As of 2016, Paradise Valley has 33 retired police officers collecting a pension totaling, on average, about $45,000 annually, with 23 active members contributing to the pension plan. (File photo) Paradise Valley officials are mulling over exploring the use of taxable bonds as payment for portions of their unfunded liability in the Public Safety Pension Retirement System. Municipalities throughout the country have historically provided pensions to their public safety personnel --- including the Town of Paradise Valley. Pensions were meant to attract quality workers and the promise to provide that pension when a worker retired served to reward employees for years of service to the public. The Arizona Public Safety Personnel Retirement System is a 236-member organization managing the pension plans for eligible public safety personnel entities statewide of which Paradise Valley participates. The Arizona Constitution recognizes public employee pensions, while PSPRS and its duties were established in the late 1960s to ensure public safety employees equal footing in terms of pension eligibility, contribution rates and benefit formulas. In 2016, the Independent reported the problem lies within:

• The Town of Paradise Valley has 33 retired police officers collecting a pension totaling, on average, about $45,000 annually. However, there are only 23 active members contributing to the pension plan along with taxpayer dollars.
• Paradise Valley, because of the PSPRS formula, is paying 62 percent of a police officer’s salary toward his or her state pension plan, which carries an estimated annual total financial obligation of about $1.5 million.

The Town Council in 2016 approved a resolution confirming that the municipality would try to pay off its then-$18 million unfunded liability in three years as opposed to its current 22-year plan.

Addressing unfunded liability

Town officials are now preparing for their 2019-20 budget, and Chief Financial Officer Douglas Allen says PSPRS funding policy and strategy is a part of that discussion. Moreover, a new state requirement stipulates that municipalities must have a funding method in place by 2036 to address unfunded PSPRS liability. Deputy Town Manager Dawn Marie Buckland says this new state requirement from the Arizona Legislature is due to municipalities who were not addressing their unpaid pensions, unlike the Town of Paradise Valley.

“I know from the conversations that occurred at the Legislature last year, the whole reason this was put into place was because there were cities and towns that hadn’t done what you all had done, hadn’t put any policy action into place that said ‘here’s how we plan on pursuing this,’” Ms. Buckland said, acknowledging the 2016 decision to aggressively pay off Paradise Valley’s unfunded liability.

“The interest of the sponsor was to make sure that was communicated to the residents --- this is unfunded liability, it needs to be paid off, so here’s our policy to do so.” The town’s unfunded liability, according to the most recent data available, is $17.3 million, Mr. Allen said. “The most recent actuarial report is for the year (that) ended June 30, 2018. That report shows an unfunded liability of $17.3 million, which is 47.7 percent of the total actuarial accrued liability (funded and unfunded),” Mr. Allen explained. “Since that date, the town has paid the required PSPRS contribution rates and an additional $5 million toward the unfunded liability.” Douglas Allen Mr. Allen pointed out the change in total pension that has increased in recent years. The funded and unfunded accrued liability increased from $31.8 million to $36.3 million June 30, 2016 to June 30, 2018, Mr. Allen says. At the start of this fiscal year, which started July 1, 2018 and ends June 30, the town paid $5 million, and has another $1 million appropriated to pay by the end of the year, Mr. Allen said. In addition, town leaders have forecast to pay $6 million next year, and estimated the need for $1.7 million to finish the payment plan, based on the 2016 resolution. “But change in liability looks like we need another extra $4 million to make it down to zero, to get to those numbers,” he explained at the meeting. Mr. Allen says the increase in $4.5 million, which occurred over the past two fiscal years primarily impacted the unfunded liability due to pension plan related factors. The extra cost isn’t required to all be paid this year, he says, but noted that it is the Town Council’s goal to pay the PSPRS unfunded liability as quickly as reasonably possible, and will be a part of the budget 2020 discussions. When looking at potential options for paying the unfunded liability, Mr. Allen says the state law prohibits using tax-exempt bonds to pay for pension liabilities, but Lake Havasu City has successfully issued taxable bonds.

