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Arizona pension funds cut debt thanks to special infusions of municipal, state money

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A pension system that serves Arizona first responders and corrections officers said it received $1.58 billion in additional contributions over the past year from city and county employers plus the state, helping to shore up the financial status of the pension funds that it manages.

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The Public Safety Personnel Retirement System also expects to receive additional voluntary contributions from other cities and counties, especially those in and around metro Phoenix.

The state contributed $1 billion of the $1.58 billion brought in over the 12 months through June 30, the pension system said. The other $580 million came from voluntary contributions from various cities, counties, airports, districts and other municipal employers. In addition to those special payments, employers around the state added another $1 billion into the system in regular, required contributions.

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The additional contributions have helped to stabilize the funds and save taxpayers money by reducing unfunded obligations that would escalate if not addressed.

“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 PSPRS Administrator Mike Townsend in a prepared statement. “Employers across the state are chopping down a mountain of pension debt.”

Reducing unfunded debt obligation

As of June 30, 2020, pension funds managed by PSPRS had about $12 billion in unfunded obligations, so the additional infusion will reduce that by more than 10%. At that time, the system had funded only about 47% of its future pension liabilities. A rule of thumb is that pension plans should be at least 80% funded, said Harry Papp, an outside investment manager who serves as vice chairman on the PSPRS board of trustees.

More current tallies of the pension system’s debt and underfunded status won’t be available for several months.

The new Arizona budget signed recently by Gov. Doug Ducey included $500 million in appropriations for both the Department of Public Safety and Department of Corrections pension funds managed by PSPRS, or $1 billion in total.

Among voluntary or additional contributions made by the municipal employers that pay into the system, some entities have diverted money from their budgets while others have raised money by selling bonds in a low interest-rate environment.

Flagstaff was one of the first to do so last year, arranging a bond-like financing deal that involved receiving money from investors while making lease payments on city buildings. The move was expected to mostly pay down the city’s $112 million shortfall to the pension system.

Various other employers, including Yuma, Pima and Pinal counties, also made relatively large additional contributions over the past year, while others are considering doing so.

Around the time the Flagstaff deal was announced, Phoenix had more than $3 billion in unfunded liabilities tied to the pension system, while Tucson, Mesa and Tempe owed another $2 billion combined. More than 300 Arizona cities, counties and other public entities support the pension system.

More willingness to contribute

The government employers that support PSPRS are more willing to ante up money lately. The $1.58 billion of additional funding that came in during the 12 months through June 30, 2021, compares with just $120 million in such contributions over the previous 12 months.

“There’s a lot more confidence in what’s going on in the PSPRS system,” Papp said.

After years of investment underperformance and other turmoil, the pension system changed much of its staff as well as actuaries, lawyers, accountants and other service providers, he said, adding that the fund’s investment management team generated a preliminary 28% return over the 12 months through June 30.

Public pension funds are entrusted with taking payroll contributions from government employers and investing that money in hopes of boosting the assets that support members in retirement.

Among various administrative changes, the board last August adopted more conservative actuarial assumptions that necessitate higher payroll contributions from employers, said Board Chairman Scott McCarty. But the payoff, he added, is a “soundly managed pension system that can deliver on its promises to members at the lowest long-term cost to employers and taxpayers.”

The PSPRS provides retirement benefits for approximately 60,000 Arizona police, fire and other first responders, as well as corrections officers and elected officials, including retirees and beneficiaries. Unlike the first two funds, which are supported by hundreds of Arizona municipalities, the elected officials program has only a single employer, the state, and thus different financing arrangements.

Reach the reporter at russ.wiles@arizonarepublic.com.

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This article originally appeared on Arizona Republic: Arizona pension funds cut debt thanks to special infusions of municipal, state money

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