Phoenix budget sidesteps soaring pension costs
If Phoenix’s bill for the police and fire pension system were payments on a mortgage, the city is looking to take out a larger loan just so it can afford its skyrocketing payments today.
That scenario is playing out as City Manager Ed Zuercher pushes a budget plan that would require the city to increase taxpayers’ long-term pension debt for public-safety workers in order to avert a roughly $30 million deficit in the next fiscal year.
Phoenix and other cities face extra large pension bills from the Arizona Public Safety Personnel Retirement System this year because of a state Supreme Court decision that shot down a law that cut costs for the system.
Zuercher’s proposed budget released Thursday aims to delay the fiscal pain, opting to phase a $37 million pension increase over the next three years. But the move would grow the city’s unfunded pension liability and increase its costs by $68.8 million over the next 22 years.
The pension system offered cities the option to take the full increase this year or phase it in over the next three, with higher long-term costs as a result. Many other Valley cities are taking the hit all at once.
Zuercher said paying the city’s full pension increase next year would force Phoenix to immediately make drastic cuts to popular services that residents use.
He said the financial maneuver gives Phoenix time to prepare to absorb the full cost. It also allows city officials to have a balanced budget for the fiscal year that starts July 1, without requiring any service cuts or tax increases.
“In my judgment, it doesn’t make sense to create immediate distress in the community for something that we have a long horizon to deal with,” Zuercher said. “The question for me is ‘Do I want to disrupt services to that degree right now when I don’t have to because there’s an option to responsibly pay now and not disrupt people’s library, parks, streets, police services?'”
A $30 million deficit might seem small considering Phoenix projects a $1.15 billion general-fund budget next year. The general fund pays for everyday expenses such as police, parks and fire.
Still, deficits of a similar magnitude have shaken City Hall in the past. The city faced a $37.7 million deficit last year and Zuercher proposed shuttering numerous pools, senior centers and other programs. Ultimately, a majority of the City Council voted to cover the gap by raising taxes and fees and cutting employee compensation.
Budget and Research Director Mario Paniagua said if the city doesn’t defer its pension costs, it could be forced to make cuts or raise taxes and couldn’t hire as many police officers.
But the budget plan could face resistance from some Phoenix leaders. The council will debate the proposal in the coming weeks and has final say over the budget, including the decision to put off paying the city’s full pension bill for a few years.
Councilman Jim Waring said he’s alarmed the city doesn’t have a plan to address its structural financial problems, which the cost of police officer and firefighter pensions will continue to exacerbate. Even with the move to delay pension costs, Phoenix could face a $31 to $58 million deficit in fiscal 2016-17, and runs the risk of red ink for years thereafter.
“I would prefer we pay just on a yearly basis and not be borrowing to pay for ongoing expenses,” Waring said of pension costs. “At some point, that gobbles up everything in its path.”
By phasing in its public-safety pension costs, Phoenix will pay less up front but its payments will be $4 million more in three years as a result, the pension system estimates. That additional cost will increase until the city has paid off its roughly $2 billion unfunded liability for police and fire pensions by around 2038.
Next year, the city’s anticipates its contributions to the system will go up by about $6 million, if it takes the phased approach. The city will have to absorb the full $37 million increase and the additional $4 million in a few years.
Mayor Greg Stanton said he supports putting off the full pension expense despite the long-term costs, calling the move “smart fiscal policy to protect key city services.”
Phoenix’s total contribution to the public-safety pension system would be nearly $143 million next fiscal year under Zuercher’s plan, up from about $7.2 million in 2002-03. Those figures don’t include the city’s civilian pension tab, which is expected to top $133.2 million next year.
Only a portion of the impact of skyrocketing pension costs hits the city’s general fund. Pension costs also eat into the city’s budgets for its airport, water and sewer, which operate as independent, self-sustaining funds.
Phoenix has taken steps to slow the rising costs of its civilian pension system, but it doesn’t control the state system. Stanton and other leaders have called on state lawmakers to make reforms that ease the financial burden of the public-safety pension system on cities.
The Professional Fire Fighters of Arizona, the statewide fire union, has advocated changes given the pension system’s perilously underfunded condition. It wants state lawmakers to pass a bill asking voters to amend the state constitution to allow one-time changes to the pension plan, including making new employees work longer to become eligible for pensions and overhauling cost-of-living increases.
Bryan Jeffries, president of the fire union, said he fears that without reform, pension costs will continue to eat away at the budgets cities like Phoenix have for police and fire.
“This is a real problem and it could affect service,” Jeffries said. “It’s not being widely publicized how much public safety is being cut.”
How cities throughout the Valley are grappling with a spike in pension costs.