PSPRS, CORP liabilities: Go into debt, raise taxes, or cut departments

The economic collapses of the market in the 2000s had devastating effects on the PSPRS and CORP returns and the consequences of those down markets are part of what created the massive debt. The state legislature decided to put the burden of the losses on the cities and counties. While the more populated counties and cities were able to handle the new debt, rural communities, like Cochise County, are still reeling from the effects.

In an effort to help the county, Mark Reader and Omar Daghestani with Stifel Public Finance and Mark Steed and Michael Townsend with PSPRS discussed ways in which the county might follow suit as many other cities and counties have done — refinance their debt obligations.

The county took the state’s offer of paying back the money by 2047 and made the minimum payment plus the annual payment which costs over $2 million a year.

Though PSPRS has been under new leadership and the state has removed certain barriers in investment options resulting in better returns on investments, there is no guarantee the up market will continue, said Townsend.

Daghestani explained some have taken the route of municipal bonds to pay debt obligations. With the interest rate so low right now, he suggested municipal bonds as an option to pay down the county’s obligations and save a few million of dollars.

Bonds do have a downside in that the public has to approve the loan by vote in an election, which takes time to get on the ballot, he said. Over a period of 25 years, the county would make a bond payment of anywhere from $2.7 million to $3.2 million annually.

However, the county would need to borrow over $57 million to pay down the $49 million, said Daghestani. This sum includes $49,752,404 to PSPRS and CORP, a reserve fund deposit of $6.5 million and some added expenses. The reserve fund would help cushion any declines in the investments.

So, what would it cost the county to put out bond issuance, asked County Administrator Richard Karwaczka.

Reader told him it would cost around $750,000 to pay for the underwriters, bond attorneys, credit rating check and other miscellaneous fees and expenses.

Some counties, cities and districts have raised property tax and/or sales tax to use specifically for the debt payments, Daghestani said. Others forego capital expenditures on such things as the purchase of needed equipment or renovations, and use that money to pay the debt down. Still others raid their rainy day funds, which are like a piggy bank for the unexpected and emergency situations, or used community assets, like buildings, as collateral.

For the 2021-2022 fiscal year, county administration is suggesting a two percent increase in the primary property tax rate which would raise an additional $532,159 and would be solely to reduce the PSPRS and CORP debt.

Money not spent from the Cochise County Sheriff’s Office budget could also be used to pay down the debt which could add up to $700,000 to $800,000 a year, noted county budget manager Daniel Duchon. As could money from higher than expected sales tax revenue collections. With AZ CARES funds somewhat offsetting certain expenses, it could be possible to use around $1 million toward the debt.

So the county could be paying more on the debt, but it cannot because of the state imposed expenditure limit. The county can only spend so much money each year as determined by the state. The addition of a few million extra dollars means a cut somewhere else in the county budget.

This worries Supervisor Ann English who has often complained about this debt being included in the expenditure limit. Though the county can come up with ways to help knock the debt down, without taking out a loan or bond issue, it is bound by the expenditure limit. Municipal bonds are not counted in the expenditure limit.

“We have to provide certain services to our residents,” she said. “So, where do we cut? This is a stupid situation the state has placed us in.”

Supervisor Peggy Judd had supported the two percent property tax hike, but in the work session voiced reservations about it.

“I think we may not need the two percent,” she said.

Judd thought the county would make more money from sales tax collected through online sales.

Though the county did see a marked increase in sales tax for much of 2020-2021 year, much of it was attributed to the construction of the border wall, English cautioned. The revenue did drop somewhat after construction stopped.

“We’re not sure what our excess might be this year,” English stated. “Or even if we’ll have excess.”

Karwaczka said, “The Board has always done a good job saving money. And that puts us in a good position. People need to know where the extra money is going to go. Let the public know it’s going for PRPRS and CORP.”

Judd suggested borrowing the money “on our own,” but county Treasurer Catherine Traywick told her the county can only borrow sums that can be paid back in just a year.

“I have no mechanism on my side to get a long term loan,” Traywick added. “I have more faith in our county people making this happen than I do with Stifel.”

She also pointed out the needed repairs and expansion of the county jail and services, a high ticket item, and needs to be addressed.

English said, “I know we can’t take out money out of our current revenues coming into the county to pay this down and cutting things won’t solve the problem enough. When I hear a board member say that we should just cut out this department or that department, I say we’re only doing what we’re required by law to do. I don’t see anyway to cut a department, or a function. We don’t have any extra things, that are not mandated.

“If we had $10 million or $15 million we could pay PSPRS and CORP, we couldn’t do it because of the expenditure limit. They want us to borrow the money and go in debt.”

She went on to say she did not want to lose any staff members and sees them as “the country’s most valuable resource. We can’t give them up in order to pay for a system we have no control over. I refuse to look at that.”

She, too, sees a disconnect between property owners and the county. Taxpayers see a raise in their tax bills, but do not see how much the school boards and special districts taxes were raised even though Traywick has each individual tax listed on the bills.

“We collect the money and we get all the blame,” she emphasized.

English was against going out for a bond to pay off the debt, while Judd seemed to be in favor of it.

Supervisor Tom Crosby, who did not attend the work session, has been adamant about not raising any taxes.