EDITORIAL

Cities should face pension costs now — not later

Editorial board
The Republic | azcentral.com
Voters turned down an effort in the fall to reform Phoenix pensions amid heavy opposition from police and fire groups.
  • The state Legislature in 2011 cut cost-of-living pension increases to some retirees%2C a decision judged unconstitutional in 2014
  • The costs of that Arizona Supreme Court decision is cascading down into municipal budgets this year
  • Phoenix is considering accepting an offer to pay its additional pension-fund debt over time%2C a bad idea

Arizona has learned the reality of constitutionally guaranteed public pensions the hard way.

The hard truth, driven home a year ago by a unanimous Arizona Supreme Court decision, is that the state Constitution forbids the Legislature from diminishing the value of public pensions.

The justices found that a 2011 legislative decision to enact public-pension reforms was a fool's errand. Change can come only through the Constitution.

And, now, seven Valley cities are about to pick up the substantial tab for that bout of foolishness.

To make up for cost-of-living pension increases suspended unconstitutionally by the Legislature in 2011, the Valley's bigger cities must pay an additional $28.6 million in the coming fiscal year to the state's most financially troubled pension plan, the Public Safety Personnel Retirement System.

Long term, the PSPRS will need to set aside an additional $335 million to cover cost-of-living hikes, mostly for retired judges, public officials and police and firefighters, thus adding still more to the cities' part of the tab.

Some of the cities are considering making the pain more severe over the long term by financing the additional payments over three years. Laden as it is with long-term debt, they should shun the opportunity.

How pension costs impact cities:

The PSPRS directors are offering the seven Valley cities an installment plan on their share of the $28.6 million pension spike coming due in July. Mesa and Phoenix will owe $8.7 million and $6 million in the coming fiscal year, respectively, while Tempe must pay $4.2 million. Glendale, Chandler, Scottsdale and Gilbert must fork over smaller shares. The pension fund will allow all seven cities to pay their portions over three years.

The catch, as ever, is compound interest, which would hit Phoenix especially hard.

As reported byThe Republic's Darren DaRonco, Phoenix's overall pension costs are set to balloon by $40 million next year, creating a tremendous incentive for the city to take the time-payment option rather than enduring still more painful budget cuts.

Over time, that would be an expensive choice. Time payments would save Phoenix an estimated $52 million over the next two years. But, including interest payments, it would mean Phoenix would have to pay out an additional $69 million over the next 22 years.

Considering how volatile the cost of public pensions has become, adding debt upon debt is a risky choice, however tempting it may be. It should be no surprise that cities that weathered the Great Recession well — Tempe, Scottsdale, Gilbert — are rejecting the time-payment offer.

The salvation for these growing burdens isn't found in creative financing, but in constitutional amendments that address the reality of modern-day public pensions.

Ideas being floated by former Phoenix Councilman Bryan Jeffries, now president of the Professional Firefighters of Arizona, are worth a look.

He proposes spreading responsibility for increasing costs, always a good thing. His proposal also would cap cost-of-living increases, a clear plus for employers seeking some kind of financial certainty about their annual pension tab.

Others may have similarly good ideas. But this conversation isn't happening. Jeffries' proposal had no traction in the Legislature, meaning a costly initiative effort would be necessary to get it on the ballot. This time bomb of an issue, solvable only by a constitutional amendment, should be getting greater attention from the state's leaders.

For today, though, the most urgent message to cities is to avoid pushing debt into the future.

It is a lesson debt-crushed governments from Detroit to Illinois to Washington, D.C., have failed to learn, to their peril.