Voters in One City to Decide On an Unusual Pension Funding Proposal

Phoenix voters later this month will decide whether to approve a ballot measure that calls for restricting city spending and pumping any resulting budget surpluses toward the city’s underfunded pensions until the balances of the retirement plans reach healthier levels.

The measure would require amending Phoenix’s city charter to cap increases in most types of city spending so they’d only rise in line with inflation and population growth. Revenue beyond those levels would go toward paying down the city’s pension funding shortfall.

Almost all city leaders oppose the requirement, saying it would unnecessarily hamstring their ability to make other key investments.

The spending restrictions would continue until the city’s projected pension costs are at least 90% funded based on an assessment that is outlined in the measure.

City Council member Sal DiCiccio, who has voiced concerns about the extent of the city’s unfunded pension liabilities, is one of the people backing the initiative, known as Proposition 106. Attempts to reach the councilman through a spokesperson were unsuccessful.

But another leading supporter, a public affairs consultant who says he lives half the year in north Phoenix, said the proposal emerged from conversations he had with DiCiccio. 

“Sal and myself have discussed the public pension crisis for years, talked about what can be done about it, because city councils are ignoring the problem,” said Chuck Warren, managing director of September Group, LLC, headquartered in Cheyenne, Wyoming.

“We talked about maybe this is an idea that would work,” he added. “I don’t understand where people think this money is going to come from, unless you start tackling it now.”

Getting the measure on the ballot required a minimum of 20,510 valid signatures. 

A political action committee called Responsible Budgets, which DiCiccio and Warren have both contributed to, paid people to help gather the signatures needed for the proposition to qualify. The group submitted close to 50,000 signatures to the city.

Warren said he believes the proposal is original and hasn’t been tried elsewhere, adding that he’s heard from council members in other cities interested in the concept. He declined to say where they are from. 

Even though Warren has contributed some of his own money and effort to the campaign for the measure, he said he’s not overly optimistic it will pass. “I think it’s a long-shot,” he said.

Phoenix’s “net pension liability” in fiscal year 2018 was about $4.5 billion, according to the city’s most recent financial report. That figure is a measure of how much the city’s pension assets are short of the benefits it is expected to owe to retirees in future years. 

About $1.6 billion of this sum is for the city’s Employee Retirement System, which covers many workers. Nearly $2.9 billion is for a plan the state oversees for police and firefighters. 

Jean-Pierre Aubry, associate director of state and local research at the Center for Retirement Research at Boston College said that while the funding level for Phoenix’s city pension system is worse than average, there’s no immediate risk the plan won’t be able to pay benefits.

“They’re by no means in an insolvency kind of mode,” he said. “The system could go on for many, many years with the current contribution rates and moderate returns.”

Proposition 106 opponents say the city is already on track to pay down its pension debt over the next 25 years and that the measure is akin to paying off a home mortgage all at once. They also say it will tie the hands of city officials when it comes to budgeting decisions.

Warren counters that the city is basing its projections that the pension debt will be paid off in 25 years on unrealistic assumptions about the returns pension fund investments will yield.

Opposition to Proposition 106 is widespread among local officials and influential groups. Mayor Kate Gallego and six members of the City Council are against it, as are the local Chamber of Commerce, AARP Arizona and a union that represents city firefighters—among others.

“Prop 106 is an investment cap initiative that will ensure the city can no longer invest in our future,” Gallego told a local political blog last month when asked about her position on the initiative. “It will mean massive cuts to areas such as libraries and after-school programs.” 

“To get this funding back once it is cut will take generations,” she added.

While the proposition would limit a lot of spending, it would exempt funding for police, fire and other emergency services. It also wouldn’t apply to certain special revenue and “enterprise” funds, and labor contracts before Jan. 1, 2018.

Proposition 106 also calls for directing funding first toward police, firefighter and first responder pensions, then toward the plans that cover other city retirees.

Additionally, the measure would require the mayor and city council members going forward to reimburse the city for pension contributions it makes on their behalf.

Warren estimated that 80% of the campaign funding in support of the proposition will likely end up coming from him, DiCiccio and another political consultant, Tim Mooney.

Alongside the measure on the Aug. 27 ballot will be another proposal, Proposition 105, that is aimed at restricting further light rail development in the city. The campaign opposed to Proposition 106 is running a coordinated effort against Proposition 105 as well.

Aubry said he hadn’t seen a proposal previously that was exactly like the Phoenix pension measure. But he said he views it as somewhat worrisome that the  proposal mixes restrictions on budget growth with a plan to pay down pension expenses using revenue surpluses.

“They're saying, ‘We are putting in law that our pensions are going to crowd out other budgetary priorities,’” he said. “It doesn’t have to be done that way.”

A question to consider with the measure, he added, is whether putting so much pressure on the current generation of taxpayers to fully fund the city’s pension plans, rather than spreading that burden further into the future, is the best path forward for the city at this time.

Unlike some other governments that are facing pension funding gaps and also struggling economically, Aubry noted that Phoenix is growing and its economy is relatively well-off.

"What you really are looking at are not just the assets on hand, but kind of the capacity to pay going forward,” he said.

In addition to arguing that the proposal would be too restrictive, opponents have suggested that Proposition 106 is poorly written in ways that will result in costly legal challenges. 

They also contend that if a recession were to force the city to make sizabe budget cuts, the way the proposal is drafted would limit how quickly they could be reversed. 

Warren says an emergency declaration clause provides flexibility for this situation, allowing for most of the requirements in the measure to be waived. But the declaration couldn’t be extended beyond a year and would require approval from eight of nine council members.

The campaign opposing the measure did not respond to a request for comment.

Phoenix’s Employees’ Retirement System system in fiscal year 2018 had about $2.6 billion of assets, 8,000 active members and 6,900 beneficiaries. Between fiscal 2014 and 2018, the system’s funded ratio was in the 55% to 58% range, according to Public Plans Data. 

That means its assets were around 40% to 45% short of the benefits its projected to owe in future years.

For the city’s plan, the assumed rate of return on investments, which is used to help project how well assets will stack up against liabilities as time goes on, is 7.5%. That’s roughly in line with the current national average for state and local plans.