With mounting pension costs in Arizona’s troubled Public Safety Personnel Retirement System (PSPRS), some local governments are looking to creative accounting and pushing the envelope when it comes to what costs can be excluded under current constitutional spending limits.
According to the Arizona Tax Research Association (ATRA), a state taxpayer watchdog group, Arizona’s Office of the Auditor General (OAG) determined in its most recent audit, spanning fiscal years 2016 and 2017, that the county has been circumventing its expenditure limit by excluding its unfunded pension liability costs from the limit.
The OAG said the pension exclusions should not be allowed and that the expenditures the county was permitted to exclude were actually $3.3 million as opposed to the $60.9 million it reported.
Constitutional expenditure limits were voted on by taxpayers in 1980 in an effort to restrict dramatic growth in local government spending, whose limits are increased each year by virtue of population and inflation.
Kevin McCarthy, president of ATRA, explained to The Center Square that the state’s constitution is very clear about excludable costs from expenditure limits, which include long-term debt obligations such as voter-approved general obligation bonds, leasing costs of properties or other capital investments.
McCarthy said the county decided to argue that the unfunded pension liabilities are actually a form of long-term debt and as such are excludable expenditures.
Unfunded pension liability occurs when the required pension contributions and investment earnings of the fund are inadequate to cover employee benefits.
However, McCarthy said the OAG’s office “totally rejected this interpretation of the state’s allowable exclusions.”
He added that the county could’ve simply “gone back to the voters and asked for an override of the expenditure limits since elections are very common at the city level.”
But McCarthy, who has been involved in tax research for more than 20 years, said he thinks the county just didn’t want to go to voters and make the argument to increase spending levels.
“These are types of situations where the county takes these end runs around instead of just simply going back to voters and asking them to vote again on the issue,” he said. “I don’t think it’s smart on their part [Maricopa County] to even try to do this.”
Going forward, McCarthy said this could result in potentially a severe challenge to the efforts of legislatures to try and control county spending levels.
“This would also make a mockery of what state voters passed in 1980 regarding expenditure limits,” he said, adding that taxpayers would have to go back to the drawing board and come up with something completely new.
Asked to speculate on why the county might take this course of action, McCarthy implied it’s something of a transparency issue.
“It’s always more comfortable to try to do these things in a circuitous route than go directly to the voters and make the argument why they need to spend more money than the law allows,” he said.
The issue remains under review as Maricopa County has asked the state’s attorney general for his opinion on whether the unfunded pension liability costs count as excludable under the current laws.
A spokesman for Maricopa County declined to comment on the issue since it is still pending review by the attorney general.