These Arizona cities are saving big money by paying down pension debt
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Illustration: Aïda Amer/Axios
Chandler this week became the largest city in Arizona to pay off its public safety pension debt, saving $8-10 million per year in the city's budget and ensuring its police and fire employees receive their promised pensions.
- This is part of a trend of Valley cities trying to clear their pension debts that, along with interest, are eating up a growing chunk of their budgets.
The big picture: The Arizona Public Safety Personnel Retirement System (PSPRS) suffered billions of dollars in investment losses from 2000-2010, in large part because of the dot-com bubble and housing crash. Cities have to make up for those losses to ensure their retirees get their promised benefits.
- For each year cities fail to satisfy their pension debts, or unfunded liability, they are assessed a roughly 7% penalty.
Why it matters: Many cities have to spend tens of millions of dollars toward their PSPRS debt. Phoenix pays upward of $100 million a year. This is on top of ongoing pension contributions for current employees.
- That money could be used for other city services, like housing, parks or law enforcement.
What's happening: Several cities, including Chandler, have realized the long-term burden of pension debt and used tax revenue surpluses from the past several years to pay it down.
- Others, like Flagstaff, have arranged financing plans that allow them to borrow money at lower interest rates and pay off their PSPRS liability, The Arizona Republic reported.
Zoom out: All together, public safety employers paid an extra $2.85 billion toward their pension debts in fiscal year 2022, according to PSPRS.
- Queen Creek was the only other Valley city to fully clear its unfunded liability as of last summer, the most recent PSPRS data available.
The intrigue: The Valley's largest cities aren't even close to catching up with their debts.
- Phoenix's police and fire pension plans were only about 43% funded as of last year. City spokesperson Adam Waltz told us Phoenix has paid an extra $117.6 million toward its debt over the past five years. But, the city still owes roughly $3.5 billion.
- Mesa's plans were about 50% funded and its unfunded liability was around $720 million.
Reality check: The pension debt represents the estimated total employers will owe to every police officer and firefighter who has retired or will someday.
- In other words, the cities won't have to shell out all of the money owed tomorrow.
- Still, the stiff penalty assessed on their debts will continue to hurt their budgets until they're paid off.