Additional pension debt contributions top $1.5 billion

June 7, 2021

Public Safety Personnel Retirement System
State of Arizona

Contact: Christian Palmer
Phone: 602-296-3736

Additional pension debt contributions top $1.5 billion

Milestone includes $1 billion towards state public safety, corrections liabilities

Arizona – Dozens of Arizona employers of first responders and corrections officers have contributed more than $1.5 billion additional dollars towards their unfunded pension liabilities last fiscal year.

The total amount – $1.58 billion during the July 1, 2020, to June 30, 2021, fiscal year – is separate and in addition to the approximately $1 billion employers were required to contribute to cover accruing pension benefits and the interest applied to unfunded pension liabilities.

The additional contributions help secure pension stability for employers’ retirees and members while saving taxpayers money by eliminating or reducing unfunded pension debt that will escalate employer costs each year if left unaddressed.

“This milestone is the result of an all-out effort to help employers understand and realize the true cost of public safety pension benefits and the taxpayer savings that can be achieved by paying off unfunded pension obligations,” said Administrator Mike Townsend. “Although the large amount of additional contributions is great, the other impressive fact is the total number of employers that are taking action. Employers across the state are chopping down a mountain of pension debt.”

The largest additional contributions to the public safety and corrections officer retirement plans were made with Governor Doug Ducey’s June 30, 2021, signing of the state budget. The budget included two $500 million appropriations to pay down unfunded liabilities for both the Arizona Department of Public Safety and the Arizona Department of Corrections, Rehabilitation and Reentry.

Many employers are using the record low interest rate environment to pay down pension liabilities through debt financing. Other local and county governments are using general fund expenditures and other budgetary maneuvers.

As of June 30, 2020, the public safety and corrections officers employer pension plans managed by PSPRS had an estimated $12 billion of unfunded pension debt. Required contributions to cover the unfunded liabilities accounts for roughly two-thirds of total required employer contributions each year.

Over the past fiscal year, most employers have been able to issue debt instruments at interest rates that are less than half, some less than one third, of the 7.3 percent rate applied by PSPRS to unfunded pension obligations.

In most cases, additional contributions of $1 million result in an estimated $1.7 million in total savings for employers with 16 years remaining on their 20-year amortization schedule. Employers also benefit from future investment returns on additional contributions beyond the 16 years.

For example, Coconino County issued $18 million in pledged revenue obligations in May to produce an estimated present value savings of $15 million (over $20 million total savings). The savings occurs by replacing annual escalating unfunded liability contributions with flat debt service payments and discounting the annual future savings to a present day value.

Employer actions to reduce unfunded pension obligations have followed aggressive steps by the PSPRS Board of Trustees to rein in future costs through sound actuarial policy.

In August, the PSPRS Board of Trustees revised the agency’s employer payroll growth assumptions after actuarial studies found that previous assumptions underestimated future pension costs. In the same effort, the board adopted a shortened 15-year “layered” amortization schedule to help ensure that employer contributions were sufficient to reduce unfunded pension liabilities.

The long-term savings of eliminating assumed payroll growth entirely through a phased-in approach was estimated to reach more than $1 billion by fiscal year 2046, according to Foster and Foster Consulting, the system’s actuaries.

Board Chairman Scott McCarty said that the direction of the PSPRS Advisory Committee, made up of members, retiree, and employer representatives, was a driving force behind in the board’s decision.

“Ultimately, when you make conservative revisions to actuarial assumptions and timeframes to reflect reality you are driving up the short-term costs on employers,” said McCarty. “The payoff, however, is a soundly managed pension system that can deliver on its promises to members at the lowest long-term cost to employers and taxpayers.”

PSPRS provides retirement benefits to approximately 60,000 first responders, corrections officers and elected officials. The system is governed by a nine-member board consisting of members of PSPRS-managed plans and civilian investment and financial experts.

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