Last week, the Pioneer reported how the La Paz County Sheriff’s Office is required to contribute the equivalent of 75 percent of their employees’ salaries to the state’s Public Safety Personnel Retirement System. The Arizona Department of Public Safety is required to contribute the equivalent of 95 percent. This raises the question of why these payment rates are so high.
At the same time, some public safety entities pay a lot less. The Parker Police Department pays 35 percent, while the Quartzsite Police Department pays 18.8 percent. Why is there such a contribution difference between public safety agencies?
PSPRS spokesman Christian Palmer said there are many reasons for this, most of them having to do with demographics. This refers to the number of people paying into the system as opposed to those who are drawing from it. There are also factors beyond the control of local employers, like economic conditions and how well the system’s investments are working.
Palmer said the system’s board of trustees are very concerned about and are sympathetic to employers who are struggling with rising contribution rates.
The contribution rate is directly related to an entity’s funding ratio. That is the percentage of their present and future obligations they have funding for. The lower the funding ratio, the higher the contribution rate.
The La Paz County SO and the DPS have funding ratios of 35.31 percent and 33.3 percent, respectively. As a result, their contribution requirements are high. The Parker and Quartzsite Police Departments have funding rations of 72 percent and 87 percent, respectively. Their contribution rates are much lower.
The PSPRS considers a funding ration of 75 percent or higher to be a healthy one.
Palmer said the contribution rates are determined by actuaries hired by the Board of Trustees.
“Actuaries take into account the number of active contributing employees and retirees, their current ages and life expectancies, as well assumed growth in employer payrolls and retiree pensions,” Palmer said in an e-mail to the Pioneer. “Contribution rates are also impacted by the assumed earnings rate, which is an estimate of the level of investment returns that PSPRS will generate over time with the employer and employee contributions. Actual investment earnings are also taken into account, but, according to the last La Paz valuation, did not have a major impact on La Paz’s contribution rate increases this year.”
Generally speaking, the more an entity has younger members contributing to the system, fewer older employees who may retire soon and fewer retirees drawing from it, the lower the contribution rate. If an entity has a high attrition rate of people leaving without a lot of new hires, that could drive the contribution rate up.
Palmer said people on disabilities can also drive the contribution rate up, especially if they are at an age when, if they hadn’t been hurt, they could still be contributing to the system.
The PSPRS was also hurt by economic conditions. They lost a lot of money in the “Dot Com” crash in the early 2000s, which caused them to move away from stocks and into other investments like real estate. These investments collapsed with the housing market and the recession of 2008. Palmer said this created a “double whammy” for employer contribution rates as it led to a major slowdown in hiring rates.
While mismanagement was cited by the Arizona Republic in 2017 for the problems with the system, Palmer said the real culprit was the Permanent Benefits Increase (PBI). The Republic was reporting on the findings of a report by the Pew Charitable Trust.
Included in the Arizona Constitution (Article 29, Section 1, Paragraph D), Palmer said the PBI provision made it difficult for the PSPRS to recover from the recession.
“It was well-intentioned, but created pension increases that were unsustainable during and after economic recessions,” he said.
The PBI was amended for the PSPRS by the voters in 2016, and for the Elected Officials Retirement Plan and Corrections Officers Retirement Plan in 2018. Palmer said the PSPRS Board of Trustees had been clamoring for such changes since 2012. If those changes hadn’t occurred, he said the funding ratios for most entities would be even lower than they are, and the contribution rates would be even higher.
In a letter to the Pioneer, PSPRS Board of Trustees Chairman Will Buividas said these measures will save the taxpayers over $1 billion over the next 30 years. He added independent analyses for these measures indicate they will make a massive impact on the system, and bring it back to full funding.
Palmer and Buividas said rolling the PSPRS into the Arizona State Retirement System would be both illegal and impractical.
Palmer said civilian employees like those in the ASRS generally work longer that public safety employees, and they’re less likely to retire with permanent injuries. The hazardous nature of public safety work makes higher-paying pensions, disability and survivor benefits almost a necessity for attracting people into the field.
Buividas said the board is working with public safety entities, government entities and financial experts to make the system more efficient, save the taxpayers money, and provide for the retirement that police officers and firefighters deserve.
“I hear it from my colleagues in uniform all the time,” Buividas said. “They want the middle-class retirement they have earned to be safe, but not at the expense of the cities they serve and protect.”