Municipalities in the East Valley used unexpected increases in general fund income last fiscal year to make large additional payments on their debt for 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 can service their huge unfunded debt.
Those five municipalities still owe a combined $1.4 billion in pensions that cover 955 retired firefighters, 1,471 retired police officers and hundreds of other firefighters and officers covered by Arizona’s public safety pension system, records show.
But that combined debt pales in comparison to the staggering $3.4 billion that the city of Phoenix owes — which accounts for nearly half of the $8.84 billion of unfunded pension system liabilities at the end of fiscal 2021 -22 passed on June 30th.
For the entire system, including county and state law enforcement officials’ pension plans and the plan for judges and elected officials, that number was $10.9 billion.
Still, the state legislature — along with counties, municipalities, and fire districts — reduced $2.85 billion in unfunded pension debt last fiscal year.
“I think it’s great,” said PSPRS Administrator Mike Townsend, who has been in office since November 2019.
“This system has been underfunded for so long, and those remaining unfunded liabilities have been costing taxpayers increasing amounts of money over time,” he said, calling the additional down payments from state employers “a big step.”
“I think it also speaks well to the staff that we’ve deployed and the changes that we’ve made,” he added, referring to his agency’s investment strategies and other internal moves as well as the dynamics of the Wall Street previously his current ailments.
Although the final results of PSPRS’ investments for fiscal year 2021-22 will not be known for several months, its success in fiscal year 2020-21 was recognized in Pensions & Investments’ annual 1,000 Largest Retirement Plans report.
The combined PSPRS pension fund and defined contribution plan assets managed by Townsend grew 44 percent 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. surveyed retirement plans.
Townsend said his agency’s success was more than just a matter of hiring new accountants, new actuaries, changing “a lot of the actuarial assumptions and the processes of how we manage the money.”
It was also about convincing municipalities and other state employers of the effectiveness of these changes and showing them ways to reduce their pension debt.
“When you think of decision makers, you’re talking about elected bodies and councils across the state,” Townsend said. “They’re obviously not retired, and a lot of them really aren’t financial people. They need to get to a place where they understand and can understand what we’re doing.”
The agency’s moves boosted state employers’ confidence in the system, which was battered by the Great Recession of 2007-08 more than a decade ago.
The Legislature spent $1.15 billion on the pension debt of state public safety and corrections officers last fiscal year.
Maricopa County has injected an additional $10 million into its prison officers’ pension plan over the past two years, which is only 56.7% funded with an unfunded liability of $283.7 million, records from PSPRS show.
Tempe led all Arizona cities in additional police and fire service pension contributions — $341 million last year alone. Despite this, both the police and firefighter pension plans are only about 45% funded, with a total unfunded liability of $341 million.
Over the past two years, Scottsdale has deposited $41.1 million to reduce its unfunded liability for its retired police officers and firefighters to $191.1 million. Chandler did the same, paying another $37 million in debt that now totals $154.3 million.
“Putting that many unfunded pension debts off the books in a single year will take an incredible amount of determination and initiative from employers across the state,” Townsend said. “It also requires confidence in our commitment to protecting members’ retirement savings and helping employers and taxpayers save money.”
The government’s $2.85 billion in additional employer contributions last fiscal year exceeded the $1.58 billion in additional payments made in 2020-21 and made up the $120 million additional payments in 2019-20 in the shadows.
Efforts by local governments to pay off their unfunded pension liabilities are not just a matter of being kind to the men and women who have risked their lives every day for years.
It’s a legal obligation with real operational ramifications, affecting municipal spending decisions and capabilities for everything from supplies and infrastructure to payroll.
Former Phoenix City Manager Ed Zuercher outlined these consequences for his city council in June 2021.
At the time, he applied for permission to borrow $1 billion at a fixed rate to repay a portion of the city’s $5.4 billion in total pension debt — which is alongside the $3.4 billion PSPRS Debts also include other plans.
“This taxpayer burden must be balanced with fiscal responsibility and commitment to providing pensions to retirees,” Zuercher told the council in a memo.
He said the pension fund’s liabilities and costs had already “exposed significant budgetary constraints on the city’s ability to provide wage increases and wage increases, public services and infrastructure maintenance.”
And he noted that “while these pressures are manageable at the moment, they will continue for the foreseeable future.
“Additionally, credit rating agencies and lenders place significant emphasis on the funding schedule and funding levels of city pension systems when determining their assessment of the city’s overall financial health,” Zuercher said.
Although several Phoenix Council members, including Mayor Kate Gallego, expressed support for Zeurcher’s proposal, a vote never took place.
Now, Phoenix — and all other companies with unfunded debt — face the likelihood of even higher interest rates on their pension debt.
But Townsend said his agency is working to help governments pay off their pension debt in slightly less onerous ways. Interest loans that make it easier to pay off your PSPRS obligations.
He said PSPRS are recalculating their contribution rates “to lower their payments to something akin to debt financing, where they have more of a dollar payback on those unfunded liabilities.”
“You’re on a big way down,” he said. “They’re going to pay for it one way or another and so we’re changing the system to accommodate that. If they want to put extra money upfront, pay it off quicker, it just makes it better for them.”
“We’re kind of shifting the slope of the line because the plan was for contributions to go up pretty significantly in 10 to 15 years,” he continued. “By making these changes, we’re sort of shifting some of those costs to the short-term side.
“So they’re going to see some premium rate increases over the next five years,” but then “there’s going to be a more stable line without the huge costs going forward.”