How Pension Debt Is Driving Rising Costs for Arizona’s Municipal Governments

This series of briefs explores the impact both the Arizona State Retirement System (ASRS) and the state’s Public Safety Personnel Retirement System (PSPRS) have on Arizona’s city and county budgets and draws a direct line between the financial risks these pension systems are facing and how that risk manifests in local budget issues.

Rapid growth in pension costs associated with the state’s two largest public pension systems is a major challenge for many local officials responsible for providing vital public services to their communities and taxpayers.

ASRS, which serves over half a million teachers and government workers, was last fully funded in 2002 but has since accumulated over $15.6 billion in debt.

PSPRS, which covers all law enforcement personnel and firefighters statewide, currently holds only $7.5 billion in assets to cover $16.3 billion in promised pension benefits.

By analyzing financial records made publicly available by ASRS, PSPRS and several major counties and cities, these reports reveal systemic growth in pension debt as the primary driver behind increased municipal pensions costs for local governments. For a range of individual municipal employers, we analyze the potential budgetary risks associated with just a single year of pension underperformance in both plans in order to quantify the fiscal risks of missing the plans’ investment return assumptions. This analysis assumed that both ASRS and PSPRS achieve a 6.5 percent annual return on investments instead of the plans’ currently assumed return rates of 7.5 percent and 7.4 percent respectively, revealing some interesting findings:

• For Maricopa County, Coconino County, Yavapai County, Scottsdale, and Queen Creek, the one-year cost of underperformance—hitting a 6.5 percent return relative to each plan’s assumption—is significantly higher for ASRS relative to PSPRS.
• For Gilbert, Mesa, Globe, and Bisbee, the costs associated with one year of underperformance are significantly higher for PSPRS than ASRS.
• In Chandler, Prescott, and Sedona, even though the cities spend significantly more on annual PSPRS contributions relative to ASRS, the one-year costs related to pension underperformance are comparable between plans.

These results hinge on the municipality’s share between ASRS and PSPRS. Underperformance will generate larger costs from the system taking up the larger share of contributions. A notable trend, however, is that a one-year investment return below expectations affects ASRS more than it does PSPRS, due to the fact that they maintain a higher assumed rate of return.

Each brief examines the costs and payments local governments are grappling with. For example, here is an excerpt from the analysis of Maricopa County:

The state’s most populous county, Maricopa, is no stranger to the increasing costs of public pensions. According to the Pension Integrity Project’s analysis of financial documents, the county’s total payments to ASRS and PSPRS have skyrocketed from about $10 million per year in 2001 to more than $142 million in 2018, with $113 million going to ASRS and $29 million going to PSPRS.

Dive Deeper Into Each Municipality to Learn More About Its Pension Costs

• Maricopa County
• Coconino County
• City of Mesa
• City of Chandler
• City of Scottsdale
• City of Prescott
• Town of Gilbert
• City of Sedona
• City of Globe
• City of Bisbee
• Yavapai County

The Pension Integrity Project at Reason Foundation produced these reports as the first part of an ongoing information series spotlighting the driving factors behind the growth in pension cost on local governments. Bringing interested parties together around a central, non-partisan understanding of the challenges Arizona policymakers, plan members and retirees face—complete with independent third-party actuarial analysis and expert technical assistance—our organization stands ready to guide policymakers and stakeholders in addressing the shifting fiscal landscape.