“This has gone to the auditor general; there’s been a lot of discussion and there’s mixed feelings from accountants and legal counsel on this factor, but this is the most recent one that’s gone through,” he explained.

The upside to taxable bonds, Mr. Allen says, is it pays the entire balance with its proceeds, assets in PSPRS investment pool, the town pays “normal cost contribution rate” in the next fiscal year, and cash on-hand is invested to partially offset the bond costs or is used for other projects. The downside to using the bonds includes losing flexibility, according to Mr. Allen, in addition to an interest rate around 3.5 percent. “The process now is to pay cash as we’re able to on availability of resources. If we do bonds, you’re committing to that two-year, five-year --- whatever that bond issuance is.” The upside of using town cash includes total flexibility to pay as resources are available, and the ability to stop should economic triggers indicate a cash-flow issue, such as another recession. The downside to this funding method, Mr. Allen says, is cash and expenditure limitation capacity could defer projects and other priorities. “If we look to pay everything off over the course of the next year or two, we’d be right at the maximum expenditure limitation,” the Mr. Allen said. “That’s just a consideration as well.” Mr. Allen says for 2020 budget preparations, he sees cash, bonds or rate only as three options. He doesn’t recommend rates only, saying staff’s recommendation is to look at both the cash option and the bond option. “…make sure we have everything legal and ready to go, as well as what’s in the best interest of the town when it comes to cost,” he said. “Paying the unfunded liability, because of those other factors outside of our control has increased that liability a little more than what was expected three or four years ago. What pace should we look at? I still think two-three years is the recommendation.” Paradise Valley Town Hall is at 6401 E. Lincoln Drive. (File photo) 

Seeking a bullet-proof solution

The Paradise Valley Town Council appeared to be supportive of hearing more about the taxable bond options. “This is a discussion of where we want to prepare the budget for 2020, whether cash or bond. I’d like to see at the bond issuance,” Councilwoman Ellen Andeen said, noting she’s interested to know how the town will sustain the PSPRS long term. Councilwoman Ellen Andeen (Independent Newsmedia/Arianna Grainey) “Consideration of both the cash and bonds to see what’s in the best interest of the town. As far as the unfunded liability rate, the biggest risk fact there is time. That’s a lot of time, 2036. When I looked at different states and cities that are funded there’s a wide variation of what’s funded and unfunded in different cities.” Councilman Paul Dembow clarified that there are no other options the council hasn’t been presented with yet, reminiscing on asking about bonds a couple years back. “I would feel badly because a few years ago I asked the question about bonding and was told absolutely not; I wasn’t told absolutely not based on nontaxable or taxable. I just want the council to be sure this is the only other option,” he said. Mr. Allen said he doesn’t have any other tools in his toolbox at the moment as far as methods to pay for PSPRS unfunded liability. Town Manager Brian Dalke chimed in on that point, referencing a government financial officer’s association meeting Mr. Allen would soon be attending. “We know there will be a lot of discussion about this. All cities are really struggling with this, how to approach it,” Mr. Dalke said. “Lake Havasu is leading with this one. It was pointed out it’s not universally accepted. They’ll have a robust discussion next week about it, as we hear what those discussions are we’ll bring those back.” Mayor Jerry Bien-Willner said he hears that the council is interested in looking at the bonds. Jerry Bien-Willner “What we can all see is there are tremendous amount of variables involved in this, and many are, as you pointed out, outside the town’s control,” Mr. Bien-Willner said. However, the notion that taxable bonds paying for unfunded liability is still a new process is something Mr. Bien-Willner says he’s not quite comfortable with. “As far as using taxable bonds to pay down this liability, I have a discomfort with the idea that it’s being floated, it’s sort of in trial, I couldn’t support anything that’s not bullet-proof, if you will,” he said. Mr. Allen said, in closing, that as a Certified Public Accountant he would not bring anything to the council for action unless it’s been fully vetted, and the town has assurance in writing.