How to address the $14.1 million unfunded debt in La Paz County accounts from the Arizona Public Safety Employees’ Retirement Plan was on the agenda for a work session of the County Oversight Board on May 1. District 2 Superintendent Deuce Minor described the unfunded liability as follows: “A Gift from the Country”

Minor said the unfunded debt is a result of state management, but counties are responsible.

“The program is run by the state, but the county pays for it,” he said.

PSPRS handles state pensions for police officers, firefighters and other public safety personnel. In recent years, many government agencies across the state have found themselves in underfunded debt with respect to this system. In addition to La Paz County, the Buckskin Fire District and the Arizona Department of Public Safety were also included.

The presentation was given by financial consultants Jay Park and Karen Ziegler. They said underfunded debt was not uncommon. They said it was a matter of donations and investments on the one hand, and payments of benefits and expenses on the other. Park and Ziegler said that when the two are equal, there is no unfunded debt.

As of June 30, 2022, La Paz County accounts have approximately $8.3 million in assets, $22.4 million in pension liabilities, and $14.1 million in unfunded liabilities.

Park and Ziegler said unfunded debt is usually the result of underperforming investments.

“There are so many things that can happen,” Park said. In March 2022, he told regulators that the county had made the necessary payments over the years, but it was up to PSPRS to manage and invest the money.

Park and Ziegler stressed that this unfunded debt must be paid. Otherwise, you will continue to accrue interest at 7.3% for the next 15 years.

The consultant presented the county with four options and the pros and cons of both. They couldn’t do anything, but the unfunded debt would continue to accrue. They can make incremental payments against plans that reduce their unfunded debt. Paying $5 million this year could reduce outstanding debt by $500,000 annually. However, this plan may not earn 7.3% interest and other factors may change. The county will not be able to get the money back.

Counties may keep money in mutual funds to offset unfunded debt. This will benefit the county and allow the county to retain control of the trust for future pension contributions. However, unfunded liabilities will continue to accrue interest over the next 15 years.

The county may also borrow funds at less than 7.3% arising from unfunded debt. While this may reduce interest on unfunded debt, it also leaves the county with debt service obligations that may result in unfunded debt in the future.

After the consultant’s presentation, the supervisors discussed various ideas. District 1 Superintendent Dave Plunkett asked if anyone has considered a 1% sales tax to address the PSPRS’ unfunded debt.

“Then everyone would pay the price,” he said.

Mr. Zeigler said a bill to create such a tax had been proposed in the state legislature but had not been debated very well. He added that La Paz County has already reached the state’s sales tax cap.

Miner said some cities and towns enact sales taxes or issue bonds to pay unfunded debts to pension plans, but counties are an extension of the state and should not do so. said it was not allowed.

One city that imposed a sales tax was Prescott. In 2017, Prescott voters approved Proposition 443, a 3/4-cent sales tax aimed solely at repaying unfunded debt to the PSPRS.

In a 2019 article on Signals Arizona’s website, Protem Mayor Billy Orr and City Councilman Steve Shishka said annual mandatory contributions to the PSPRS prior to Proposition 443. He said the money had made the city’s general finances very unstable. Mr. Prescott focused on the $80 million unfunded debt of the Public Safety Retirement Fund. Some called for Prescott to declare bankruptcy.

Proposition 443 allowed the City to increase its funding ratio and pay less to PSPRS.

The PSPRS problem goes back many years. As of July 2020, the pension plan had $12 billion of unfunded liabilities, 47% of which was funded. PSPRS said its healthy funding rate is at least 75%.

In 2020, Arizona contributed an additional $1 billion, and counties and local governments contributed $580 million in the next fiscal year. An additional $1.1 billion was contributed in the first two months of fiscal 2021-22. As of December 2021, total unfunded debt stood at $10.9 billion.

This was a working session and options were provided to supervisors for consideration of future meetings. County Governor Megan Spielman said she plans to bring people in to talk further with regulators about various options.

Plunkett said regulators need to hear from someone at PSPRS itself.