The Oro Valley Town Council voted unanimously last week to continue their plan to fully fund the Public Safety Retirement Fund by 2036. It is funded at 60.8% of anticipated liability this year. Last year it was funded at a 59.9% level.
Winfield: "We're losing ground".
Unfunded balance grew in 2019
Mayor Winfield observed that the town is "losing ground" when it comes to funding this estimated liability. Though the funding ration is greater this year than last, the unfunded liability increased to $24.4 million from $22.8 million in 2018. The amount of the unfunded accrued liability is increasing, even though the town added $500,000 in payment last year.
Reason: Poor PSPRS investment returns
The problem, according to town Finance Director David Gephart, is that the investment return has been lower than anticipated. "It's not going to get better unless we see some strong investment returns."
 |
| Funded status improved in 2019 but the liability and the contribution rate grew |
The reason is that the Arizona Public Safety Personnel Retirement System (PSPRS) invests the pension funds. PSPRS took a very conservative investment stance in 2008 and returns have been "abysmal". They target a 7.4% return. "The return on the market value of assets for the year ending June 30, 2019 was 5.4% for Tiers 1 and 2". (Source: PSPRS Oro Valley Report, 2019).
Tier 1 and Tier 2 are the culprit
Some years back elected officials across the nation decided to give defined pension benefits away instead of giving wage increases. It was easy for them to do because none of them would be around when the pensions had to be paid. Now, the problem is squarely in front of municipalities.
According to Gephart, what we are now seeing is the impact of this giveaway.
"It was an unsustainable plan of PSPRS. Because it was unsustainable, they created Tier 2, which was Tier 1 with basically less benefits" for employees hired after 2011. "They decided that even Tier 2 was unsustainable so they created Tier 3" for employees hired started in 2018. "The only way this turns around is when Tier 1 employees start rolling off." Even then, according to Gephart, "Tier 2 needs to roll off."
Our thinking...Underfunding PSPRS is a Statewide problem that needs to be addressed by PSPRS
We've said it before but we will repeat it again. There is no benefit to paying more than the minimum required annual contribution. The State will make payments to recipients even though a town's funding is less than 100%. . Paying more simply bails out a very bad PSPRS investment scheme.
The State of Arizona created the program.
The State created the problem.
Here's how the State can fix the problem.
The State has the borrowing power and the ability to fix the problem. It could borrow the funds to "buyout" Tier 1 and Tier 3 participants. The State could probably borrow the funds at 3%, pledging the amount it recovers from a pro rata share of the funding each town would pay over the life of the bond, which is usually 30 years. That "buyout" could be an option for each participant to take a lump sum payment, rollover the sum to another tax deferred account, or settle for a lifetime annuity paid by an insurance company. This, by the way, is the solution used for years in the private sector.
Regardless, we suspect that this council and all future councils will always be chasing this moving target... and they will only catch it when all members of tier 1 and tier 2 have "rolled off", as Gephart has so gently put it. He means, of course, they have died.
---
No comments:
Post a Comment