A Tucson pension board decision likely means the city will pony up more for its nonpublic safety pension plan next year.
The board voted 4-3 last week to drop its expected rate of return on its investments from 7.75 percent to 7.25 percent.
Depending on the final numbers, the Tucson Supplemental Retirement System Board’s decision could add an additional $4 million to the city’s annual pension payment beginning in fiscal year 2016.
The exact cost-split of the increase between what city employees would contribute and what taxpayers would cover will be worked out over the next several months, said Finance Director Silvia Amparano, who sits on the board and voted against the change.
Amparano wasn’t opposed to dropping the rate. She just didn’t support that deep of a cut and that big of hit to the budget all at once.
But the rate drop was necessary because the city needs to infuse as much cash into the system to cover the $350 million unfunded liability the plan has accrued over the years, said board member Kevin Larson.
Even though the city’s pension system is on a stable track, Larson said the board had to make the change.
“There’s not a lot of things we can influence,” Larson said. “We need more cash. We’re not going to make up this difference just on returns. We need funding from some source.”
This year, the city expects to pay about $41 million toward its nonpublic safety pension. The city will pay $34.4 million, while employees will kick in about $6.7 million.
The change is tentatively projected to cost the city $45.5 million in fiscal year 2016.
Cities have two ways to fund their pension promises: either through investments or contributions. If investments don’t earn enough in the market to cover expenses, the city and its employees must make up the difference.
In 2000, the city had a fully funded pension portfolio. But the city’s investments did not recover from the tech-stock bubble bursting in 2003 and the housing and financial collapse in 2008.
In 2008 alone, the city’s investments dropped $180 million in value.
Since the city couldn’t write a check to cover the massive losses, it had to carry an unfunded liability.
As part of its annual process, the pension board decides on an expected rate of return, which affects how much the city must contribute toward the plan. Lower rates mean the city and its employees must pay more to cover the annual cost.
Critics have argued that governments inflate their expected rates of return to disguise how much trouble their pension plans are in.
University of Arizona Finance professor Michael Bondsaid the lower rate was a step in the right direction.
“It has a double whammy. It makes it more probable their investment return will be met over the future and also increases the present value of their promised pension payments to a more reasonable level,” Bond wrote in an email.
Chief Finance Officer Kelly Gottschalksaid the decision places additional strain on the overburdened budget.
She said the council might be “squeamish” about all of the extra funding it will require.