Tucson’s City Council received bad news about its police and fire pensions Wednesday — it could have to pay an extra $17.9 million for the two funds.
That would boost the city’s total obligation for the two public-safety pension funds to about $62 million next year, exacerbating and already-difficult budget balancing act.
The ballooning costs are mostly the result of a recent Arizona Supreme Court decision overturning a 2011 state law designed to keep pension costs down.
A year ago, the court ordered the Public Safety Personnel Retirement System to reimburse retirees $40 million for past cost-of-living increases and to shift $335 million to a reserve fund to cover future cost-of-living increases.
The state pension board calculated how much of a dent the court order would put in each city’s retirement funds.
For Tucson, it dropped its police and fire pensions to under 40 percent funded through the plan’s investments, according to retirement system documents, and puts taxpayers are on the hook for $763 million in unfunded pension obligations owed to existing and future public safety retirees.
As a result, every dollar of salary will be matched by 65 cents for police and fire pensions.
For a firefighter or police officer making $50,000 a year, the city would have to pay an additional $32,500 for his or her pension.
Just over a decade ago, when funding levels were high, the city contributed $5 million a year toward police and fire employee pensions.
Although Arizona cities face a significant jump in their pension costs next year, the state board is offering a three-year payment option to lessen the blow.
However, the city will pay interest on the unpaid amount, raising future costs even more, said Deputy City Manager Kelly Gottschalk.
The city would pay an extra $24 million over 22 years if it selects the payment option.
The council must decide if it wants the installment plan by March 31.
Mayor Jonathan Rothschild said the city has no good options.
He said the city doesn’t have $18 million for next year, but it also can’t afford even larger payments if it delays paying the full amount.
Rothschild said the current system is not sustainable and the city needs to start look for some fixes.
Councilman Paul Cunningham wondered if the city could start pulling out of the state system in favor of a different plan.
“I’m worried about this system crumbling financially,” Cunningham said.
City Attorney Mike Rankin said it wasn’t an option at this point, but his office would look into what, if any, options exist.
Even if the city could eventually extricate itself from the plan, it would still be a responsible for paying its unfunded liability.
Since the pension plans are controlled by the state, the city has little control over them. But Gottschalk sits on a task force with other Arizona cities to determine just what steps cities can take to mitigate their costs.
As bad as this year’s increase might be, the future could be even worse.
A second lawsuit over the 2011 law dealing with other employee pension contributions is making its way through the courts.
If that portion of the law is overturned as well, it could push pensions costs up even further