Santa Cruz County (SCC) has been saddled with an $11million debt due to a shortfall in the funds held in the Public Safety Personnel Retirement System (PSPRS).
PSPRS, a state-run pension system that invests funds collected from more than 200 counties, municipalities and fire districts, manages retirement plans for law enforcement, firefighters and corrections officers. In SCC, this debt has accrued in the account that manages the pension funds for 65 active and retired members of the County Sheriff’s Department.
The Town of Patagonia also has an unfunded liability of $687,572, according to the PSPRS’s actuarial valuation report as of June 30, 2020, in the PSPRS account that funds the Marshall’s Office personnel.
The PSPRS Board, which is entirely run at the state level with no input from its funders, invests the money paid into the system. Over the last several years, these investments have fallen short of their investment goals, this past year showing a return of only 0.3%.
“Problems with the books at PSPRS are the latest embarrassment for a system that has less than half the money needed to pay current and future pension benefits,” according to an article in azcentral.com.
In January 2019, Governor Ducey appointed a new board to the PSPRS in response to charges of lax accounting, sexual harassment, and controversy.
“They’re trying to put in safety measures to correct what happened in the past,” SCC Manager Jennifer St. John said. “I think they were not in touch with their members and were using bad assumptions.”
According to St. John, this unfunded liability grows each year, partly because of this lack of return on investments and partly because contributions into the system are projected to be higher than they actually are. For example, the formula is based on a projection of payroll growth at 4%, but few funding entities have raised their payrolls in recent years.
Three and a half years ago PSPRS offered counties and other entities the option of paying their shortfalls in full or having their annual contributions increased over the next 20 or 30 years. Santa Cruz County currently pays approximately $1 million annually into the PSPRS, which comes out of the general fund. 30% of the annual payment goes to the unfunded liability debt. If the County does not pay down this debt, annual payments will be $2 million and would rise to $2.7 million in 17 years, assuming that the fund does not require additional bailouts. The total amount that would be paid by SCC at the end of 20 years would be close to $21,000,000, according to St. John.
The choices for SCC and the Town of Patagonia are whether to pay the debt off over 20 years or 30 years, refinance the entire debt or pay off a portion of the debt to lower future payments. The City of Yuma, which was looking at a $274,000,000 debt if it were to make payments over the next 20 years, opted to borrow the money to pay off its unfunded liability, as did Flagstaff. Prescott opted to raise its sales tax by .5% to cover its liability.
As of June 30, 2020, there were seven active and retired members vested in the Patagonia Marshall’s pension plan, according to the actuarial valuation report.
Last year 37.54% of the Patagonia’s annual payments into the system went to pay the amortized unfunded liability, which the Town will be paying off for the next 26 years. At the end of the 26 years, these payments will total $1,082,223. The Town does have the option to try to borrow the money from another source at a lower interest rate to pay off the unfunded liability.
“I don’t like it. This is getting more of my attention right now. I am researching it to find out exactly where we stand,” Patagonia Town Manager Ron Robinson said. “Their mismanagement at the state level gets passed down to us. There needs to be legislation to indemnify towns, cities and counties from their mismanagement.
“I don’t think we would borrow that money,” he added. “It is easier to make the bi-weekly payments than it would be for us to take on a loan.”
Paying the debt off does not ensure that the fund will not develop a shortfall in the future.
“Do you borrow the money and hope they invest it wisely?” County Supervisor Bruce Bracker asked.
Robinson echoed Bracker’s comment. “I don’t want to pay for something and then turn around and pay for it again,” he said.
The burden to fund the PSPRS will, of course, ultimately be placed on the taxpayers of the County and the Town of Patagonia, whether it be through sales tax increases, property taxes, or both. Bracker feels that the state has an obligation to help fix this problem.
“Why isn’t the state addressing this since they created this problem? The state has $1 billion in the rainy-day fund and is talking about cutting another $1 billion in taxes because they have too much money,” he said. “This mismanagement of a critical pension fund has been an ongoing issue for years. The teachers’ pension fund does not have a shortfall. Why is it a burden on local taxpayers if those entities didn’t have control? It’s an expensive problem.”