PHOENIX — A group of Arizona House lawmakers is launching an effort aimed at cutting the soaring costs to communities of police and fire pensions, with its leader warning that cities could end up declaring bankruptcy if legislators fail to act.
The new committee, announced by House Speaker J.D. Mesnard, comes just over a year after 70 percent of voters approved changes to the state’s public safety pension plan designed to return it to solvency in 20 years.
The voter approval and separate legislative overhauls to the Public Safety Personnel Retirement System, or PSPRS, couldn’t address current costs because the state Constitution bans cuts to promised pensions. Instead, they established less-generous and lower-cost pensions for new hires and changed how current cost-of-living increases are calculated, a switch intended to stabilize the system over time.
Republican Rep. Noel Campbell of Prescott said he understands the difficult task ahead but believes the pension issue requires urgent attention, calling the debt load a “tsunami.”
“We have to start taking a hard look at this because my fear is that two, three years down the road here, cities, municipalities will start filing (bankruptcy),” Campbell said Friday.
There are 230 different entities — cities, towns, counties and fire districts — in the pension plan, and each is responsible for its own liabilities in the plan. Employers have seen median contribution rates soar to an average of 52 percent of each officer’s salary as the value of the pension plan failed to meet expected returns to meet its obligations. A decade ago, the rate was 21 percent, and just last year it was 42 percent.
Some cities, including Bisbee and Prescott, are paying much higher rates. Bisbee is paying 134 percent of an officer’s salary in pension costs, according to plan records. It has $10.8 million in liabilities and only $800,000 in assets.
The state’s largest city, Phoenix, also is struggling with soaring pension costs. The City Council voted Wednesday to ask the state pension plan to allow it to pay off its outstanding debt of $2.4 billion over 30 years instead of 20, a change made possible by a new state law. Phoenix has seen its yearly costs for police and fire pensions soar to $207 million from just $56 million in 2007.
As of last June 30, plan members are owed $14.5 billion in retirement benefits and the plan has just $6.4 billion in assets.
Mesnard appointed five Republicans and two Democrats to examine possible solutions, with Campbell chairing the effort. The committee plans a series of meetings across the state, followed by four formal meetings at the Capitol.
Campbell says part of the committee’s job is to raise awareness about the looming problems.
“It’s amazing in talking about this issue how few legislators know anything about it — it’s not something being brought to their attention,” Campbell said.
Campbell said one of the big problems is that the fund hasn’t come near to meeting the 7½ percent return its actuaries anticipated. Its 10-year average return is less than 5 percent. In addition, generous benefits have sapped returns.
The 2016 overhaul addressed another major cause of plan underfunding: cost-of-living adjustments. The way the plan was set up, excess earnings were put into a fund that doles out automatic increases of up to 4 percent in most years. The problem is that when the overall pension fund had losses, as it did during the Great Recession, excess cash in flush years couldn’t make up the difference because it is sent to the cost-of-living adjustment fund.
Prescott, Campbell’s hometown, has nearly $80 million in unfunded liabilities and plans to ask voters in August to raise city sales taxes from 2 percent to 2.75 percent. Campbell said people are angry about the proposed tax increase, and he worries that it won’t put a dent in the pension debt.
More worrisome, he said, is that the Arizona Constitution’s limits on cutting promised pensions may crimp any efforts to reform the system.
“I don’t know if there is a solution because ... the constitution prevents any reduction or diminution of retirement benefits,” he said.