Tucson City officials have devised an investment strategy to save taxpayers from losing money while paying into a public safety pension fund.
Tucson, like most Arizona communities, pays into the state retirement fund, which provides retirement benefits to law enforcement officers and firefighters. These payments can be costly to the city.
“The city of Tucson is currently paying about $ 75 million annually this fiscal year. That will grow over the next 20 years. We pay $ 250 million annually for this retirement plan. If you put that together, we collect that much sales tax annually, ”said Joyce Garland, Tucson’s chief financial officer.
These payments will amount to around $ 1 billion over the next 20 years, crippling the city’s budget.
To solve the problem in the simplest possible way, Tucson Mayor Regina Romero and the city council approved a plan to sell bonds to repay part of the city’s debt to the pension fund.
If this debt is removed from the books, the city can provide services in addition to police and fire departments.
“We invest millions of dollars each year from our general fund that typically pays for other services, parks and recreation, road repairs, and other services for our community from there. The more we invest in our pension payments from our general fund, the less services we can provide to Tucsonans, ”said Romero.
Selling bonds relieves the General Fund of the pressures of annual payment, but it also comes with a cost as the city has to pay interest to everyone who buys the bonds.
Garland, Tucson CFO, said it usually doesn’t make sense to take on debt in order to pay off a debt. This is a different situation, however, as the money from the bond sale is invested before it is used for the annual payment to the pension fund.
“When we saw that we could actually go in the market and get less than 2% in debt if I could make 6-7%, we figured this was something we really need to look out for,” Garland said.
Bond interest rates are low due to the impact of COVID-19 on the economy. It is the same reason mortgage rates are currently low and lead many people to refinance.
If every pensionable cop or firefighter retired tomorrow, the city would only have enough money right now to pay 30-40% of them. Selling bonds enables Tucson to pay 70% of public service retirees their monthly checks when they all retire tomorrow.
Financial experts think this is a healthy ratio as not every member of the pension group retires tomorrow.
Tucson’s move will determine the city’s financial future.
“This is one of the most important financial steps the mayor and city council could have taken in a generation,” said Romero.
In 2016, Arizona law made changes to the Public Safety Pension Fund that came with a voter-approved constitutional amendment. These steps were taken to prevent the larger sovereign wealth fund from getting the state into financial trouble later.
“The first thing we had to do was stop digging the hole, so they closed this system and created a new Tier 3 that is much safer and more stable than how it should be funded in the future,” said Mike Townsend, who takes over the management of the pension fund for the state.
Townsend said it will take decades to fill the hole. He also pointed out that the benefits for those who are in the pension fund cannot be changed.
“It was tested in court. Once this benefit has been granted and promised to these first responders, we can no longer reduce it. In the Constitution we cannot mitigate these benefits, ”Townsend said.
Tucson isn’t the only local Arizona government trying to find ways to address the pension fund deficit, but the eyes of the financial world are on Tucson to see if that plan is the solution many are looking for .
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