Cities bite big into public safety pension debt - SanTan Sun News SanTan Sun News

Cities bite big into public safety pension debt

August 16th, 2022 SanTan Sun News
Cities bite big into public safety pension debt

By Paul Maryniak
Executive Editor

East Valley municipalities in the last fiscal year took advantage of unanticipated general fund revenue increases to make big additional payments on their debt to pensions earned by thousands of retired police officers and firefighters.

But Tempe, Mesa, Gilbert, Chandler and Scottsdale still have a long way to go before they erase their huge unfunded liabilities.

Those five municipalities still owe a total $1.4 billion for pensions covering 955 retired firefighters, 1,471 retired cops and hundreds more firefighters and officers who are covered by Arizona’s Public Safety Personnel Retirement System, records show.

But that combined debt pales in comparison to the staggering $3.4 billion the City of Phoenix owes – which accounts for nearly half the $8.84 billion of the unfunded liability in the retirement system that existed at the close of the 2021-22 fiscal year on June 30.

For the entire system, including county and state corrections officers’ retirement plans and the plan for judges and elected officials, that number was $10.9 billion.

Still, the state Legislature – together with county, municipalities and fire districts – eliminated $2.85 billion of unfunded pension debt last fiscal year.

“I think it’s great,” said PSPRS Administrator Mike Townsend, who has been in the job since November 2019.

“This system has been underfunded for so long and those lingering unfunded liabilities just ended up costing taxpayers more and more money over time,” he said, calling the government employers’ additional pay-downs “a huge move.”

“I think also it speaks well to the
staff that we’ve put in place and the changes we’ve made,” he added, referring to both his agency’s investment strategies and other internal moves as well as the vibrancy of Wall Street prior to its current woes.

Although the final results of PSPRS’ investments for the 2021-22 fiscal year won’t be known for a few months, its success in the 2020-21 fiscal year drew kudos in the Pensions & Investments annual 1,000 Largest Retirement Plans report.

It said the combined PSPRS plan pension trust and defined contribution plan assets under Townsend’s management grew 44% to $16.1 billion in 2020-21, exceeding the percentage growth of all public pensions in the top 200 of the largest 1,000 U.S. retirement plans surveyed.

Townsend said his agency’s success was more than just a matter of hiring new auditors, new actuaries, changing “a lot of the actuarial assumptions and the processes of how we’re managing the money.”

It also was a matter of convincing the municipalities and other government employers about the efficacy of those changes and showing them options for whittling down their pension debt.

“When you think about the decision makers, you’re talking about elected boards and councils around the state,” Townsend said. “They’re not pension people, obviously, and a lot of them are really not financial people. They need to get to a place where they can understand and understand what we’re doing.”

The agency’s moves increased the government employers’ trust in the system, which had been battered more than a decade ago by the Great Recession of 2007-08.

The Legislature last fiscal year applied $1.15 billion to the state public safety and corrections officers’ pension debts.

Maricopa County over the last two years has put an extra $10 million into its jail officers’ pension plan, which is only 56.7% funded with an unfunded liability of $283.7 million, PSPRS records show.

Tempe led all cities in Arizona with its additional police and fire pension debt contributions – $341 million last year alone. Even so, both its police and its firefighter pension plans are only about 45% funded with a total unfunded liability of $341 million.

Over the last two years, Scottsdale put down $41.1 million to reduce its unfunded liability to $191.1 million for its retired police and firefighters. Chandler shelled out an additional $37 million on a debt that now stands at $154.3 million.

“Clearing this much unfunded pension debt off the books in a single year takes an incredible amount of resolve and initiative among employers throughout the state,” said Townsend. “It also takes faith in our commitment to protect members’ retirement benefits and to help employers and taxpayers save money.”

The $2.85 billion in additional government employer contributions last fiscal year surpassed the $1.58 billion in additional payments made in 2020-21 and dwarfed the $120 million in extra payments made in 2019-20.

The effort by local governments to pay down their unfunded pension liabilities isn’t just a matter of kindness for the men and women who spent years putting their lives on the line day in and day out.

It’s a legal obligation with genuine operational consequences that impact municipal spending decisions and capabilities for everything from supplies and infrastructure to payrolls.

Former Phoenix City Manager Ed Zuercher outlined those consequences for his City Council in June 2021.

At the time, he sought permission to borrow $1 billion at a fixed-interest rate to pay down part of the city’s total $5.4 billion pension debt – which includes other plans besides the $3.4 billion PSPRS debt.

“This taxpayer burden must be balanced with being fiscally responsible and committed in providing pensions to retirees,” Zuercher told Council in a memo.

He said the pension fund liabilities and costs already had “placed significant budgetary constraints on the City’s ability to provide employee wage and non-pension benefit increases, public services and infrastructure maintenance.”

And he noted that “while currently manageable, this pressure will continue into the foreseeable future.

“Further, credit rating agencies and lenders place strong consideration on the funding plan and funding levels of the City’s pension systems when determining their view of the overall financial health of the City,” Zuercher said.

Though several Phoenix Council members, including Mayor Kate Gallego, voiced support for Zeurcher’s proposal, it never came up for a vote.

Now Phoenix – and all the other entities with unfunded liabilities – face the likelihood of even higher interest rates on their pension debt.

But Townsend said his agency is working to help governments pay down their pension debt in a somewhat less burdensome manner, noting it will take years to eliminate that debt and voicing optimism that cities at some point in the future will have another opportunity to secure fixed-interest loans that will make it easier to pay off their PSPRS obligations.

He said PSPRS is recalculating their contribution rates “to get their payments down to something similar to debt financing where they’re on more of a level dollar amortization for those unfunded liabilities.”

“They’re on a big way down,” he said. “They’re going to pay it down one way or the other and so we’re changing the system to help account for that. If
they want to put additional cash up front, pay it down faster, it just makes it better for them.”

“We’re kind of shifting the slope of the line because the contributions were planned to increase pretty significantly 10 to 15 years out into the future,” he continued. “By making these changes, we’re kind of shifting some of that cost to the short term.

“So they’ll see some increased contribution rates over the next five years” but then it “will get it to where it’s more of a stable line going forward without the huge cost out in the future.”