Valley cities are experiencing sticker shock over a $28.6 million spike in police and fire pension bills for next fiscal year.
Seven cities will fork over more money, with Mesa taking the biggest hit, an $8.7 million increase, and Phoenix coming in second, at $6 million.
Tempe and Glendale will experience the next-highest spikes of $4.2 million and $3.3 million, respectively, followed by Chandler at $2.7 million, Scottsdale at $2.6 million and Gilbert at $1.1 million.
Cities have seen their pension costs rise steadily in recent years, but next year they will experience the additional bump mostly due to the Arizona Supreme Court’s decision to strike down part of a 2011 state law crafted to rein in pension costs.
As part of the February 2014 ruling, the court ruled the state’s Public Safety Personnel Retirement System must repay retirees $40 million for previous cost-of-living increases and set aside $335 million in a reserve fund for future increases.
The decision means most Arizona cities will see their pension bills skyrocket next fiscal year.
And as pension bills climb, cities must scramble to fill the gaps with limited budget dollars, which could translate into less funding for parks, roads and other city services.
“We’re feeling this pressure of some of these costs that we just can’t control,” said Mesa City Manager Chris Brady. “We have to absorb over $8 million in public-safety pension costs. That’s a huge number. Every police officer, every (firefighter) we hire has just got that much more expensive. So it’s putting a big strain there. So we’re having to ask for departments to come up with some efficiency savings to be able to help us make up for those kinds of differences.”
The court decision also dropped how much each city’s investment plan contributes to annual pension costs.
For example, Tempe now carries roughly $220 million in unfunded pension benefits owed to current and future retirees. That means more tax dollars are needed to cover the city’s annual pension obligations.
About a decade ago, when the pension plans were better funded, Tempe paid $1.9 million for the two plans, compared with the estimated $18.3 million it expects to pay next year.
Mesa paid $6 million for its police and fire pensions about a decade ago.
As for Phoenix, it paid $16.8 million.
But then the tech-stock bubble burst and was followed by a protracted recession. Next year, Mesa will pay a total of $41.4 million for its pensions. Phoenix will pay $143 million.
“The biggest challenge with funding these systems is we had two unprecedented financial crises within a decade,” said Jean-Pierre Aubry, assistant director of state and local research at Boston College’s Center for Retirement Research. “That’s not something actuarial science is built to navigate. It’s built for small fluctuations. All it tells you is that you’ve got to put in more money.”
Because most benefits are protected by law and the plans are controlled by the state, cities have few options to reverse their plans’ fortunes.
“There’s not a magic bullet for this. These are costs that were incurred and promises that were made,” Aubry said. “In most cases, all you can really do is nibble around the edges by shifting some of the costs to current employees.”
Although the pension outlook is bleak, it could be the right time for reform as employees, retirees and cities recognize the status quo is untenable.
“There is an opportunity here to think about how to create a system moving forward (and) how to spread the risk when markets fluctuate … so it’s not a free lunch on any one side,” Aubry said.
The president of the state’s firefighters union also believes change should come sooner, rather than later.
“We just want to fix this and get it healthy again,” said Bryan Jeffries, president of the Professional Firefighters of Arizona.
Jeffries has returned to the Legislature with a plan he says would restore most of the funding for police and fire pensions within 13 years.
The constitutional change would require employees to pay more and retire later while capping annual cost-of-living increases for retirees at 2 percent or less, depending on how the plan performs each year.
So far, retirees and active employees have expressed support for the plan. But Jeffries conceded that if it were implemented, it would likely be challenged in court.
Jeffries hopes the Legislature agrees to place it on the ballot. But if it declines, Jeffries said the union would seek an initiative for the 2016 election.
While plans to reform the system percolate, cities must deal with the increases now.
To help mitigate budget impacts, the state pension board is offering cities a three-year installment plan to pay for the increase next fiscal year.
But the payment plan would only compound city pension woes, said Tempe Deputy City Manager Ken Jones.
“That approach just adds financing costs to the liability,” Jones wrote in an e-mail to The Arizona Republic.
If Tempe chose the installment option, it would add an extra $6 million over 22 years to the city’s pension bill.
Mesa’s costs would increase by $13 million over that time.
Jones said Tempe won’t be accepting the state board’s offer of an installment plan.
Scottsdale and Gilbert also will not accept the three-year plan.
Mesa is considering a partial phase-in of the offer, while Chandler and Glendale will make their decisions as the budget process continues this spring. However, Glendale’s staff is recommending the city reject the three-year installment plan.
In Phoenix, where costs were expected to balloon by roughly $40 million next fiscal year, City Manager Ed Zuercher is recommending in his 2016 budget that the city accept the installment plan.
While the payment plan will save Phoenix an estimated $52 million over the next two years, it comes at a price.
Even though Phoenix’s budget will be spared paying the full amount, it still must cover the difference through financing mechanisms, costing roughly $69 million over the next 22 years.
According to information provided by Tammy Vo of the city’s communications office, the payment option will save the city from making immediate cuts or requiring it to find new revenue sources on short notice to cover the costs.
The delay also will give Phoenix some breathing room to figure out how to absorb the costs while looking at ways to reduce public-safety pension expenses.
Although this year’s pension news was dire, the near future isn’t any rosier.
The state is appealing the verdict in a second lawsuit filed against the 2011 law. The second lawsuit dealt with employee pension contributions.
If the appeal fails, pension costs will rise even higher.
Even though cities have little control over the state-run plans, some cities have joined the League of Arizona Cities and Towns task force to determine what, if any, long-term solutions exist to tackle the pension problem.
Pension cost spike
Seven Valley cities will fork over an extra $28.6 million next fiscal year for police and fire pensions, largely because of an Arizona Supreme Court decision to strike down part of a 2011 state law crafted to rein in pension costs. Here’s how much extra each city will pay:
Mesa: $8.7 million.
Phoenix: $6 million.
Tempe: $4.2 million.
Glendale: $3.3 million.
Chandler: $2.7 million.
Scottsdale: $2.6 million.
Gilbert: $1.1 million.
Source: Public Safety Personnel Retirement System
Republic reporter Maria Polletta contributed to this article.