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Title:
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Authorization to Adopt Proposed Update to Pension Funding Policies (Ordinance S-51007)
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Title
Authorization to Adopt Proposed Update to Pension Funding Policies (Ordinance S-51007)
Description
Request to adopt a Pension Funding Policy applicable to City of Phoenix Employee Retirement System (COPERS) and Public Safety Personnel Retirement System (PSPRS). A Pension Funding Policy to clearly communicate the City's funding objectives is a requirement adopted by the State Legislature in 2018 as Arizona Revised Statutes section 38-863.01 (Attachment A) to be implemented on an annual basis by June 30. While the State law only applies to PSPRS, for the sixth year in a row City staff recommends also adopting a Pension Funding Policy for COPERS as a transparent sound financial practice.
Report
Summary
The State law requires the City to:
Annually adopt a Pension Funding Policy.
Formally accept the Employer's share of the assets and liabilities under each pension system.
Post the Policy on the City's website.
For review and discussion purposes, a proposed Pension Funding Policy for both COPERS and PSPRS can be found in Attachments B and C. A final City Pension Funding Policy must be adopted and posted on the City's website by July 1 each year.
Over the last several years the Phoenix City Council and voters have taken responsible actions to ensure the pension systems are financially stable while maintaining services to the public. Fluctuations in unfunded pension liabilities (Attachment D) and annual costs (Attachment E) have placed significant budgetary constraints on the City’s ability to provide employee wage and non-pension benefit increases, public services and infrastructure maintenance. 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.
The Phoenix City Council has requested staff provide various pension funding options, which has resulted in the following actions:
Adopted a balanced budget based on a 25-year amortization schedule for PSPRS, which is more aggressive than the 30-year amortization adopted through State law. However, the 25-year amortization schedule still allows budgetary capacity to continue providing quality services and fair compensation for employees.
Established a Pension Reserve Fund to stabilize annual PSPRS payments.
Advanced $70 million in Wastewater enterprise funds to pay down the COPERS liability in Fiscal Year 2017-18. Advanced $170 million in Aviation enterprise funds to pay down the COPERS liability in Fiscal Year 2020-21.
Authorized a portion of recreational (non-medical) marijuana tax revenue to directly pay down the PSPRS pension liability.
These actions are in addition to the COPERS pension reform that the City Council and voters have implemented since 2013 and the statewide PSPRS pension reform passed by the voters in 2016.
Results to Date
Implementation of the City Council's direction has resulted in improvements to the funded position and stabilization of COPERS, including the current funded ratio for COPERS to 69.29 percent for fiscal year ending 2023, up from 68.65 percent in fiscal year ending 2022 (Attachment F).
The funded ratio for PSPRS was 42.77 and 46.41 percent for Police and Fire, respectively, for fiscal year ending 2023 and was 42.44 and 45.20 percent for Police and Fire, respectively, for fiscal year ending 2022 (Attachment F). This is an indication that ongoing attention to the funded position of PSPRS and strategies to increase payments over a sustained period is necessary in conjunction with balancing the current needs of the community and employees.
In November 2020, voters approved Proposition 207 legalizing the sale of recreational marijuana in the State of Arizona beginning in January 2021. Towards the end of Fiscal Year 2020-21, the City of Phoenix started receiving recreational marijuana revenues from four sources, including:
City of Phoenix regular general fund sales tax.
Public Safety proportional allocation based on PSPRS membership.
Highway User Revenue Fund (HURF) proportional allocation.
State-shared sales tax revenue.
As part of the PSPRS Pension Funding Policy for Fiscal Year 2021-22, City Council adopted a policy to annually direct revenues from 1 and 2 above (the general fund portion of the City’s sales tax of recreational marijuana and the City’s Public Safety allocation) to paying down PSPRS pension liability. Since Fiscal Year 2020-21, $31.4 million has been collected and remitted to PSPRS, above the Actuarially Determined Contribution (ADC). The City is anticipating approximately $14 million in collections by Fiscal Year-End 2023-24.
City Council Considerations
In accordance with State law, the City Council must formally accept the assets and liabilities of the City's pension funds for the City of Phoenix (Attachments G and H) and must approve Pension Funding Policies (Attachments B and C) by July 1, 2024.
Pension Obligation Bonds (POBs) are bonds issued to pay pension plan liabilities. This type of bond issuance is very complex and as such, has many critical considerations. As part of the PSPRS Pension Funding Policy for fiscal year 2024, City Council adopted a framework establishing parameters around issuing POBs to mitigate risks. This framework is included as part of the proposed PSPRS Pension Funding Policy for Fiscal Year 2024-25. The policy establishes a framework only. Additional City Council authorization would be required for issuance of POBs.
The City has allowed the Deferred Retirement Option Plan (DROP) Tier 1 members (who entered prior to July 6, 2022) to be eligible to extend their DROP service from five to seven years in accordance with the statutory guidelines when in the best interest of the City; this will be evaluated annually and on a case-by-case basis.
While the pension systems are not currently fully funded, the strategy to pay the ADC and pay down the liability over a set period (17 years remaining for PSPRS and 14 years remaining for COPERS) allows flexibility in improving services to the public while spreading the liability over a period of time.
Under current actuarial calculations and amortization periods, PSPRS will be 100 percent funded by June 30, 2042 (Attachment I) and COPERS will be 100 percent funded by June 30, 2039 (Attachment I). Under the leadership of the City Council, the City can continue to take steps to ensure current funding expectations are achieved on this schedule, or even reach 100 percent funded within a shorter time frame.
Department
Responsible Department
This item is submitted by City Manager Jeffrey Barton and the Finance Department.