Funding at 105% of anticipated need
The Town of Oro Valley’s public safety pension retirement fund (PS PRS) is now at a 105% funded position. This the result of a one-time contribution the town made on July 6, 2021 to the fund of $27.6 million; and some portion of an excellent return on investment on the funds. That return for last year was al all time record for PSPRS of 27%.The one-time contribution came from two sources: The issuance of $18 million in pension bonds and $10 million from the town's cash reserve. The bonds have a face interest rate of 2.39%. (source)
Fund now has a small funding cushion
Substantial improvement over prior years
As of June 30, 2021, and this is prior to the submission of $27.6 million to fund the PSPRS, the net unfunded liability was $24 million. The plan was funded and a 66% level ("funding ratio"). That is: The amount of value in the fund as of that date was less than the liability estimated by the State. Even though that is less than the estimated needed amount, that result was an improvement over the prior year. Then, the unfunded liability was $25.7 million in the funding ratio was 61.7%.
"You've got some cushion that has been built," according to PSPRS representative Clark Partridge speaking to the town's Budget and Finance Commission at its February 15 meeting. "You're also saving approximately $2 million a year on your employer contribution. That $2 million in savings is going allow you the budget capacity to be able to pay for that financing [on the bond] that you have going forward. But once that financing is paid, you're really going to be in a much better position."
Headwinds ahead because of high inflation
The projections made by PSPRS are sensitive to changes in two areas. The projection assumes that the fund will return 7% in the long term. This has held true for the past seven to ten years, according to Partridge.
The other area is inflation and its impact on current wage levels. The plan projections assume a 2% rate of inflation. Inflation is currently running at 8%. That's four times the level assumed in the projections. "That growth rate has been higher than what it has been historically but [the PSPRS Board] are also looking at and will be paying attention as inflation happens. If current salaries increase more than what the 2% inflation rate, the PSPRS Board may consider some other course of action," according to Partridge.
An increase in salaries of current employees increases the amount of annual contribution towns are required to put in the fund. Annual contributions are based on a percent of current salaries. The town is undertaking a staff compensation study as part of it's 2022-23 budget process. It is highly likely that the town manager's recommended budget will include substantial wage increases as it did the last time a study was done in 2014.
Future contributions to the fund
Partridge recommends the town continue to fund PSPRS so that the funding ratio is around 100%. "That's the sweet spot."
