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The Flagstaff City Council adopted the Fiscal Year 2020-21 budget at their meeting on June 16, 2020, which includes plans to fully fund the city public safety pensions plans. The city has entered into contracts for the issuance of Certificates of Participation debt to address the city’s unfunded pension liability.
“The decision to address the PSPRS unfunded liability in this fashion is one of the most important decisions the Council has made this year,” said Flagstaff Mayor Coral Evans. “This will save our taxpayers approximately $ 65 million and frees up general fund revenues to support other community needs and priorities.”
Since 2003, the city’s unfunded actuarial liability has grown to $112 million, a debt owed by the city to its active and retired first responders. The city’s public safety pension is managed by the Public Safety Pension Retirement System (PSPRS), a statewide program. This year, staff engaged Stifel, Nicolaus & Company as the Underwriters, Greenburg Traurig, LLP as Bond Counsel, and PSPRS staff to discuss opportunities to address the City’s continually growing debt. This group developed a plan to have a 100% funded pension plan for the city’s fire and police staff.
“The biggest risk with the current unfunded pension liability is doing nothing. If the city was to simply stay the course and fund this debt each year, we will continue to lose ground,” said City Manager Greg Clifton. “Moreover, under the current amortization schedule, the annual debt service increases substantially in some years, upward to $20M. The city cannot afford this. Financing this unfunded liability at this time makes all the sense in the world and comes with much less risk.”
By issuing Certificates of Participation debt at a lower interest rate, the city is able to:
- Reduce its annual contributions
- Level off future contributions
- Pay off the debt in 20 years versus the previous 28-year plan
- Set up a reserve fund to mitigate the risk of changing market values and actuarial assumptions
- Provide for over $65 million present value savings to the taxpayer.
“The city of Flagstaff’s decisive action to pay off their unfunded pension liability is emblematic of the city’s can-do spirit and commitment to public safety,” said PSPRS Administrator Mike Townsend, a Flagstaff native. “PSPRS will continue to work with Arizona employers, municipalities, and agencies on proposals like this and other strategies to provide information and education in support of possible solutions to reduce the pension burden on cities and taxpayers.”
The issuance of Certificates of Participation debt is a novel approach in Arizona to address the pension funding of public safety plans. With the issuance of Certificates of Participation, the city’s PSPRS plans are expected to be fully funded by June 30, 2021 and the Certificates of Participation will be paid off by June 30, 2040.
“After years of managing annual increases to the city’s unfunded pension liability, the city has developed a path forward to pay level debt, have 100% funded pension plans for our police and fire personnel, and set forth a reserve policy that will mitigate future changes in the plan. This plan makes fiscal sense,” said Rick Tadder, Management Services Director.