Tag: Phoenix pension debt

Moody’s: Voter Rejection of Prop. 487 Is “Credit Negative” For Phoenix

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Last week, Phoenix voters shot down Proposition 487, the ballot measure that would have shifted the city’s non-public safety new hires into a 401(k)-style retirement plan.

Many public workers, and the city’s mayor, were happy with the result. But one credit rating agency was not.

A Moody’s report released Tuesday said the measure would have improved the city’s finances, and the results of the vote are a “credit negative” for Phoenix.

From the Arizona Republic:

“The vote is a credit negative for the city,” which is grappling with a $4.4 billion adjusted net pension liability, said Moody’s Investors Service. Phoenix has the sixth-highest adjusted pension shortfall relative to revenues among 50 large cities tracked by Moody’s.

[…]

According to the update by Moody’s analysts Tom Aaron and Don Steed, Phoenix actuaries projected the new plan would have increased city contributions by $358 million over 20 years but with savings that would have exceeded those outlays, especially if the underlying investments didn’t perform well.

The ballot measure could have saved the city up to $1.9 billion over 20 years, according to Moody’s, citing a city-council analysis. Cost savings would have derived from limiting the types of pay used to calculate benefits — which leads to the costly practice of “pension spiking” — eliminating supplemental retirement plans offered by the city and calculating pension benefits by spreading them over more years of employee salary, which tends to lower the payout.

But Moody’s admitted the measure would have incurred some extra costs if it had passed. Among the costs: legal expenses. From the Arizona Republic:

On the other hand, Moody’s noted that the measure, had it passed, likely would have triggered costly legal challenges. For example, one part of the proposition would have required only one retirement plan to be offered to newly hired employees, including those in public safety. That would have conflicted with a state law mandating participation in the Public Safety Personnel Retirement Plan, which covers police and fire employees throughout the state.

Moody’s didn’t change the city’s credit rating, however. It remains at Aa1.

Fact Check: Would Phoenix’s Pension Proposal Really Cost $350 Million?

Entering Arizona sign

In just two weeks, Phoenix residents will head to the ballot boxes to vote on Proposition 487, the controversial pension reform measure that would shift new hires into a 401(k)-type system.

Recently, a group opposing the law made a bold claim:

“Prop. 487 will cost Phoenix taxpayers more than $350 million over the next 20 years.”

But is it true?

The Arizona Republic did some fact checking. They found that the switch to a 401(k)-type system wouldn’t save the city any money initially. In fact, one report claims that the switch would indeed cost the city $350 million:

That [401(k)] provision would not save money, according to the city’s actuary. A report from the financial analysis firm Cheiron states that closing the pension system and replacing it with a 401(k)-style plan would cost the city an estimated $358 million over the first 20 years, assuming the city contributes 5 percent of employees’ pay to the defined-contribution plan.

An analyst for Cheiron and city officials said the move to a 401(k)-style plan itself would cost more initially because Phoenix must pay down its massive unfunded pension liability while funding a new retirement plan.

The city’s pension system for general employees, the City of Phoenix Employees’ Retirement System, is only 64.2 percent funded, meaning it doesn’t have the assets to pay about $1.09 billion in existing liabilities. In other words, the city only has about 64 cents on the dollar to cover all of its long-term payments for current and future retirees.

Phoenix must pay off that pension debt regardless of what voters decide. Prop. 487 wouldn’t decrease the existing unfunded liability, but it would stop the city’s liability from growing, opponents and supporters agree.

But there’s a twist: other aspects of Prop. 487 could offset the previously-mentioned costs. From the Arizona Republic:

Other changes outlined in Prop. 487 could offset that up-front cost of switching to a 401(k)-style plan. If fully implemented, the initiative would save the city a net of at least $325 million over the first 20 years, according to Cheiron’s report.

Two key provisions of Prop. 487 could save money in the first 20 years:

–Make permanent and expand reforms the city has made to combat the practice of “pension spiking,” generally seen as the artificial inflation of a city employee’s income to boost retirement benefits. It would exclude from the pension calculation any compensation beyond base pay and expand the number of years used to determine an employee’s final average salary, a key part of the benefit formula. Those changes could save an estimated $475 million over the first 20 years, Cheiron’s report states.

–Prohibit the city from contributing to more than one retirement account for each city worker, including current employees. Currently, the city contributes to a second retirement plan, known as deferred compensation, on top of most employees’ pensions. Cheiron projects eliminating deferred compensation would save an estimated $208 million.

Consultants for the city have said Prop. 487 could save additional money if those changes are applied to public-safety employees, who are in a separate, state-run pension system. Although the initiative contains intent language saying it doesn’t impact police officers and firefighters, supporters and opponents disagree whether it will be interpreted that way.

Interestingly, city officials have tended to agree that the reform measure would cost the city $350 million over the next 20 years. Officials are also worried about the litigation the proposal could invite if passed by voters.