November 10, 2014
The Arizona Republic
The rejection by Phoenix voters of the pension-savings opportunities in Proposition 487 was a "credit negative" move for the city, according to an post-election update by Moody's Investors Service.
Phoenix voters turned down an opportunity to reform the city's pension system and squandered an opportunity to shore up the city's finances, said a municipal credit-rating agency in a post-election update.
"The vote is a credit negative for the city," which is grappling with a $4.4 billion adjusted net pension liability, said Moody's Investors Service. Phoenix has the sixth-highest adjusted pension shortfall relative to revenues among 50 large cities tracked by Moody's.
Proposition 487, on the Nov. 4 ballot, was easily rejected. It would have addressed "pension spiking" and would have made employees, rather than the city itself, responsible for investment risk, as is typical in a 401(k)-style retirement program. That provision would have applied to new employees.
According to the update by Moody's analysts Tom Aaron and Don Steed, Phoenix actuaries projected the new plan would have increased city contributions by $358 million over 20 years but with savings that would have exceeded those outlays, especially if the underlying investments didn't perform well.
The ballot measure could have saved the city up to $1.9 billion over 20 years, according to Moody's, citing a city-council analysis. Cost savings would have derived from limiting the types of pay used to calculate benefits — which leads to the costly practice of "pension spiking" — eliminating supplemental retirement plans offered by the city and calculating pension benefits by spreading them over more years of employee salary, which tends to lower the payout.
On the other hand, Moody's noted that the measure, had it passed, likely would have triggered costly legal challenges. For example, one part of the proposition would have required only one retirement plan to be offered to newly hired employees, including those in public safety. That would have conflicted with a state law mandating participation in the Public Safety Personnel Retirement Plan, which covers police and fire employees throughout the state.
Moody's hasn't changed its evaluation of Phoenix's credit rating. At Aa1, the rating is near the top of Moody's scale, where Aaa is the highest grade. Superior ratings allow cities, counties and other municipalities to pay lower interest expense on the bonds they sell, since the issuers are perceived as less-risky. Ratings also provide a third-party evaluation of a municipality's finances.
Potential pension savings
Moody's Investors Service said Phoenix voters turned down an opportunity to achieve pension-cost savings by rejecting Proposition 487. Here are the potential savings over 20 years, based on an analysis contained in a city council report.