Title
Authorization to Adopt Update to Annual Pension Funding Policy Per State Law A.R.S. 38-863.01 (Ordinance S-46748)
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 policy to clearly communicate the City's pension funding objectives is a requirement adopted by the State Legislature as A.R.S. 38-863.01 (Attachment A) to be implemented on an annual basis by June 30. While the State law only applies to PSPRS, City staff recommends also adopting a funding policy for all employee pension plans, such as COPERS, as a transparent sound financial practice. The Council first approved a plan on May 15, 2019.
Report
Summary
On an annual basis, the State law requires the City to:
1) Adopt a Pension Funding Policy;
2) Formally accept the Employer's share of the assets and liabilities under each
pension system based on the actuarial valuation report; and
3) Post the Policy on the City's website.
For review and discussion purposes, proposed pension funding policies for both PSPRS and COPERS can be found in Attachments B and C. A final City Pension Funding Policy must be adopted and posted on the website by June 30 and every year thereafter. The Council previously approved a Policy on May 15, 2019. The proposed City Pension Funding Policy is consistent with what was approved last year with minor additions related to actively monitoring the financial health of both plans. Staff seeks Council approval to post the required documents on the City's website by June 30, 2020.
Information
Over the last several years the Phoenix City Council and voters have taken responsible actions to ensure financially stable pension plans while maintaining services to the public. Increases in net pension liabilities (Attachment D) and annual pension 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.
In prior years, City Council has asked management for various pension funding options, resulting in the following actions:
1) Maintained our legal commitment to employees and retirees to pay at least
100 percent of the actuarially required contribution (ARC) to each plan;
2) Adopted a balanced budget based on 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 allows
capacity to continue providing quality services and fair compensation
for employees;
3) Established a Pension Reserve Fund to stabilize future annual PSPRS
payments; and
4) Advanced $70 million in Wastewater enterprise funds to pay down the
COPERS liability.
These actions are in addition to the COPERS pension reform that the City Council and voters have implemented since 2013, saving the City more than $1 billion over 25 years, and the statewide PSPRS pension reform passed by the voters in 2016. Some of the City’s reforms on employee vacation and sick leave pension spiking are still being litigated at the Arizona Supreme Court.
Results to Date
Implementation of the City Council’s direction has stabilized the funded position of the plans. The funded ratio for COPERS was 60.43 percent for fiscal year ending 2019 and was 60.64 percent in fiscal year 2018 (Attachment F). The funded ratio for PSPRS was 40.34 percent for fiscal year ending 2019 and was 41.23 percent in fiscal year 2018 (Attachment F). However, the City's total Net Pensions Liability increased slightly to $4.8 billion. This is an indication that ongoing attention to the funded position of the plans and strategies to increase payments over a sustained period is necessary. This must be considered in conjunction with the current needs of the community and employees.
Looking Ahead
In accordance with state law, the Council must formally accept the assets, liabilities, and current funding ratio of the City’s pension funds as stated in the annual actuarial valuations for the City of Phoenix (Attachments G and H) and must approve funding goals (Attachments B and C) by June 30, 2020.
While the pension systems are not fully funded, the strategy to pay the ARC and pay down the liability over a set period (21 years remaining for PSPRS and 19 years remaining for COPERS) allows flexibility in providing services to the public while spreading the liability to our residents over a period of time.
Under current actuarial calculations and amortization periods, PSPRS will be 100 percent funded by June 30, 2041 (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 the current actuarial determined funding expectations are achieved on this schedule, or even reach 100 percent funded within a shorter time frame.
Next steps to address pension liabilities include:
1) Continuing to balance the budget and pay the annual contribution required by actuaries;
2) Using a portion of excess cash to fund the pension reserve fund or directly pay down the liability;
3) Seeking opportunities to advance payments from enterprise and/or special revenue funds;
4) Evaluating appropriate timing and feasibility of Pension Obligation Bonds, while maintaining a structurally balanced budget;
5) Reviewing investment rate of returns on pension assets, actuary assumptions and to forecast future annual required contributions; and
6) Compiling sensitivity and scenario analyses on proposed changes to the pension plans.
Conclusion and Next Steps
Over the past decade, the City Council has diligently managed the financial stability of the pension plans and will need to continue to remain vigilant in the future to ensure the long-term viability of the pension plans. However, pension funding is a long-term problem requiring constant evaluation until plans are fully funded. The City has successfully balanced its obligations to retirees and public services to keep Phoenix a desirable community. The proposed Pension Funding Policy for COPERS and PSPRS provides a roadmap for regular review and assessment of the City’s pension obligations. Staff recommends adopting the attached policies in compliance with State law.
Previous Council Action
A Pension Plans Funding Policy was adopted at the City Council Formal Session on May 15, 2019.
Department
Responsible Department
This item is submitted by City Manager Ed Zuercher and Chief Financial Officer Denise Olson.