Pension debt: Pay faster, or pay more
Plan to lower annual cost would cost Phoenix $2.3B
Soaring pension costs are strangling Phoenix’s city budget, but city officials are weighing a plan to ease the nearterm misery: Punt on paying pension debt, and spend big later.
The maneuver could cost the city up to an additional $2.3 billion in police and fire pension costs over the next 30 years — and possibly much more, if investments don’t perform as assumed.
But it would lower the city’s annual pension payments to the state-run pension system for police officers and firefighters immediately, and help the city avert a steep budget deficit in 2018.
Phoenix’s public-safety pension costs have ballooned from $56 million in its general fund in 2007 to about $207 million in the upcoming fiscal year, which starts July 1. That’s an increase of 270 percent.
Skyrocketing costs make it hard for the city to balance its budget and maintain basic services. The city faces the prospect of a $43 million to $64 million deficit in 2018, which could require cuts to popular services like libraries, senior centers and swimming pools.
City Manager Ed Zuercher is proposing the city relieve the pressure by taking more time to pay off pension debt — a move the Arizona Legislature and Gov. Doug Ducey authorized this year to help localities with their pension costs.
Zuercher likened the maneuver to a homeowner picking between a 15- or 30year mortgage: The longer loan requires a homeowner to pay more in interest, but a family might not afford the higher monthly payments of a 15-year loan.
As the analogy goes, Zuercher contends Phoenix can’t cover higher pension payments and still pay for services residents need and expect today.
“It’s about having flexibility so that we can make sure the police officers and firefighters have the pensions that were promised to them,” Zuercher said, “but our kids can go to libraries and swimming pools, too.”
The City Council is expected to vote on the proposal at its meeting Wednesday, but the move faces vocal opposition from some council members and financial experts concerned about the longterm costs. Councilman Sal DiCiccio has called the maneuver “insane” and “the most fiscally irresponsible move ever by the city of Phoenix.”
Similarly, two government-watchdog groups contacted by The Arizona Republic criticized the prospect, saying the city should not drastically inflate its pension debt for future generations to relieve a budget problem today.
“I think it’s a particularly bad idea,” said Kevin McCarthy, president of the Arizona Tax Research Association. “Trying to get out from underneath the reality of what we are facing ... it’s the last thing that we ought to do.”
Zuercher wants the city to switch from a 20-year plan to pay off its pension debt — which has accrued over decades due to economic downturns and other issues — to a 30-year plan.
Phoenix’s pension debt, also called its unfunded liability, reflects pension benefits the city owes to retirees and active employees over their lifetimes but doesn’t have money in the plan to cover. Today, that unfunded liability is $2.1 billion.
The city’s payments to the state public-safety pension system have dramatically increased as the system aims to pay off those long-term unfunded costs.
The switch would essentially allow the city to put off some principal payments on what it owes for the retirement benefits of police officers and firefighters. In exchange for an additional decade to pay the debt, the city would pay more in interest. If the city took the full 30 years, it would spend an estimated $2.3 billion more.
While the city would be officially locked into the 30-year payment plan, it could pay the debt sooner. Zuercher wants the city to pay it off in 25 years, to keep costs lower. Under the 25-year scenario, the city’s interest would be about $1.1 billion more. But lower annual payments from the city’s budget would take effect immediately. The city’s payment would drop by $10 million to $25 million in the next fiscal year.
Zuercher wants to put that money in a “Pension Reserve Fund” so the city has a rainy-day account to deal with future increases in pension costs. That could help offset the city’s projected budget deficit in 2018. And lower pension payments to the state would carry forward. Starting in 2018, the city expects it would save $10 million to $15 million every year.
A few council members have voiced support for Zuercher’s plan, dubbed the “Hybrid Option,” because they say it gives the city leeway to pay less if it faces potential budget crises in the future while avoiding steep budget cuts in 2018. The city’s police and firefighter unions also support the hybrid plan.
Phoenix has a short deadline to act. If the council agrees with Zuercher’s plan, the decision must also get approval from state Public Safety Personnel Retirement System Board of Trustees at a June 28 meeting.