| AGENDA ITEM #: 11. DATE: 05/10/2021 AI #:238 |
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CITY COUNCIL ACTION REPORT
| SUBJECT: | AUTHORIZE A ONE-TIME PAYMENT FROM THE GENERAL FUND TO THE PUBLIC SAFETY PERSONNEL RETIREMENT SYSTEM TO REDUCE THE CURRENT UNFUNDED LIABILITY |
| STAFF PRESENTER(S): | Doug Sandstrom, Finance Director |
SUMMARY:
The City of Goodyear participates in two retirement plans through the Arizona Public Safety Personnel Retirement System (PSPRS), these are two separate and distinct plans for our sworn police and sworn fire personnel, each with its own contribution rate and actuarially determined funded rate. This action is to address the current unfunded liabilities of these two systems which fall below the 80% level which is one benchmark of a "healthy" plan and also below our stated policy objective of 100% funded. Based on the most recent actuarial report the Police retirement system has an unfunded liability of $20,744,308 and a funded ratio of 66.7%; the Fire retirement system has an unfunded liability of $17,921,619 and a funded ratio of 71.7%. The payment of $12.0 million into each plan is estimated to increase the funded status of these two plans to 85% and 90% respectively, putting both plans into the healthy funding category. An additional benefit of this payment will be a reduction in the FY2023 PSPRS employer contribution rates. Police rates will drop from 32.89% to 21.59% and Fire will drop from 31.28% to 19.34% reducing required general fund contributions by approximately $2.0 million in the first year. Employee contributions are fixed by statute and will be unchanged by this action.
Recommendation:
Authorize a one-time payment from the general fund in the amount of $24.0 million to the Public Safety Personnel Retirement System ($12.0 million Police and $12.0 million Fire) to reduce the balance of each plans current unfunded liability and authorize associated budget transfers. (Doug Sandstrom, Finance Director)
FISCAL IMPACT:
Funding for this $24.0 million payment is available in the general fund due to FY2021 revenues exceeding conservative budget projections resulting from the unknown impacts that the COVID pandemic would have, combined with delayed consideration of many FY2021 supplemental requests. It is anticipated that after this payment of $24.0 million the general fund will end fiscal year 2021 with a fund balance of $44.2 million for use in FY2022. The FY2022 recommended budget was prepared in anticipation of this one-time payment. Payments received by PSPRS prior to June 30, 2021 will be calculated into the actuarial valuation utilized to determine FY2023 required contributions and funded levels.
BACKGROUND AND PREVIOUS ACTIONS:
This specific action was overviewed with council as part of the FY2022 City Manager's recommended budget presentation on April 19, 2021. General fund operational savings have been factored into the ongoing cost analysis for FY2022 and the five-year general fund forecast. Prior actions of council to reduce the unfunded liability of our PSPRS have included adoption of a funding pension policy establishing the goal of 100% funding; paying the employee and employer share of contributions at the beginning of each fiscal year; and mandating that the full budgeted amount for PSPRS contributions be paid to reduce liabilities each year.
STAFF ANALYSIS
Public Safety Pension systems in Arizona began experiencing severe funding issues in FY2012 due to a number of factors including decreased earnings, expansion of benefits such as the DROP, annual Post Benefit Increases (COLA's). In addition to these factors, various actuarial assumptions minimized the impact of these real costs for several years leading to a drop in the overall funded rate and dramatically increasing employer contribution rates. As retirement benefits are protected by the Arizona Constitution a new retirement tier was created for all employees hired after July 1, 2012 (Tier II). To address the factors listed above this new tier eliminated the DROP and other benefits while increasing the employee contribution from 7.65% to 11.65%. As funded ratios continued to drop and employer contribution rates increased another Tier was created in 2017 to radically change the PSPRS for all members hired after July 1, 2017. This new Tier (Tier III) is based upon equal contributions between employee and employer as well as offering a choice between defined benefit or defined contribution plans; Tiers I & II are both defined benefit plans. Although Tier III modifications should correct the issue in the long run, the majority of our sworn employees are in Tier I & II - this contribution will strengthen their retirement program.The actuarially determined contribution rates for the City have tripled for our Fire system and more than doubled for the Police system since FY2012.
The pension rate itself for tiers I/II have increased from an average of 10.8% in FY2012 to 15.2% in FY2021, however an additional rate is added to this to pay down the unfunded liabilities of the system. The average unfunded liability rate for the two systems have increased from 1.4% in FY2012 to the FY2022 rate of 16.7%. The unfunded liability rate is paid on the earnings of all sworn employees including those in Tier III and those in DROP.In addition to strengthening our sworn employees retirement plans, this action will reduce our outstanding debt as unfunded liabilities of our retirement systems are considered a debt of the City. These liabilities have an impact on our bonding ability and on our credit ratings. The potential of issuing pension obligation bonds has also been explored, however the utilization of available cash balances to pay down our unfunded liabilities is the recommended course of action.
The pension rate itself for tiers I/II have increased from an average of 10.8% in FY2012 to 15.2% in FY2021, however an additional rate is added to this to pay down the unfunded liabilities of the system. The average unfunded liability rate for the two systems have increased from 1.4% in FY2012 to the FY2022 rate of 16.7%. The unfunded liability rate is paid on the earnings of all sworn employees including those in Tier III and those in DROP.In addition to strengthening our sworn employees retirement plans, this action will reduce our outstanding debt as unfunded liabilities of our retirement systems are considered a debt of the City. These liabilities have an impact on our bonding ability and on our credit ratings. The potential of issuing pension obligation bonds has also been explored, however the utilization of available cash balances to pay down our unfunded liabilities is the recommended course of action.