Consideration and Adoption of Resolution No. 2019-32:  A resolution of the Flagstaff City Council adopting the City of Flagstaff Public Safety Personnel Retirement System Pension Funding Policy; delegating authority; and establishing an effective date.

The Flagstaff City Council is required to adopt a pension funding policy for its funding of the Public Safety Personnel Retirement System ("PSPRS") on or before July 1, 2019, pursuant to a new law, Arizona Revised Statutes Section 38-863.01. The policy will also need to be posted on the City website and updated annually.

Council will be adopting the Fiscal Year 2020 budget on June 18, 2019, which includes funding for the public safety pension plans as outlined in the pension funding policy.  Details provided in the Expanded Financial Considerations section.

The intent of this policy is to clearly communicate the Council’s pension funding objectives, its commitment to our employees and the sound financial management of the City, and to comply with Arizona Revised Statutes Section 38-863.01.

City Council Goals:
Personnel: Attract and retain quality staff: Evaluate ways to pay down unfunded pension liabilities in a quicker manner.

Regional Plan:
Goal PF.3. Provide high-quality emergency response and public safety services including law enforcement, fire, medical, and ambulance transport service.

On April 23-24, 2019 during the FY 2020 Budget Retreat staff presented on the pension funding policy.

• Adopt the Public Safety Personnel Retirement System Funding Policy as presented.
• Adopt the Public Safety Personnel Retirement System Funding Policy with amendments.

The City of Flagstaff has two separate pension plans for the City’s public safety staff.  While all the PSPRS plans are managed by the State, each plan within PSPRS stands alone by the City and employee group.  The two plans for the City are the PSPRS-Fire and the PSPRS-Police. The City and its employees are responsible for the contributions and the City is solely responsible for liabilities of these plans.  

The City’s PSPRS plans currently are not fully funded to account for projected future liabilities. The financial health of each plan is updated annually in an actuarial report.   The calculation of Unfunded Liability is calculated by taking the total Trust Asset and comparing that to the Accrued Pension Liability.  If the Accrued Pension Liability is greater than the Trust Assets, it is called an Unfunded Liability.  The most recent year that the plans were fully funded was June 30, 2002.  The plans were $6.3M overfunded in 2002.  In 2003 and 2004 the plans became underfunded by $206K and $5.5M respectively.  As of June 30, 2019 (the most recent actuarial report) the plans are $107.7M underfunded. 

The growth in the Unfunded Liability cannot be contributed to one single event or policy.  There are many issues that impacted the pension funds since 2000.  Most notably is related to investment losses and reduced earnings as a result of the 2000 stock market downturn and then again during the Great Recession in 2007-2009.  Other contributing factors are related to pension plan design, legislative attempts to change pensions, the number of retired versus active members and actuarial assumptions changes.  Actuarial assumption changes include items such as employee base, wage inflation, and investment returns.  This list is not all inclusive of the factors that impacted the City's unfunded liability. 

During the 2018 State legislative session, Arizona Revised Statute Section 38-863.01 was adopted, which requires all entities with a PSPRS plan to adopt a pension funding policy prior to July 1, 2019, and updated and adopted annually. 

During the April 2019 Budget Retreat for the FY 2020, staff presented information about the PSPRS plans, a draft pension funding policy and several funding options for Council to consider for the purpose of reducing the unfunded liability of the plans. 

At that time a majority of Council agreed to consider an increase in the Use Tax rate to dedicate a resource to pay additional contributions to the PSPRS plans.  The proposal is to increase the Use Tax rate from 1% to 2.281% (to match the Transaction Privilege Tax base rate) as of July 1, 2019.  The ordinance to consider a Use Tax rate increase is currently scheduled for the June 18, 2019, and July 2, 2019, Council meetings.  The rate increase will provide approximately $900,000 in revenues annually.  

In the actuarial reports for the periods ending June 30, 2016, 2017, and 2018, the City has maintained a 37% funding ratio for the combined plans.  The funding ratio is based on the trust assets divided by the accrued pension liability.  An 80% funded ratio is considered healthy. The U.S. Government Accountability Office states: “Most public pension plans report having sufficient assets to pay for retiree benefits over the next several decades.  Many experts and officials to whom we spoke consider a funded ratio of 80% to be sufficient for public plans for a couple of reasons.  First, it is unlikely that public employees will go out of business or cease operations as can happen with private sector employers, and state and local governments can spread the costs of unfunded liabilities over a period up to 30 years under current GASB standards.” 

The pension funding policy outlines several measures the City is taking to improve funding ratios in our PSPRS plans, including:

• Make the City's annual contributions based on the higher of the amount in the City budget or actual required contribution calculations
• Make the City's annual estimated contribution based on the City budget at the beginning of each fiscal year to allow PSPRS to invest those contributions earlier for enhanced potential investment earnings
• Make City contributions for public safety employees participating in the Deferred Retirement Option Plan (DROP), even though the City is not required to do so
• In years when the minimum contribution rate decreases, maintain contributions at the prior year's amount plus projected wage growth.
• Continue to pay additional annual contributions to the Police plan based on the decision to extend the amortization period to 30 years
• Consider additional revenue sources from an increased Use Tax rate

Based on these pension funding policy decisions by the Council, the City PSPRS plans are expected to achieve a goal of 100% funding by June 30, 2039.  The change in the funding ratios is outlined below.

• PSPRS-Fire
  • 80% funded ratio in FY 2032 versus FY 2034
  • 100% funded ratio in FY 2036 versus FY 2037
• PSPRS-Police
  • 80% funded ratio in FY 2034 versus FY 2044
  • 100% funded ratio in FY 2039 versus FY 2047

 

The FY 2020 budget includes the following pension contributions:
 

Plan	Annual Required Contribution	Additional Contributions	Total Contributions
PSPRS-Fire	$ 5,826,648	$ 521,000	$ 6,347,648
PSPRS-Police	$ 4,092,554	$ 1,233,000	$ 5,325,554
Total	$ 9,919,202	$ 1,754,000	$ 11,673,202

Inform:  The pension funding policy will inform our community of the policy decisions made by the Council to address the PSPRS unfunded pension liability.
Involve:  The community was invited to the annual retreat and is able to provide comments.