How this East Valley city became Arizona's first to clear its public safety pension gap
Corrections and clarifications: An earlier version of the story had a headline with an incorrect amount by which Chandler paid off its pension debt.
Chandler has become the largest Arizona city to fully pay off its police and firefighter pension debt, overcoming a nearly $200 million shortfall within just seven years and averting a fiscal disaster that still looms over the vast majority of Arizona communities.
The Public Safety Personnel Retirement System is a statewide pension program that manages over 300 government accounts. Cities and employees put cash into the system each year — staffers contribute about 7% of their salaries, and employers are required to at least match that. PSPRS invests that money, similar to a 401K.
But the program has long been troubled. It was the third-worst-performing government trust in the U.S. between 2005 and 2015 because of low investment returns and high costs. That threw cities into chaos when they realized they were hundreds of millions short of covering their legally-mandated pension costs.
"They found that investments were being handled too loosely. So, the pension obligations were growing without anyone really monitoring and paying attention to it," said Chandler's CFO Dawn Lang, who added that the city decided to "overpay" into the system by about $13 million between 2016 and spring of 2019.
But that didn't cut it. The shortfall hit its peak of $180 million in 2019, a sum that Chandler could have financially crippled the city if the bill kept ballooning. So officials went all-in by investing an extra $113 million — on top of the roughly $32 million in regular pension payments they had to pay — over the next five years.
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On Tuesday, Chandler announced it had made its final investment of $73 million, clearing what was left of the deficit before any other sizable city in Arizona, from Tucson to Phoenix to Flagstaff. It will cut down on the city's regular contributions by as much as $10 million annually and free up the roughly $28 million used for yearly overpayments.
“We’ve made concerted efforts over several years to pay off our largest unfunded debt,” said Chandler Mayor Kevin Hartke. “Doing so has stabilized the pension system that is a critical benefit for first responders who have served our community and generated ongoing savings that we can apply toward needs in other areas.”
City staffers partially credit the expansion of Chandler's semiconductor industry, specifically Intel, for driving the influx in sales tax revenue needed to bridge the gap.
Matt Dunbar, Chandler's assistant director of budget and policy, also said the region's population growth was a major factor in generating enough general fund cash to make the pension investment. Chandler's population had grown by nearly 20% since 2010, the Valley's by nearly 40%.
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"Any time you have that many construction workers staying in your hotels and eating at restaurants, and that much infrastructure coming into Chandler, it has a definite impact," he said. "The number of people moving here, the amount of businesses coming here — all of that has played into our ability to ...pay off the obligations."
The current 7% rate of return on PSPRS investments is what made clearing the deficit early the ideal strategy for Chandler officials, who prioritized that over funding things like capital projects with city cash.
The idea is that the more money they contribute now, the more time that money has to grow through PSRSP investments, which means Chandler's principal investments will be significantly reduced in the coming years. But that strategy requires a solid financial situation, as Chandler's is.
Others aren't so lucky.
Some cities didn't have enough cash on hand to make early contributions, so they opted to borrow money. Tempe issued bonds to clear most of its $338 shortfall. It will allow the city to benefit from the PSPRS's investment returns but will also saddle it with $308 million in debt for the next 30 years, plus all of the interest.
Other cities are still struggling to escape rising pension gaps. Phoenix's $3.5 billion deficit in 2022 was an increase of 3% over the previous year. Mesa added $24 million to its shortfall during that same timeframe, bringing its total gap up to $720 million.
All of those cities will have to contend with that liability when they consider funding anything from road improvements to additional police units. Chandler, on the other hand, is in a prime position to boost investment in more substantive ways, rather than just worrying about catching up.
"Chandler has been in a position where we've been able to focus on this debt payment and, through good budgeting and management of finances, (we are) able to pay this down so that we can free up ongoing revenues at an earlier time," Dunbar said.
This article originally appeared on Arizona Republic: Chandler clears its $73M pension shortfall for police, firefighters
