Paradise Valley Town Council may amend General Fund reserve policy

The Paradise Valley Municipal Complex is at 6401 E. Lincoln Drive. (File photo)

The Paradise Valley Municipal Complex is at 6401 E. Lincoln Drive. (File photo)

Paradise Valley Town Council appears primed to tap into its General Fund reserve balance in an effort to rapidly pay down the unfunded liability of public safety pensions.

The local governing board held a work session discussion Thursday, Sept. 8, but a consensus of next steps or an acceptable change to the 90-to 110-percent General Fund reserve balance was not reached.

If approved, the move will set a new fund reserve policy through ordinance.

Town staff recommended a reduction of the reserve level to 75 percent, according to the Sept. 8 work session discussion. The Town of Paradise Valley fiscal year 2016-17 operating budget is about $26 million.

Municipalities throughout the country have for a long time 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.

The problem:

  • 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 underlying push to change the General Fund reserve fund policy, local leaders say, is to pay that unfunded liability to PSPRS — for Paradise Valley that number is about $18 million — and eliminate the 8 percent assessment that the town must pay each year on any outstanding balance.

“When you look at the reserves, the Town of Paradise Valley has always had exceptional levels of reserves,” is how Paradise Valley Administrative and Government Affairs Director Dawn-Marie Buckland prefaced the Sept. 8 work session discussion.

“And, that really provides us with a lot of financial flexibility.”

Ms. Buckland points out the Government Finance Officers Association recommends a minimum of 60 days’ worth — or 16 percent — of day-to-day expenses on-hand at anytime.

“But there is just not a one-size-fits-all for reserve fund balances,” Ms. Buckland points out. “There is uncertainty in fiscal forecasting. You make an assessment on those historical perspectives to figure out what you may have to weather in the future.”

Ms. Buckland says a policy ought to be in place for what happens once the adopted reserve threshold is achieved.

“What are the factors here specific to Arizona and here in the Town of Paradise Valley,” she asked of council. “Is there an interest in creating a true minimum? If we do reach that 110 percent, what does the mean for the town?”

Ms. Buckland provided town council with a hypothetical payment schedule where the town would pay down its PSPRS obligation in as little as three years, the municipality would realize almost $11 million in savings over the current 22-year payment schedule.

However, the General Fund reserve would be at an estimated 58 percent at the end of the three-year payment plan, the Sept. 8 staff report states.

A historical perspective

Pam Kirby, a former member of Paradise Valley Town Council, says the 90- to 110-percent threshold of General Fund reserve policy was set due to necessity.

Pam Kirby

Pam Kirby

“Responding to the recession, the 2008-09 council approved the 90- to 110-percent reserve policy to replace an existing reserve policy,” she said in a Sept. 14 statement.

“Because of the financial pressures put on the operating budget from the recession, the council and staff engaged in rich discussions around how much reserve was too much, and, conversely, the short- and long-term risks associated with drawing down the reserve. The ‘08-09 council concluded that 90 percent was the fiscally responsible floor.”

Ms. Kirby says Paradise Valley is unique to other Arizona municipalities, which her view, calls for higher than traditional General Fund reserve levels.

“The Town of Paradise Valley differs from other municipalities in that our primary revenue sources are construction and tourism versus property tax,” she explained.  “While we enjoy no property tax, we must recognize that our revenue sources are susceptible to significant swings, driven largely by the economy.”

When those economic swings that capitalism brings occurred in 2008, Ms. Kirby says town council was forced with difficult decisions.

“One can look back to 2008, when we had to cut our expenditures by 30 percent because of revenue declines driven by the recession, to understand just how possible these worst-case scenarios are,” she said.  “A higher reserve fund balance of 90- to 110-percent allows us to responsibly plan for that variability.”

A value-based decision

Paradise Valley Mayor Michael Collins, who was first elected to town council in 2010, says the issue of General Fund reserves rests as a value decision for members of council to make.

Michael Collins

Michael Collins

“For me, paying down a significant, if not entire balance of public safety pension liability is the critical outcome,” he said in a Sept. 13 statement.

“The question of reserve policy for me is based on finding a safe, conservative reserve balance level, while applying as many funds as possible to paying off the pension liability.”

Mayor Collins says the 75 percent recommendation is reasonable.

“Given a national average of less than 50 percent, I think that dipping to 75 percent or somewhere around there would be OK as long as the use of the reserve funds was to pay down long-term liabilities such as the public safety pension and replacement or repair of critical infrastructure,” he explained.

While Mayor Collins says Paradise Valley is on excellent financial footing, finding an appropriate General Fund reserve balance is paramount to effective tax dollar stewardship.

“Understanding an appropriate reserve fund balance is an important piece of conservative public resource stewardship. But in the end, what matters most are the annual budgets that our staff and council put forward,” he said.

“So long as we are diligent in our management of town funds, and appropriately weigh short-term versus long-term objectives, I am confident that our staff and council will continue to make decisions that advance the conservative financial agenda that our town so proudly advocates.”

Paradise Valley Vice Mayor David Sherf says 75 percent of reserve funds is his absolute bottom.

David Sherf

David Sherf

“Personally, I  would not like to see our reserve funds drop below 75 percent,” he said of the hypothetical PSPRS payment schedule in a Sept. 14 statement.

“Over 50 percent of our revenues are derived from our resort, bed and sales taxes and construction sales taxes. Both of these revenue sources are at-risk if the economy falters so we must be prudent with our reserves. We will be evaluating the funding needed to pay off the Public Safety Pension liability over a 3-10 year time period and that will allow us to evaluate what the reserve balance would be under each scenario.”

Vice Mayor Sherf says the conversation ought to be happening given the situation with PSPRS liability payments.

“Resolving the Public Safety Pension liability is a good example of why ample reserve funds are necessary,” he said. “Another example for the use of reserve funds may be needed capital projects but I do not foresee using reserve funds for items beyond these two.”

The creation of the Paradise Valley town budget is one of the most important things done at Town Hall, Vice Mayor Sherf says.

“We also review and evaluate the capital projects anticipated over the next five to eight years, so we know what money will be needed to maintain the town streets and buildings and balance this against anticipated future revenues,” he said.

“If the town did decide to pay off the public safety pension liability over future years, the amount actually funded each year would still be based on the annual budget with the goal being to maintain reserves that are felt to be needed. Again, the Town has been and I think will maintain a fiscally conservative town.”

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