In 2021, the Town of Oro Valley, under council direction, paid almost $28 million into the state's Public Safety Personnel Retirement System (PSPRS) to fully fund the town’s public safety pension. Ten million dollars of these funds were from the town’s general fund. The town borrowed the remaining amount, $17.6 million, at an interest rate of 2.39%, with the anticipation that the funds would be invested by the state at a target rate of 7.2%. The town pledged its sales tax revenues to back the bond. The borrowing will be fully paid by 2038.
“Leveraging Debt" and paying down reserves to save big money
Borrowing funds at a low rate of interest and then investing the borrowed funds at a much higher rate is called “debt leverage.” The favorable interest rate environment of 2021 allowed the town to achieve this strategy successfully. According to the town’s financial advisor, Stifel Public Financing, the move enabled the town to save millions in future pension funding costs. Stifel estimated that the combination of a $10 million cash contribution and $17.6 million in debt financing allowed the town to generate savings of $17 million from 2021 to 2038.
What was initially successful in achieving 102% funding is now at 95%
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| Barrett support of action in 2021 |
Initially, that contribution resulted in the town’s PSPRS being funded at a higher level of 102%. However, whether the fund remains fully funded depends on three factors: the state’s seven-year rolling average calculation of funding requirements, the actual return on invested funds, and the actual pension payouts to retirees. It is the last of these factors that has caused the current shortfall.
Upcoming 2024 budgeted PSPRS contribution of $2.5 million should return funding to 100% level
Upcoming 2024 budgeted PSPRS contribution of $2.5 million should return funding to 100% level
At present, the PSPRS fund is now calculated to be 95% funded, according to state figures. As a result, the town is making a $2.5 million contribution this fiscal year to return to a 100% funding status. The shortfall arose because of increased pension payments to Tier 1 and Tier 2 retirees, increases that were greater than the actuary’s assumption. Despite the fact that the PSPRS fund earned an 8.6% return, which is above its 7.2% target, these factors led to an underfunded status.
Keeping PSPRS fully funded is "a moving target"
Keeping PSPRS fully funded is "a moving target"
Town Finance Director David Gephart noted in his discussion with the council at the May 9 TMRB study session: “We have to live with the reality: Police are living longer and their benefit increases. We're shooting at a moving target all the time. We got to 100. It’s going to be like doing a pull-up. You're going to get over the bar, and you're going to be under the bar.”
Like this link to follow LOVE’s previous coverage of the PSPRS investment.
Like this link to follow LOVE’s previous coverage of the PSPRS investment.
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About PSPRS
As of 2023, the Arizona Public Safety Personnel Retirement System managed approximately $19.5 billion in total assets. The system has been recognized for its transparency, earning the 2024 NCPERS Transparency Award. Despite facing challenges such as underfunded liabilities, PSPRS continues to work towards ensuring the long-term solvency and stability of the retirement system for Arizona’s public safety personnel.
