At a Cottonwood City Council meeting May 18, the city took aim at dealing with its unfunded pension liability, as the council voted 5-1 to approve approximately $21 million in bonding, which will be used to pay for the hole in the public safety employee pension system and paid back year over year for the next 10 years or more.
Councilwoman Tosca Henry was the lone dissenting vote. Vice Mayor Michael Mathews was absent.
The Arizona Public SafetyPersonnel Retirement System has faced growing shortfalls in recent years, with over $15 billion in unfunded liability, representing 27.2% of the total needed to fund pensions for retired government employees, affecting municipalities throughout the state.
The city’s share, to pay for the retirements of its police and fire staff, is $18 million lower than it was projected to be at this point, based on disappointing returns on investments made by the fund at the state level.
Stifel Financial Corp., an investment banking firm the city has partnered with, estimates that interest accrued on the growing pension liability will average 7.3% in coming years. Under the current setup without any changes, the hole in the city’s pension liability would require increased funding from the city’s budget to go toward the pension liability, with the expectation that by 2030 it would exceed 100% of employee salaries, according to Cottonwood Finance Director Kirsten Lennon.
The expectation is that the interest rates on the bonds will be somewhere in the 2% to 3% range, far lower than the 7% that the pension liability is expected to rise to in the near future.
“It’s a great deal. That’s why people are proposing it, because paying the 3% is better than paying the 7%,” Lennon told the council at a previous discussion of the proposal on March 16. “The bond payment is flat so in 2030, when we’re supposed to be paying at 101%, the bond won’t increase. The way that we’re structuring this bond it would start out a little bit less than what we’d be paying on the liability and then [the difference] would slowly increase.”
Tuesday’s vote represented the final step after several months of deliberation on the issue, approving the bonding, which Lennon said should begin on June 29. The city will find out what the interest rates on the new bonds will be about a week before that.
Lennon is also expecting particularly favorable interest rates as a result of a recent upgrade in the city’s credit rating by S&P Global, which issued an“AA” rating, the third-highest the ratings agency provides.
“We are not a credit risk,” Lennon said. “We’re in good standing. We’re working on getting our reserves up.”
The resolution was approved by the council under emergency stipulations, which makes it go into effect immediately and makes it exempt from the referendum process. This was done, according to City Attorney Steve Horton, in the interest of allowing city staff to move quickly to approve the bonding when they receive the contract in June.
