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Was it constitutional for Proposition 124 to replace PSPRS' permanent benefit increases with a capped 2% COLA?

In this blog I and multiple commenters have broached the subject of the suspect constitutionality of PSPRS' replacement of the old perma...

Thursday, September 29, 2016

If you're an employer, how do you stop PSPRS from destroying your budget?

In the coming years, we can probably expect to see more and more pieces like this one by Prescott Mayor Harry Oberg, Yes, the State's PSPRS debt can be solved, which appeared in Prescott's The Daily Courier on July 28, 2016.  I find Mayor Oberg's editorial quite interesting, not because of what it actually says, but what can be read between the lines.

If we look at his proposals for eliminating PSPRS' debt, they are all, to varying degrees, non-starters with most falling into the "rich relative(s)" solution that can only work as long as there is actually some entity available that can play that role.  The City of Detroit was only "saved" because contributions obtained from charitable foundations, the Detroit Institute of Arts (a city-owned museum with an art collection valued in the billions), and Michigan's taxpayers were used for to pay for the $800 million "Grand Bargain" that helped limit cuts to pensions and city services.  As far as I know, we have only Arizona taxpayers on which to rely for contributions.

Mayor Oberg offers five suggestions to generally eliminate PSPRS' debt and Prescott's more specifically:

1. "Pool the assets and debt of all Tier 3 PSPRS employees."  As it stands now, only assets are pooled for investment reasons, while every employer has its PSPRS liabilities calculated individually.  This proposal sounds good, but it is a horrible idea.  As with any financial proposal, we should remember basic economics and look at potential unintended consequences.  This proposal will incentivize irresponsible behavior by employers and public safety employees, yet spread the cost to all employers and taxpayers, regardless of how judiciously they manage themselves.  Shouldn't we first ask why there already exists such a disparity in contribution rates between various state employers?  The answer is obviously that some employers and public safety employees have been irresponsible with their finances over the years, despite the fact that they could see their PSPRS liabilities inexorably growing.  Why would expect better behavior if we hide individual irresponsibility in one large debt pool?  Most likely, this will incentivize bad behavior by even those who are inclined to act responsibly.

2. "Add one cent to the state sales tax for a specified period of years until the state PSPRS debt is 80% funded."  Do we need to say any more than we already said about the first proposal?  Mayor Oberg wants to punish everyone in the state for the excesses of individual employers and their public safety employees.  This would include taxpayers who pay for private fire protection or donate to and work at volunteer fire departments.  This seems unlikely to be approved by Arizona voters, and it is especially hypocritical for someone opposed to any increase in Prescott's local sales tax for the same purpose to propose a similar measure for the entire state.

3. "Create a revolving fund similar to the state’s Water Infrastructure Finance Authority of Arizona (WIFA) to allow immediate payment of debt and establish a repayment bond at 2-3 percent." I am perplexed at this fascination politicians have with pension bonds, as if they were some form of free lunch.  Pension bonds are one of the worst things a government can do and act only to postone a permanent solution to pension underfunding.  They remove the immediacy of the pension problem, which also removes the impetus towards the necessary financial discipline that had been missing in the first place.  Pension problems will continue and underfunding will not decrease, and governments end up with the same pension liabilities and pension bond debt.

4. "Obtain state legislative authority to increase the city property tax (with a cap) to a level which will sustain police and fire operations and pay."  Of all Mayor Oberg's suggestions, this is the only one I can see as feasible since both costs and revenue will stay local.  However, money is fungible, and the mayor and council will still be in charge of the budget.  How do they assure taxpayers that they are actually paying down Prescott's PSPRS liability, rather than using the increased tax revenue for other things?  Taxpayers in Prescott already rejected a sales tax increase for this very same purpose, so why would they trust the mayor and council any more with enhanced property tax revenue?

