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Q&A: Prop 443 - Will It Work?
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28 July 2017  

Questions and Answers: Prop 443

Q. What is Prop 443?

A. Prop 443 is a ballot measure referred to the voters of Prescott, Arizona. If it passes, it will add a 3/4 cent sales tax in the City of Prescott.

Q. What will the tax be used for? 

A. According to the language of Proposition 443, the tax can only be used to pay down the unfunded liability for the Public Safety Personnel Retirement System (PSPRS). 

Here is the exact wording of the ballot measure (bold italics added):

Q. How long will the Prop 443 tax last if it is approved by the voters? 

A. According to the language of the measure, it will last no longer than 10 years. If the unfunded liability is paid down to $1.5 million or less before the ten years are up, then it will end sooner.

Q. What does all that mean? 

A. Here is a visual explanation:

Q. How much of an unfunded liability does the City have in PSPRS?

A. There are many estimates, most likely it will be close to $81,000,000 as of January 1, 2018.

Q. Why is it so darned high? 

A. Stock market collapses. Bad legislation. Unfavorable Court decisions. Questionable policies. More retirees and people collecting benefits than active members paying in.

Q. Has anything been done to fix it?

A. Yes. Legislation, including a new Tier 3 of Public Safety retirement benefits was created last year, which will greatly reduce costs in the future. However, the unfunded liability is based on current legal Constitutional protections, and unless the Constitution is changed, the debt cannot be erased. It will take decades to realize the benefits from last year’s legislation in creating Tier 3. 

Q. How much will the tax bring in? 

A. The tax is estimated to bring in approximately $11,000,000 per year. 

Q. Can the City pay a higher amount than the tax revenue towards the unfunded liability? 

A. If the Council votes to pay additional monies towards the unfunded liability, and puts the money in the budget, yes. It would likely have to be specifically voted on each year.

Q. Will the City of Prescott have the highest sales tax in the area if this passes?

A. No. The only community in the Quad City area with a lower sales tax rate will be Dewey-Humboldt.

Information from a December, 2016, City of Prescott public presentation.

 

However, if you consider the total tax burden in the Quad City area, which would include sales tax and Municipal/Fire District Property Tax, the City of Prescott is by far the lowest, even if Prop 443 passes.

Information from a December, 2016, City of Prescott public presentation.

 

Q. Is a 3/4¢ sales tax enough to pay the unfunded liability in ten years or less?

A. Yes. Probably. It depends.

Q. That’s a crazy answer. It’s not very definitive. 

A. Well, it all hinges on many variables. How much does the tax actually bring in? How much will the Council need to add annually to the payment to make it work? How much will the liability increase due to unforeseen circumstances, such as a market crash, or an unexpected rash of retirements from the local public safety agencies? Will the PSPRS Fund meet their projected returns of 7.4%? Those are factors that can be guesstimated, but not predicted accurately. 

Here are some facts that may help you:

1. The tax is expected to bring in $11M per year.

2. In the first year, the Council has committed to adding $7.5M to the payment in addition to the tax. They are in discussions to add even more from the City’s reserve savings.

3. Because the tax wouldn’t start until January 1, which is in the middle of the fiscal year, it will bring in approximately $5,500,000 in Fiscal Year 2018. 

4. Add $7.5M plus $5.5M, and that is $13M to be paid towards the liability in F/Y 2018.

5. The average increase in the liability over the last 10 years (taking out 2014, because that was an anomaly year due to the deaths of the Granite Mountain Hotshots) is about 12% annually. 

6. The increase expected this year is closer to 4%. 

So, check it out for yourself. Below is a spreadsheet depicting ten years of the tax. If you click on the link, you can even test assumptions yourself.

Year 1:

Column A. Year of the tax (Remember, it can only last 10 years.)

Column B. The starting amount of liability. 

Column C. The payments to be made towards the unfunded liability each year. 

Column D. How much the liability will increase from year to year. Expressed in a percentage.

Column E. This is the dollar amount of the beginning liability (column A) times the percentage of the increase (column D). 

Year 2:

Column A. Year of the tax.

Column B. Year 1’s liability, plus the increase amount, minus the payment. In other words, assuming it starts at $81M, with a $13M payment and a 12% increase in the liability:

$81,000,000 + $9,720,000 - $13,000,000 = $77,720,000 

That means Year 2 starts with the unfunded liability of $77,720,000 

…and so forth. 

IMPORTANT DISCLAIMER: We are not actuarial experts. We are not pretending to be actuarial experts. This is not meant to be an exact depiction of PSPRS. If it were this easy to figure out, they wouldn’t need to hire big expensive companies to create the official actuarial. What this is meant to do is to give people a rough - very, very, very rough - estimate as to whether or not it is possible to pay down the City’s unfunded liability in ten years and what investments the City has to make for it to happen. Did we mention that this spreadsheet is only a very, very, very rough estimate? We know it’s not 100% perfect. We’re not trying to be perfect. We just want you to be able to look at a super uncomplicated spreadsheet so you have a little more information as to whether the tax from Prop 443 has any chance of paying down the unfunded liability. You will be making your best guess. But, welcome to the club. An actuarial is just someone else’s best (hopefully educated) guess anyway. 

Here is one of my guesses. This one assumes the increase percentage at 12%. If it happens like this, it would take a little over 8 years to pay it off if Council continued to add $6M in addition to the $11M tax revenue.

Here’s another one. You can see the effect making a change to the increase percentage can have. With this scenario, it would be paid off in about 6 1/2 years.

Here’s another one. This one assumes the Council makes only the bare, minimum payment from the tax and does not add in any additional funds. At a 7% annual increase, in ten years it would not get the unfunded liability amount below $1.5 million. 

And here’s what happens if Prop 443 doesn’t pass and the Council does nothing, while the liability continues to increase at a rate of 12%.

Now it’s your turn. Test it out. Check the numbers. Make your best guess. Heck, make two or three guesses. 

The blue columns are locked to preserve the mathematical formulas. But, you can change the amount of the payments and the annual increase to see what it will take to get the unfunded liability paid in ten years or less. The changes you make will cause the Liability and the Increase Amount columns to adjust accordingly. Here is the link to the spreadsheet (click on the link below to make your own changes): 

https://docs.google.com/spreadsheets/d/1foXftMfgyCHwsZrLQSmODyzmoplkfP70W6BFG3tXaS8/edit#gid=0