A plan to overhaul the state’s woefully underfunded pension plan for public safety workers is nearing completion after months of meetings between lawmakers, pension officials, firefighter and police unions and cities, towns and other public agencies that pay into the system.
The issue is pressing as public agencies that pay into the system have seen their contribution rates soar to an average of 42 percent of the salary paid to each police officer or firefighter in the Arizona Public Safety Personnel Retirement System. Some are paying much more, including the city of Bisbee, which is paying 90 percent of its police and fire payroll for pensions.
That level is simply unsustainable, Bisbee City Manager Jestin Johnson said Wednesday. The city’s public safety pension costs now gobble up 18 percent of the city’s general fund budget, and all 105 city employees have been forced to take between 40 and 80 hours of unpaid furlough this year.
“The pension obligations, I think that’s one of the hardest pills for us to swallow,” Johnson said. “I’m really appreciative that our public safety guys, our mayor and council, do understand the realities of the issue. And they’re not fighting any changes that may have to be made, to include reducing staffing, knowing that we can’t hire, realizing that you’re not going to get raises.”
Employees also kick in 11.65 percent of their salaries to the system. But that rate is capped, so if the fund balance goes down employees don’t see increases as employers do.
The problems with the public safety pension fund, known as PSPRS, have been growing for years. The Legislature tried to change how cost-of-living increases were made in 2011, but the courts struck that down as an unconstitutional cut in promised benefits.
Before that 2014 decision, PSPRS had funding for just 57 percent of its expected liabilities but was set to head toward 70 percent funding with the changes, said Jared Smout, the administrator who heads up the pension funds. Now, the funding level has sunk to just 50 percent of its expected liabilities, with $6.2 billion in assets and $12.7 billion in liabilities.
State Sen. Debbie Lesko, R-Peoria, has been spearheading talks with police and fire unions on an overhaul. Also at the table are the League of Arizona Cities and Towns, the Goldwater institute, Free Enterprise Club, and the Reason Foundation, a libertarian organization that lobbies nationally for public pension overhauls.
Lesko said last week that she believes a plan can be ready for the upcoming legislative session.
“The good news is I’m very confident, although I can’t say 100 percent, I’m really thinking we’re going to get something done,” she said at the Arizona Tax Research Association’s outlook conference.
The plan includes a firefighter’s proposal to change yearly benefit increases that are sapping the trust fund. The change would require voter approval. The way the plan is now structured, excess earnings from the pension trust are put into a fund that doles out automatic increases in most years. The problem is that when the fund sees losses, as it did during the Great Recession, excess cash in flush years can’t make up the difference because it is sent to the cost-of-living-adjustment fund. The firefighter’s proposal would end that practice.
Other changes include proposals to increase the pension eligibility age, equalize employer-employee contribution rates and a cap on earnings that are used to calculate pensions. That would address problems with so-called “pension spiking” where employees cash in vacation time, sick days and other accrued time to increase earnings in the final years of service and boost their pensions forever.
The Professional Fire Fighters of Arizona has been pushing an overhaul of the pension plan for the past two years. Its president, Bryan Jeffries, declined to comment.
Smout said the trust expects employer rates to remain fairly steady at about 42 percent for 21 years before funding reaches 100 percent, and then go way down. But he said he’s encouraged that this year’s pension reform talks include police and firefighters.
“There’s a lot more people at the table from all sides,” Smout said. “I hear that this time it’s a lot more collaborative, which is great.”