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Wednesday, November 28, 2012

Arizona Public Safety Personnel Retirement System (PSPRS) FY 2012 actuarial report

While wine enthusiasts eagerly anticipate the arrival of the beaujolais nouveau at this time of the year, others await the release of PSPRS' actuarial and consolidated annual financial reports.  The actuarial report for the fiscal year ending June 30, 2012 (FY 2012) was released to PSPRS' trustees on October 12, 2012 and recently became accessible online.  The actuarial report is compiled to allow PSPRS to calculate the employer contribution rates for the fiscal year starting on July 1, 2013 (FY 2014).

As a layman, I find many parts of the actuarial report difficult to understand, though the authors, to their credit, have done their best to make it user-friendly.  While a better analysis of PSPRS' current financial state will have to wait until the annual report is released to the public in the next few weeks, here are some of the key numbers included in the FY 2012 actuarial report:

  1. The funding ratio of PSPRS dropped from 61.9% to 58.6%.
  2. The employer contribution rate will increase from 27.18% to 30.44%.
  3. PSPRS had a market return on investments of -0.8%.  Under the 7-year smoothing that PSPRS uses to calculate yield, PSPRS produced a 3.2% return.  The smoothing technique is utilized to prevent large fluctuations in employer contribution rates from year to year.
  4. The smoothed 58.6% funding ratio would drop to 49% if the current market value of assets were used to calculate the funding ratio.
  5. The average annual retirement increased from $47,739 to $49,480.
  6. The average salary of active employees increased from $71,110 to $72,767.
  7. There are 18,542 active employees, 9,802 retirees and beneficiaries, and 1,496 employees in the Deferred Retirement Option Plan (DROP).  This means that 18,542 are paying into PSPRS, while 11,298 are not (note: some DROP participants continue to pay into PSPRS but will be refunded their contributions with interest when they retire).  This is a ratio of 1.64 active contributing employee to each retired or DROPped non-contributing indivicual.
There is little good news in this report, and the writers state that the funding ratio can be expected to continue to drop and the employer contribution rate to increase over the next few years.  For those interested in how their own employers stand, use the following link: PSPRS 2012 Actuarial Reports (By Employer).  The most important information given by these employer reports is an estimate of  how much the employer will have to contribute to PSPRS next fiscal year. 

Using the Tucson Fire Department (TFD) as an example, we can see that TFD is only 48.7% funded with about $416 million in liabilities and only about $203 million in assets.  The contribution rate for TFD will increase from 42.6% to 46.77%.  The following table shows TFD's annual contributions:

    Fiscal Year ended June 30       Annual Required Contribution

                  2003                                         $   1,724,572
                  2004                                         $   2,653,025
                  2005                                         $   4,621,390
                  2006                                         $   5,100,332
                  2007                                         $   7,260,919
                  2008                                         $   9,981,531
                  2009                                         $ 12,625,922
                  2010                                         $ 10,905,280
                  2011                                         $ 11,200,199 (est.)
                  2012                                         $ 12,271,596 (est.)
                  2013                                         $ 14,011,673 (est.)
                  2014                                         $ 16,962,862 (est.)

If the FY 2014 estimate is accurate, the city of Tucson will need to find another $3 million in order to pay just TFD's increased annual required contribution.  This extra money does nothing to enhance services, decrease call loads, or replace aging equipment, so it does not benefit Tucson residents in any way.  If revenue projections are not sufficient to make up this $3 million and the additional $5 million increase to the Tucson Police Department's annual required contribution to PSPRS, it is easy to figure out of which departments' budgets these costs will be paid.

If the 2012 annual report is anything like the actuarial report, it will be interesting reading.

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