Pension liabilities worry city bond-rating agency

2013-05-28T00:00:00Z Pension liabilities worry city bond-rating agencyDarren DaRonco Arizona Daily Star Arizona Daily Star
May 28, 2013 12:00 am  • 

There's a mixture of good news and bad news with the city's recent report card from the Fitch rating agency.

While Fitch kept the city's bond rating at double A, due to what it said was "manageable debt" and some indicators showing an economic recovery was underway, Fitch revised its future outlook for the city from stable to negative, mostly due to the city's increasing pension obligations.

A negative outlook can affect the interest rate the city must pay on any bonds it sells, raising taxpayer costs.

With about $1 billion in unfunded liabilities combined between the city's four pension programs, Fitch considers "the weak funding levels for all programs as a negative credit factor."

The biggest problem for the city are its police and fire pension funds, Fitch noted. Next fiscal year alone, the city will pay $42 million for the two retirement funds, a 20 percent increase from the current year.

Just a decade ago, the city paid less than $5 million a year for public-safety pensions.

But that was before the recession. Since then, slumping stocks, hiring freezes and retiring employees combined to put a strain on the retirement system.

Compounding Tucson's problem is that it's one of the oldest cities in the state, which means there are more retired employees than active ones. The system has less than one active public-safety officer for every retired or noncontributing employee.

All of those factors have left the city with about $540 million in unfunded pension liabilities for police and fire employees and paying one of the highest rates in the state - 44 cents for every dollar of those employees' wages is paid to fund the programs. Projections show that could rise to 66 cents or higher by 2027 if nothing changes.

Mayor Jonathan Rothschild said he was pleased the city's bond rating stayed the same. But this serves as a warning for the city to tackle its pension issues before it's too late, he said.

The city already started on this path a few weeks ago, with the City Council voting to set up a task force to rein in costs.

But how much the city can actually do is unclear, since the state controls public-safety pensions.

Even though Tucson is at the front end of the looming pension crisis, other municipalities are recognizing that they face a similar pension shortfall, Rothschild said, and mayors from other cities have contacted him about what can be done.

"Mayors from other cities are seeing these as problems now," Rothschild said. "What we're hearing is the Valley cities are catching up with us in the next few years and they want to get this conversation started."

For now, the best thing the city can do, Rothschild said, is to start the local task force and bring everyone to the table for some frank talks about the economic realities surrounding current pension programs.

The Fitch outlook doesn't come as a surprise to Councilman Steve Kozachik, who has been warning for weeks that the city needs to get its financial house in order.

"The bond rating folks are simply reading the same tea leaves that I've been reading. We have significant problems coming in the next few years, and giving raises and lowering the employee pension contributions only drew attention to that by the people at Fitch," Kozachik said. "We have a structurally imbalanced budget, and even they say that's primarily being driven by increases in the costs of employee benefits."

Kozachik said it's still not too late to put the money slated for next year's pay raises into the city's reserve fund to assuage some of Fitch's concerns.

"The council can still put our excess capacity into the rainy-day fund," Kozachik said. "But what we've done over the past couple of months in wages and pension changes has now put us in the negative-outlook category by the people who are involved in setting interest charges we'll be paying. I'd suggest we don't wait until the fall to make that decision."

Contact reporter Darren DaRonco at 573-4243 or ddaronco@azstarnet.com

Copyright 2014 Arizona Daily Star. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Video

Follow the Arizona Daily Star

Featured businesses

View more...

Deals, offers & events

View more...

Event Calendar

Today's events | Add an event

Most viewed: