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Phoenix Sells $300 Million Amid Pension Push: Muni Credit

Phoenix, facing pension costs that have doubled in six years, may become the largest U.S. city to put new workers in 401(k)-style plans if voters pass a ballot measure in November.

Backers of the plan say a move last year to roll back pensions didn’t go far enough to curb retirement expenses, which swallowed $218 million, or 22 percent of Phoenix’s general-fund expenditures in the year through June 2013, up from 11 percent in 2007, budget documents indicate. Standard & Poor’s cited the costs in stripping Phoenix of its AAA rating in December.

Investors get to weigh in on the sixth-most-populous city’s fiscal wellbeing next month, when Phoenix plans to sell $297 million of debt. The state’s capital city still has time to get a handle on its pension obligations, said Todd Curtis, who manages the Aquila Group of Funds’ $271 million Aquila Tax-Free Trust of Arizona.

“Pensions are a growing concern within the credit analysis of any city in the country,” Curtis said from Phoenix. “Being an Arizona buyer, I am not too worried about Phoenix. They have a long history of taking steps to balance their budget.”

Pension Deficit

Local officials nationwide are contending with pension deficits exacerbated by the recession that ended almost five years ago. The 25 most-populous U.S. cities have more than $125 billion less than needed to meet promises to retirees, according to Morningstar Inc.

Unfunded obligations for pensions and retiree health care are crowding out spending on schools, police and libraries, Pew Charitable Trusts said in a March 2013 report. Pension costs have helped tip Detroit and the California cities of Stockton and San Bernardino into bankruptcy since 2012.

Phoenix pensions are 61 percent funded, trailing the median of 75 percent for the 25 largest cities, Morningstar said in a December report. The proportion of Phoenix’s spending going toward pensions is the group’s third-highest, trailing California’s San Jose and San Diego, according to Morningstar. Voter-approved changes in March 2013 should ease the pressure on Phoenix, the company said.

Phoenix Rising

The city of about 1.5 million has rebounded from the recession, which led to the smallest municipal workforce in 40 years and cuts to parks, recreation and cultural facilities, Pew said.

Home prices in Phoenix reached a five-year high in November, although they’re still down almost 40 percent from a 2006 peak, according to the S&P/Case-Shiller property-value index.

Phoenix balanced its budget last year as the rebounding economy boosted revenue, allowing it to restore police and fire services, pool and library hours and programs for youth and seniors. The city cut services to deal with a $277 million budget shortfall two years earlier caused by declining tax revenue, according to the city’s 2013 fiscal report.

Pension costs threaten to reverse the progress, Jim Waring, the vice mayor, said in an interview.

Benefit Crossroads

Waring, a Republican, supports the November ballot measure to cap pension benefits available to current employees -- a measure intended to curb padding of benefits through late-career raises and special pay -- and to put new civilian hires into a 401(k)-style system rather than a defined-benefit pension. The 401(k) is a tax-deferred retirement account that workers manage themselves.

Savings would total $150 million in the first 10 years, said Scot Mussi, executive director of the Arizona Free Enterprise Club, which backs the measure. City officials haven’t produced an estimate.

Phoenix would be the most-populous city to replace pensions with 401(k)-type accounts for new hires, said Jordan Marks, executive director of the union-backed National Public Pension Coalition. Voters in San Diego approved such a system in 2012, and it went into effect that year.

“Where we’re going to be in 20 years is a potentially unsustainable path,” Waring said. “We’re trying to get ahead of the curve.”

Phoenix, which hasn’t offered general-obligation debt since 2012, plans to refinance bonds issued in 2003, 2004 and 2005, said Treasurer Randy Piotrowski. The city plans to price the bonds June 2, he said.

Highest Rating

Even after S&P downgraded Phoenix in December to AA+, its second-highest level, Phoenix is still tied with Houston for the highest rating of the seven most populous cities.

“Pension costs have been on the radar of all investors,” Piotrowski said. “However, we haven’t heard any direct concerns from investors.”

The pension change that voters approved last year -- which increased employee contributions toward pensions and established later retirement ages -- is projected to save $600 million over 23 years, the city’s then-acting chief financial officer, Neal Young, wrote in the 2013 fiscal report.

The population of Phoenix, home of PetSmart Inc. (PETM) and Freeport-McMoRan Copper & Gold Inc. (FCX), grew almost 3 percent from 2010 to 2012, according to the U.S. Census.

Waring said the measures, which were backed by Democratic Mayor Greg Stanton, didn’t reverse the growth in pension liabilities.

Stanton’s policy director, Seth Scott, didn’t return two phone calls and an e-mail message seeking the mayor’s position on the latest initiative.

‘Free Market’

The Phoenix Pension Reform Act is principally funded by the Arizona Free Enterprise Club, according to its website. The club, which describes itself as a “free market policy and lobbying group,” raised $501,000 in 2012, all through membership dues, according to its most recent tax filing.

City unions have formed the Arizona Retirement Security Coalition to fight the measure. Money from outside Phoenix is fanning the perception of a pension crisis to persuade voters to hand over management of municipal retirement accounts to private firms, said Frank Piccioli, president of the American Federation of State, County & Municipal Employees Local 2960, which represents about 2,200 city employees.

Marks of the National Public Pension Coalition was in Phoenix this week planning how to defeat the measure. Marks said Phoenix could set a “dangerous” precedent for stripping municipal workers of guaranteed pensions.

Piccioli couldn’t name the funders of the drive to cut pensions, and Mussi declined to name donors. Neither side of the ballot measure has filed financial disclosure statements ahead of a June 30 deadline.

“The long-term outlook is a very healthy pension system,” Piccioli said. “We are not in crisis. This is not Detroit.”

To contact the reporter on this story: James Nash in Los Angeles at jnash24@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Mark Tannenbaum, Stacie Sherman

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