s salary into the system – dramatically increasing the cost of public safety which goes mostly to salaries.
But as towns and counties cut staff, many senior officers and firefighters opted to simply retire. So they went from paying 10 percent of their salary into the system and receiving no benefits, to paying nothing and collecting benefits.
The Navajo County Sheriff’s Office ended up with 40 active members and 33 retirees. Apache county has 26 active deputies and 23 retirees.
And to get an idea of the long-term costs of supporting a retired employee, consider the odd case of the single Navajo County Attorney’s office investigator. The PSPRS benefits chart lists just one position – and he’s retired. And what does the county need to contribute to the system to cover the lifetime retirement benefits of that employee? About $467,000, according to the PSPRS chart.
PSPRS and the state retirement system generally remains one of the few surviving “defined benefit” pension plans, as union-based, private-sector pension plans have declined with union membership. A “defined benefit” plan promises a monthly check for life. That compares to a 401K based plan, where the employer and employee both contribute to an investment fund. Once an the employee retires, the employer makes no further contribution.
Moreover, the public safety plan allows people to retire and start collecting benefits after 20 years. The formula doesn’t provide the full benefit after 20 years – but will pay the reduced benefit indefinitely even if the retiree takes another full-time job. Some officers and firefighters end up with several pensions, each collected after 20 years on the job. They don’t have to wait until they’re of retirement age. The system also has remained relatively generous in paying benefits to members who become disabled, since they work a dangerous, stressful, physically demanding job.
And that’s how we got here.
Granted, PSPRS has come under fire for its investment portfolio and the fees it pays for financial advice and a host of other issues. But the gains and losses in the fund have remained in the ballpark of retirement funds nationally, said Palmer. The big difference remains the impact of the Permanent Benefit Increase – a formula almost unique to PSPRS.
So where does that leave us?
The total system has about 18,000 active members and 13,000 retirees.
It has 46 percent of the money it needs to pay the promised benefits for those 30,000 police officers and firefighters. The system has about $10 billion in assets. That sounds reassuring. But it needs another $8.8 billion to keep its promises to retirees.
Every White Mountains community with police or fire protection owes a share of that debt.
Navajo County is paying just 34 percent of its debt, falling a little further behind each year. Apache County’s paying 30 percent. Pinetop’s stands at 33 percent. Most of the towns are a little better off. Show Low’s up to 56 percent, Snowflake at 45 percent, St. Johns at 70 percent and Timber Mesa Fire Fire & Medical at a heartening 76 percent. The Heber-Overgarrd Fire District is actually at 95 percent, one of the few in the state. But that’s because the department has 13 employees supporting just one retiree.
So what will become of us?
What has the state and PSPRS done to put the system back on solid ground? Stay tuned for Part II.
Peter Aleshire covers county government and other topics for the Independent. He is the former editor of the Payson Roundup. Reach him at email@example.com