Law enforcement pension liability is adding up for the Santa Cruz County government, and a financial advisor is suggesting that officials take out a loan using a county building as collateral to start paying it down.
During a County Board of Supervisors meeting on Tuesday, Michael Vasquez, senior vice president for the investment banking company Piper Sandler, said that Santa Cruz County had more than $10.5 million in unfunded pension liability for both sheriff’s deputies and corrections officers as of 2019.
“The amount of unfunded actuarial accrued liability (UAAL)… in Santa Cruz County’s retirement plans was not caused by any action or failure to act on the part of the county,” Vasquez insisted. “The county has always paid in full its annual required contribution.”
Instead, Vasquez said that there were various factors that led the county to that shortfall, including challenges brought by the 2008 economy, longer life expectancies and overall higher pension costs.
He added that, in speaking with county officials, he recommended that the county enter a Certificate of Participation (COP), or a lease-financing agreement, which would serve as an approximately $10 million to $11 million loan that they could use to pay off the unfunded pension liability.
“It’s, in effect, what most bond transactions are. It’s just a complicated loan and we have a security in this, which is going to be a lease hold interest in one of the county’s buildings,” Vasquez said.
Once the COP goes through, he said, the county would then make lease-type payments to the investors. That would include paying an interest rate of approximately 2.5 to 3.5 percent on a semi-annual basis in January and July, and paying principal amounts once a year in July, or about $756,000 in annual debt service payments.
“So that helps us reduce the outstanding liability and makes it much more manageable for the county to descale the obligation that we currently have,” County Supervisor Manuel Ruiz confirmed.
Supervisors Bruce Bracker and Rudy Molera blamed the state for the shortfall that the county is facing in its liability.
Taxpayers around the state “are stepping up to pay this money that the state fiscally mismanaged, and the state should have the liability to at least participate in some form in this,” Bracker said. “Yet, once again, we the taxpayers of Santa Cruz County will be paying this burden.”
“If we sit and depend on the state, it’s not going to happen,” Molera said about finding a solution to the problem. “I think if we work proactively, as we are now, I think that’s going to put us in a good position as other counties are doing now.”
Ruiz noted that other counties and cities raised taxes to cover those costs, but local officials are looking at other options.
“We’re trying to be as fiscally responsible in trying to find a method, but yeah, it is taxpayers’ dollars. It’s through no fault of county government, but through state failures,” Ruiz said. “At least there’s options that we can do to try to minimize the huge impact.”
One issue that increases the county’s overall pension liability for sheriff’s officers is the department’s participation in Operation Stonegarden, a federal program that pays for local law enforcement to work overtime helping the U.S. Border Patrol enforce federal immigration and smuggling laws.
OT earned by deputies while working Stonegarden hours can become part of their “pensionable” income, meaning it’s part of the calculation that determines the officers’ retirement income.
Long-term costs associated with Stonegarden have led some local governments, like Pima County and the City of Bisbee, to take a hard look at their officers’ participation in the program. In 2020, the Pima County Board of Supervisors rejected a $1.8 million Stonegarden grant, due in part to the pension obligation issue.
County Manager Jennifer St. John said it made sense to take a closer look at costs incurred by Stonegarden, as has been the case in other counties and cities. But, she said the real issue is ensuring that effective pension programs are in place.
“There’s a percentage that you have to pay into the pension, and you still pay that when you work Stonegarden,” St. John said, noting that a portion of the grant is set aside for pension costs. “This is very controversial but in my opinion, if that percentage was proper, it would fund itself… If a pension program is working properly, then it funds itself.”
The Arizona Public Safety Personnel Retirement System (PSPRS), which is what the country pays into for law enforcement pensions, has been plagued by poor management and underperformance in recent years.
In addition to Operation Stonegarden, another practice that has presumably driven up pensionable salaries at the Sheriff’s Office is a system reportedly created in 2000 under former Sheriff Antonio Estrada in which employees entered unworked overtime on their timesheets in exchange for performing certain job functions. The practice was reportedly in place until October 2018, and resulted in the Arizona Attorney General’s Office filing a civil action against Estrada and former Capt. Ruben Fuentes earlier this year.
In a court filing, a lawyer representing the county alleged that 77 different Sheriff’s Office employees reported unworked overtime hours on their timesheets just between June 28, 2013 and Sept. 21, 2018, resulting in $196,842 in total compensation during that period.
In addition, the lawyer wrote, one sheriff’s officer received $14,840 in unworked overtime payments between 2016 and his retirement in 2018 – payments that could have helped increase the officer’s retirement pension.
Speaking to the NI on Wednesday afternoon, St. John declined to comment on how the matter might be addressed in terms of the county’s pension liability.
“Since this is still ongoing, I don’t feel comfortable making any comments on that,” she said.
(Additional reporting by Jonathan Clark.)