Mike Townsend.

Mike Townsend, administrator of the Arizona Public Safety Personnel Retirement System, praised the dozens of municipalities, counties and state agencies that have make extra payments on their unfunded pension liability. Phoenix taxpayers are paying additional penalties on an unfunded police and fire pension liability of $3.2 billion.

Despite an $11.8 billion unfunded liability owed by more than 300 Arizona municipalities, counties and state agencies, some encouraging trends are emerging in the system that provides pensions for nearly 60,000 retired first responders, corrections officers and qualifying elected officials.

And Gilbert Town Council helped in that trend.

Shaped in part by the unexpected surge in revenue many of those government entities have seen for nearly a year, those trends aren’t just good news for the retirees who receive pensions from the Public Safety Personnel Retirement System.  

They’re also good news for Chandler and other taxpayers.

One trend involves the largely unflagging health of the stock market that – combined with some astute investment decisions by PSPRS – produced an unaudited return of close to 25 percent on the agency’s investments.

Though the final percentage won’t be known for several months pending a routine annual audit, that one-year return is the biggest the PSPRS has seen in more than 30 years.

The other trend not only puts the pension fund on more solid footing, but also spares taxpayers millions of dollars in fees on the unfunded liability owed by municipalities, counties and some state agencies.

Over the past fiscal year, many of those employers have paid a total $1.58 billion in additional contributions to PSPRS to whittle down some of their unfunded liability.

For taxpayers, that means savings in penalties for the unfunded liability totaling more than $2.7 billion.

Employers either devoted some of their budget surplus from the 2020-21 fiscal year to pay down their pension debt or borrowed money at interest rates that are less than half and even a third of the 7.3 percent rate PSPRS assesses annually on their unfunded pension liability.

That $1.58 billion in extra payments is on top of the $1 billion employers were required to pay on accruing pension benefits and the interest on their pension debt.

Gilbert did its part by putting down an extra $15 million to whittle down an unfunded combined fire-police pension liability of $42.5 million. 

Records show that even with that debt, Gilbert’s police and fire pensions are funded at a level of 82 percent and 88.8 percent, respectively.

Required contributions to cover the unfunded liabilities account for roughly two-thirds of total required employer contributions each year.

“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,” PSPRS spokesman Christian Palmer said.

His boss, PSPRS Administrator Mike Townsend, was even more ebullient.

“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 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.”

One thing Townsend didn’t mention is the role he personally played in the employers’ big pay-down effort.

Sources said he personally appeared before more than 40 county boards of supervisors and city and town councils to urge them to take advantage of historically low interest rates to pay down their pension debt.

Many of those bodies heeded Townsend’s encouragement, with Gov. Doug Ducey taking the biggest step by adding $500 million each to the unfunded liability owed on pensions for corrections officers and retired state troopers. 

The current unfunded liability for retired adult and juvenile corrections officers combined is $1.12 billion while the unfunded liability for Department of Public Safety employees totals $898 million.

In the East Valley, Chandler in the 2020-21 fiscal year shelled out an extra $15 million on its combined police and fire pension liability of more than $271 million.

 Despite the size of that debt, those two pension funds for Chandler fire and police retirees currently have a higher funding ratio than many Arizona entities that pay into the system.

Records show 68.6 percent and 62.7 percent funding levels for Chandler fire and police pension funds, respectively.

Tempe kicked off the new fiscal year, which began July 1, by paying almost all of its unfunded liability of $343.2 million by paying $341.1 million last month.

That stands in sharp contrast to Mesa, which has not made any extra payment on a debt that totals $231 million for firefighters and $459.8 million for police. Current funding levels for those pension funds are at 45.8 percent for police and 48.5 percent for fire.

Why unfunded liabilities are important was outlined in a memo that the Phoenix city administration sent Phoenix City Council last month as it grapples with an unfunded police and fire pension liability totaling more than $3.2 billion.

In that memo, City Manager Ed Zuercher and  Chief Financial Officer Denise Olson explained the need to whittle down that unfunded liability and “avoid a huge burden” down the road that would require “significantly decreasing services or an increase in taxes.”

“This taxpayer burden must be balanced with being fiscally responsible and committed in providing pensions to retirees,” the memo said.

And because pension debt is a priority expenditure for any governmental employer, the unfunded liability’s costs “have placed significant budgetary constraints on the City’s ability to provide employee wage and non-pension benefit increases, public services and infrastructure maintenance,” the memo noted.

Up until the end of the last century, unfunded pension liability for PSPRS didn’t exist.

Then came the housing market crash in 2008 and the subsequent economic collapse that not only adversely impacted the stock market but also reduced government hiring to a crawl.

At the same time, more government employees were retiring and with fewer new employees paying into the plan, the agency’s pension obligations were increasing.

As municipalities started putting more of their available revenue into more immediate public services, their pension debt steadily increased – fueled in part by the penalties assessed annually on that debt.

Voters in 2016 overwhelmingly approved Prop 124, which reduced cost-of-living increases in the pensions for retired firefighters, police and elected officials. 

Those cost-of-living adjustments were tied to the regional Consumer Price Index with an annual cap of 2 percent. For nearly 20 years, an annual 4 percent compounded increase had been paid out to retirees, significantly cutting into the amount of money remaining to pay future benefits.

Proposition 124 had the strong support of public safety unions, which said the move would make the pension fund more secure. A subsequent prop two years later made the same changes in pensions for corrections and probation officers.

Not everyone favored the propositions.

The Arizona Tax Research Association and the Goldwater Institute contended the measures provided no short-term financial relief for taxpayers and that savings may occur only years down the road.