5. "Specifically for Prescott, consider providing pension funding for all the families of the deceased Granite Mountain Hot Shots (GMHS) covered under PSPRS."  I am not completely sure how much Mayor Oberg wants from the state.  He mentions a $5 million payment already paid by the state to cover the pension obligations of the six full-time Prescott firefighters that were part of the GMHS.  I believe he is saying that he wants more to cover those six firefighters' pensions.  I believe he is also implying that the state should also help with the pension obligations of the three seasonal GMHS firefighters who were retroactively awarded PSPRS pensions by the Prescott PSPRS fire board.  He bases these claims on the fact that the GMHS were ordered onto state trust land by the state forestry division.  I do not know the details of the agreements between the City of Prescott and the state forestry division when it came to fighting wildfires, but I would assume that if there was any potential that the state was legally liable for any of the pension obligations, Prescott would already be pursuing this in the courts.  Mayor Oberg is free to make any claim he wants based on compassion, but the choice to staff a hot shot team with all the attendant financial risks for such a small city was Prescott's, not the state of Arizona's.  And while I am not making any statement about the morality of retroactively awarding PSPRS pensions to the seasonal employees of the GMHS, this entirely local decision was made knowing that it had huge financial consequences for the City of Prescott.  Fortunately, there were other programs that helped the families, but Prescott should not expect the state to bear the costs of its decisions.

All these proposals, except possibly for one, are not realistic.  None of them solve the underlying problem for Prescott or any of the other 256 public safety employers.  Mayor Oberg hints at it, but he never comes out and says what that underlying problem is: pension costs fall fully on local entities, though the local entities do not control the pension benefits.  Would Mayor Oberg accept it if Prescott city workers negotiated their wages, health insurance premiums, or vacation accruals with the state legislature?  I would think not.  Yet this is exactly what happens with public safety pension benefits.  The state legislature, which has nothing to lose, negotiates pension benefits with state public safety unions, which have everything to gain, while the local entities have to pay for whatever they agree to.

This most recent pension reform was a perfect example.  The League of Arizona Cities and Towns offered a "yardstick" for pension reform, but as far as I know they played no part after that, despite the fact that they had the most at stake.  Fortunately for the League, the state public safety unions were too busy protecting the benefits of senior members and betraying the next generation of public safety personnel to realize that they set the PSPRS defined benefit pension on the path to extinction, so local entities will make out in the long run.  However, this does not mean that that the legislature and the state public safety unions will not continue to play the same game they have always played.

I hope Mayor Oberg and other local elected officials realize that any enhancement to pensions become permanent via the Arizona Constitution's Article 29, unless changed via a vote of the state electorate (ala Proposition 124 in May 2016).  I suspect that the process of reintroducing harmful policies and unsustainable benefits is already in the works.  If Mayor Oberg wants to do something to help his city, he and other local elected officials should reassert their authority over their own budgets and get more proactively involved in the crafting of state pension statutes.  This strategy will be more ethical, more successful, and certainly more dignified, than begging the state for money.


  1. I would think that if the study that is currently underway to determine the feasibility of an Cost Sharing type fund for PSPRS (just like ASRS) were to see the light of day, it would require the eventual dissolution of the Local PSRPRS Boards. They would exist only as long as there were tier 1-3 members. Tier 4 (ee's hired after 9/1/17) would no longer be under the purview of the local boards. Ergo they would no longer be in a position to make bad choices such as allowing spiking in one form or another.

  2. Thank you for your comment. Currently, the local pension boards have no control over the policies of individual employers. I know that PSPRS has been hands-off regarding how employers treated pensionable income, and they calculated pensions based on the numbers employers sent to them. Their attitude was that it was the employers' responsibility to police themselves. That was how we got the situation where employers were counting sick leave sellback as pensionable income, even though it was against state law. It was only after the Goldwater Institute sued that it was finally stopped by those employers who allowed it.

    What you say is intriguing, but I don't know how a statewide board could control 250+ employers' payroll practices. I still think it would have to be a legislative responsibility to clarify what is and isn't pensionable pay, in order to stop the questionable that is bound to occur. Thanks again for your comment.


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