Safford City Manager John Cassella has asked city council members to consider issuing taxable bonds to pay off more than $12.7 million in unfunded pension plans for its public safety employees.
Right now, the unfunded pension liability is accruing at over 7 percent annually, a figure that can change depending upon the market. However, if the city issues bonds, they could lock in historically low interest rates, perhaps as low as 4 percent, Cassella said.
The Public Safety Personnel Retirement System pays current and future pension benefits to police officers, firefighters, judges, lawmakers and correctional officers.
However, the system has been struggling for years due to economic downturns and poor asset management, Cassella told council members during an Oct. 30 work study session.
Because of the issues, public entities have been forced to contribute more in tax dollars to fund retirements. PSPRS currently has less than half the money it needs to pay those who pay into it. An audit conducted last year showed such poor record keeping on the part of the trust that state and local governments may have overpaid or underpaid their mandatory pensions payments for two years.
The city’s unfunded liability increased from $5.7 million in 2014 to $12.7 million even though contributions rose, Cassella said.
Right now, the city has three options to address the issue, Cassella said. City council members can hope adjustments made by the state fix the issues, the city can issue bonds or the city could impose a special tax dedicated toward the unfunded liability.
The latter is not something he seriously thought the council would entertain, he said.
If the city council goes with the first option, the unfunded liability would continue to carry on for years, be susceptible to market variations and prove more costly in the end, Cassella said.
By issuing bonds, the city’s interest rate would be lower, it would have a predictable payment schedule and the debt would be eliminated upfront, he said.
Assuming the city paid roughly 4 percent interest on the bonds, the city could save more than $14 million over the next 28 years, Cassella said.
On the negative side, there would be bonding costs to pay, Cassella said.
Both Flagstaff and Pinal County have issued bonds to pay off their unfunded liabilities, he said.
“I think it makes sense getting out from under the debt as it continues to grow,” Cassella said.
After the meeting Cassella said he expects the issue to be discussed again at a council meeting in the near future.