Title
Authorization to Adopt Proposed Pension Funding Policy Per State Law A.R.S. 38-863.01 (Ordinance S-45679)
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 new requirement adopted by the State Legislature in 2018 as A.R.S. 38-863.01 (Attachment A) to be implemented by July 1, 2019. While the State law only applies to PSPRS, City staff recommends also adopting a COPERS funding policy as a transparent sound financial practice.
Report
Summary
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, adapted from the State's Pension Funding Policy for PSPRS, can be found in Attachments B and C. A final City Pension Funding Policy must be adopted and posted on the website by July 1, 2019 and every year thereafter. Staff seeks Council approval to post the required documents on the City's website by July 1, 2019.
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 and F) 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.
As part of the 2018-19 budget process, the City Council 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 that 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 currently at $35 million to stabilize future
annual PSPRS payments; and
4) Advanced $70 million in Wastewater enterprise funds to pay down the
COPERS liability.
5) As part of the 2019-20 budget process, there is a recommended $1 million
annual allocation to the pension reserve and up to $4.5 million in one-time
funds for potential allocation to the reserve.
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 in the Arizona Court of Appeals.
Results to Date
Implementation of the City Council’s direction has resulted in improvements to the funded position of the plans, including an increase in the funded ratio for COPERS to 60.64 percent for fiscal year ending 2018, up from 58.00 percent in fiscal year ending 2017. The funded ratio for PSPRS has decreased slightly to 41.23 percent for fiscal year 2018 from 42.32 percent for fiscal year 2017 (Attachment G). The City’s total Unfunded Actuarial Accrued Liability increased to $4.6 billion. This high level of pension liability is a concern that requires ongoing attention and must be considered in balance 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 H and I) and must approve funding goals (Attachment B and C) by July 1, 2019.
While the pension systems are not currently 100 percent funded, the strategy to pay the ARC and pay down the liability over a set period (currently 23 years for PSPRS and 20 years 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 and COPERS will be 100 percent funded by June 30, 2038 (Attachment J). 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 timeframe.
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 each year to fund the pension reserve fund or
directly pay down the liability.
3) Continuing to seek opportunities to advance payments from enterprise and/or
special revenue funds.
4) Evaluating appropriate timing and feasibility of Pension Obligation Bonds.
5) Adding even more resources to the current pension funding plan through one
or more of the following strategies:
a. Reduced employee compensation;
b. Reduced services;
c. Additional dedicated revenue; or
d. Diversion of revenue growth from services or compensation to extra
pension payments.
Conclusion and Next Steps
Over the past decade, the City Council has diligently managed the financial stability of the pension systems through the worst financial crisis since the Great Depression. However, pension funding is a long-term issue requiring constant evaluation until plans are fully funded. The City of Phoenix has successfully balanced its obligations to residents, retirees and employees 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.
Concurrence/Previous Council Action
The Proposed Pension Plans Funding Policy was presented at the City Council Policy Session on March 19, 2019. The Council voted 4-2 to support the policy; however five votes are necessary to pass a resolution or formal action. In order to comply with State law by July 1, 2019, the item is being returned to the Council for further consideration.
Department
Responsible Department
This item is submitted by City Manager Ed Zuercher and Chief Financial Officer Denise Olson.