The city of Tucson has developed a strategy to pay down the pension obligation for police and fire personnel, a plan that is expected to save $800 million in taxpayer dollars over the next 25 years.
By issuing bond-like instruments called certificates of participation, the city will work to fund the growing obligation to the Public Safety Personnel Retirement System, which is currently unfunded by about $1.5 billion. The strategy involves borrowing money, taking advantage of the market’s unusually low interest rates — approximately 2.95% — and then investing those funds for a higher return.
“This is a historic, once-in-a-generation decision that puts Tucson at the forefront of our state and our nation, when it comes to securing our public safety pension system,” said Tucson Mayor Regina Romero. “This move has the potential to save Tucsonans more than $800 million taxpayer dollars over the next few decades and ensure the retirement security of our first responders. My thanks to the city manager and his financial team for their diligent work and commitment to positioning Tucson on such strong financial footing.”
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Tucson’s public safety pension system, which funds the retirement benefits promised to government employees, is paid into by both the city and individual employees every year. This year alone, the city will put $77 million in general fund dollars into the pension fund. Without the bond strategy, that number is expected to grow to $240 million by 2046.
“The idea is the employer puts money into it, the employee puts money into it and it grows over time from investment earnings,” said Joyce Garland, Tucson’s chief financial officer. “And then you start paying retirees with the thought that there’s always somebody behind paying into the system.”
Like local governments throughout the country, over the years the city of Tucson has experienced a decrease in the number of active employees but an increase in the number of employees who reached retirement age and started receiving pension benefits. These factors have contributed greatly to the city’s pension fund gap, according to Garland.
“We had to find some kind of funding strategy to mitigate these increases over the course of time,” she said. “So what we’re doing is making sure there’s enough dollars to continually provide services for our community.”
The Tucson City Council also established a Public Safety Pension Trust to “manage, invest and safeguard the bond proceeds.” The trust will have an independent investment advisor and administrator and will be a part of the annual audit of city government funds.
“What we didn’t want was for us to borrow this money, invest it, and then lose it. This allows us to take the principal proceeds and plop them in a trust and then we can invest them with our own investment strategy,” Garland said. “But with this trust, we can only use either the proceeds or the investment earnings to pay for this public safety pension plan. It can’t be used for anything else.”
Garland said the city would likely make fixed investments, like other government bonds, as well as investments in equity markets. An Arizona state statute details what they can and can’t invest in.
Before approving the plan, Garland said the city also assessed all the possible risks associated with pension obligation bonds. The city of Tucson, she said, is in a good financial position with high cash flow, which will help protect them if there is a dip in the market.
“Our staff did not just sit here and craft this,” she said. “We engaged a team of people. We hired actuaries to help us plan. We did over 95 different scenarios on what could happen. What if we have a tick in the market like this recession that we just had. How long would it take for us to climb out of it. We did a lot of research.”
