It has been known for over a decade now – the State’s pension system is a sinking ship.  Despite efforts in recent years by the Legislature to bail as much water out of the vessel as possible; it would seem the system has been doomed by the Bermuda Triangle of forces: unions and their politically complicit cities, the system’s managing investment board, and activist Courts.

PSPRS is currently a $9.3 billion fund, with roughly 50 percent unfunded liabilities.  Recently, 20 Arizona Mayors penned a letter to Governor Ducey calling for him to “do something” about PSPRS (Public Safety Pension Retirement Fund), and its deepening insolvency that threatens to completely tank cities such as Bisbee, Prescott and Flagstaff and unleash a tidal wave that would topple the system as a whole.

Among the suggestions being offered by local leaders is to fire the PSPRS board and move its financial and investment management to the State Treasurer’s office.  It is clear the panic has finally settled in.  Consider, these same local leaders have been at best complacent to union-efforts to continually ratchet up benefits, and at worst complicit in efforts to stop the State from curbing benefits, cost of living adjustments, and employer contributions.

Although local cities are trying to shift blame to the legislature for all their pension woes, State lawmakers have made several attempts to right the ship.  In 2011 lawmakers passed legislation to suspend Cost of Living adjustments and increase public safety personnel’s’ contributions.  In 2013, they partially eliminated pensions for new judges and elected officials.  And in 2016, they made modest improvements to the system going forward by creating a third tier of beneficiaries who would be subject to new provisions for pay-outs, cost of living adjustments, and employee contribution rates.  Although this latest legislation provides some cost savings in the future, it does little to nothing for the impending crisis everyone is currently facing.

For smaller cities, especially those that have stagnated growth, a lack of fiscal restraint, generous overtime and vacation, retirees who are living longer, and other factors have driven their contribution rates skyward.  Though the average jurisdiction contributes 32 and half percent, Bisbee pays almost 88 percent.  Bisbee is on the cusp of capsizing.  Cities have a habit of adopting each other’s bad ideas.  Over-recruiting, over-paying, and over-promising rich benefits in the future they can’t possibly make good on, is one of the worst practices that has spread among the cities like a plague.

Even with the knowledge that the bill has come due, cities are still trying to kick the can down the road to avoid the day of reckoning.  The City of Mesa and the City of Phoenix recently voted to extend their amortization schedules from 20 to 30 years for their pension debts.  For Phoenix, this freed up $50 million in additional spending capacity for the next year at a cost of $2.3 billion in additional debt on the backs of taxpayers.

One complaint that does seem to generate consensus among most cities and the legislature has been the inept management of the PSPRS system. The Pew Research Trust ranked Arizona’s PSPRS system as one of the worst managed in the country.  Last year, the fund only achieved less than a percent in returns.  In the past 10 years they averaged 3.67 percent returns; in the same period the S&P 500 achieved an average 7.88 percent returns.  These low returns have made a difficult situation nearly impossible to manage as liabilities continue to outstrip contributions to the fund.

The call by Arizona Mayors to wrestle control away from the PSPRS board is well founded.  Of the 73 largest public retirement systems in the country, PSPRS paid the highest percentage in fees for outside investment management – $129 million last year though they earned only $49 million in returns.  Compare this management to Arizona State Retirement System (ASRS), a fund 4 times the size, that performs in the top third of funds on investment returns and pays about four tenths of one percent the management fees PSPRS pays.

Arizona’s public pension system is in the 11th hour of unavoidable implosion.  A series of decisions by governments, elected leaders, and the courts have brought us to this situation and only these parties can correct it going forward.  The answer cannot be to expect taxpayers of fiscally prudent cities to subsidize the poor decisions of insolvent cities.  Nor can it be to drain the wealth of private citizens (and public employees coming under the third tier in the system) to bail out outrageously generous benefits of previous public employees.

The ship may be sinking, but taxpayers shouldn’t have to go down with it.