File #: 21-1596   
Type: Ordinance-S Status: Adopted
Meeting Body: City Council Formal Meeting
On agenda: 6/16/2021 Final action: 6/16/2021
Title: Authorization to Adopt Proposed Update to Pension Plans Funding Policy (Ordinance S-47723)
District: Citywide
Attachments: 1. Attachment A - 38-863.01 - Pension funding policies; employers.pdf, 2. Attachment B & C - PSPRS COPERS Funding Policy - 2021.pdf, 3. Attachment D - Pension Policy - June 2021.pdf, 4. Attachment E - Pension Policy - June 2021.pdf, 5. Attachment F - Pension Policy - June 2021.pdf, 6. Attachment G - Pension Policy - June 2021.pdf, 7. Attachment H - Pension Policy - June 2021.pdf, 8. Attachment I - Pension Policy - June 2021.pdf

Title

Authorization to Adopt Proposed Update to Pension Plans Funding Policy (Ordinance S-47723)

 

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 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, for the third year in a row City staff recommends also adopting a COPERS funding policy as a transparent sound financial practice. This report further requests the Council to adopt a policy for the utilization of recreational marijuana revenues and a policy on the issuance of Pension Obligation Bonds.

 

Report

Summary

The State law requires the City to:

 

                     1)                     Annually 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.

 

                     3)                     Post the Policy on the City's website.

 

For review and discussion purposes, a proposed Pension Funding Policy 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 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 plans are financially stable while maintaining services to the public. Increase in net 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:

 

1)                     Maintained our legal commitment to employees and retirees to pay at least

                     100% of the actuarially required contribution (ARC) to each plan.

 

                     2)                     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 allow

                                          budgetary capacity to continue providing quality services and fair

                                          compensation for employees.

 

3)                     Established a Pension Reserve Fund to stabilize annual PSPRS

                     payments.

 

4)                     Advanced $70 million in Wastewater enterprise funds to pay down the

                     COPERS liability in FY18.

 

5)                     Ongoing coordination with the Aviation Department for advance paydowns

                     of $100 million and $70 million in FY21 and FY22, respectively.                      

 

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. These actions have resulted in savings of more than $1 billion over 25 years for the City.

 

Results to Date

Implementation of the City Council's direction has resulted in improvements to the funded position and stabilization of the plans, including an increase in the funded ratio for COPERS to 60.74 percent for fiscal year ending 2020, up from 60.43 percent in fiscal year ending 2019 (Attachment F). The funded ratio for PSPRS was 39.81 percent for fiscal year ending 2020 and was 40.24 percent for fiscal year 2019 (Attachment F). However, the City's total Net Pension Liability increased to $5.4 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 in conjunction with balancing the current needs of the community and employees.

 

Future Considerations

In accordance with State law, the City 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 July 1, 2021.

 

While the pension systems are not currently fully funded, the strategy to pay the ARC and pay down the liability over a set period (20 years remaining for PSPRS and 18 years remaining for COPERS) allows flexibility in proving 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% funded by June 30, 2042 (Attachment I) and COPERS will be 100% 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% funded within a shorter timeframe.

 

Next steps to address the City's pension liability could include:

 

1)                     Continuing to balance the budget and pay the annual contribution required

                     by actuaries.

 

2)                     Using any excess cash, including any savings from the refinancing of

                     long-term debt obligations, to fund the pension reserve fund or

                     directly pay down the liability.

 

                     3)                     Allocating budgetary resources of revenues from recreational

                                          (non-medical) marijuana sales to directly pay down the liability for

                                          PSPRS through accelerated pension payments.

 

4)                     Seeking opportunities to advance payments from enterprise and/or

                     special revenue funds.

 

5)                     Continue evaluating the feasibility of funding the pensions through

                     Pension Obligation Bonds under the proposed policy if established

                     by the City Council.

                     

6)                     Reviewing investment rate or returns on pension assets, actuary

                     assumptions and to forecast future annual required                      contributions.

 

7)                     Compiling sensitivity and scenario analyses on proposed changes to

                     the pension plans.

 

 

Recreational (non-medical) Marijuana Revenues

In November 2020 voters approved Proposition 207 legalizing the sale of recreational marijuana in the State of Arizona. This proposition also created a new fund for the revenues collected from the sale of recreational marijuana which will be distributed through several allocation streams.

 

The City of Phoenix will receive recreational marijuana revenues from four sources, including:

 

1)                     City of Phoenix regular general fund sales tax.

2)                     Public Safety proportional allocation based on PSPRS membership.

3)                     HURF proportional allocation.

4)                     State-shared sales tax revenue.

 

Staff recommends the City Council adopt a policy to annually direct revenues from 1 and 2 above (the City’s sales tax of recreational marijuana and the City’s Public Safety allocation) to paying down PSPRS pension liability. Staff estimates applying the additional revenues to PSPRS would result in reaching 100% funded a year earlier than projected without doing so.

 

Pension Obligation Bonds (POBs)

Pension Obligation Bonds are bonds issued to pay pension plan liabilities. The City Council previously directed staff to study and evaluate the possibility of issuing Pension Obligation Bonds. With City Council’s direction, staff research and determined a set of conditions required for issuing Pension Obligation Bonds.

 

Staff recommends the City Council adopt a policy for issuing Pension Obligations Bonds only if the following conditions exist:

 

                     1)                     Bond Interest rates are under 3.5 percent.

                     2)                     The City applies all savings from issuing POBs to PSPRS for the unfunded liability.

                     3)                     Rating indications are neutral.

 

Furthermore, additional City Council authorization would be required for issuance of Pension Obligation Bonds. Staff estimates issuing Pension Obligations Bonds would result in PSPRS reaching 100% three years earlier.

 

Department

Responsible Department

This item is submitted by City Manager Ed Zuercher and Chief Financial Officer Denise Olson.