City of Tempe Questions 1-5

We are being asked to approve $349 million of new general obligation (GO) debt, divided into five ballot questions for different budget purposes. The city provided this 20 minute youtube presentation, here. The proposed bonds are intended to fund the projects in the City’s Capital Improvement Program (CIP), here. The total program will cost $776 million over 5 years. Every four years, the City asks voters for the authority to issue bonds. It is not possible to relate the numbers for the proposed borrowing to the CIP. Our approval is needed to continue the ongoing process of borrowing and spending, so the five questions are really one.

Four years ago, the last request for bond authority (for $254 million) passed 25,439 to 14,187. If you are uncomfortable with this process, merely withholding your vote is not an effective protest.

Even if you value water pressure, paved streets, and police protection, there are two reasons to vote ‘No.’ First, the City has for years demonstrated an odd obsession with mass transit and it has stopped enforcing single family residential zoning (see neighboring posts, here, here, and here), possibly because our leaders believe we should all be encouraged to live more closely together. The CIP not only cannot be mapped to the proposed bonds, it is impossible to pick out, for example, mass transit-related projects, and oppose them. A ‘No’ vote, against all the bonds, is a protest against the neglect of the suburban neighborhoods.

Second, the City carries a heavy load of pension debt and they should demonstrate that they have a plan for paying it. As of June 30 2019, the City had about $450 million of GO debt and $500 million of pension debt outstanding. (See page 34 of the Comprehensive Annual Financial Report (CAFR) here.)

The state limits the amount cities can borrow on a GO basis to a fraction of the property tax base and Tempe has unused GO debt capacity under that calculation. There are no limits on pension debt and the accounting is faulty.

promiseamount recognized
Arizona State Retirement System (ASRS)108
Public Service Personnel Retirement System (PSPRS)305
Other Post-Employment Benefits (OPEB)79

The two retirement systems are at the state level and have boards of trustees. If they are accountable to anyone, it will be the legislature.

Pension debt differs from normal, bonded debt in that the liability must be estimated. Government organizations systematically cheat, choosing actuarial assumptions that understate the liability.

The ASRS and PSPRS trustees assume that their investments will earn about 7.5% per year and that their future obligations can be discounted to the present at the same rate. If the trustees were to adopt actuarial assumptions from the private sector — say, Berkshire Hathaway’s assumptions (see page K-17 of their 2019 annual report, here) of 6% for earnings and 3% for the discount rate, the debt would be far greater, maybe more than 50% more. Both retirement systems publish their sensitivity to changes in their actuarial assumptions, on page 52 of the PSPRS CAFR, here, and on page 69 of the ASRS Annual Actuarial Valuation, here. Both systems estimate their sensitivity to a 1% change in assumptions to be about 10%. (The City, on page 108 of its CAFR, estimates the sensitivity to be higher, about 20%, so 10% may be a low estimate.) All the changes from their assumptions to private sector assumptions are adverse, totaling 5 1/2 percentage points. This suggests that the debt calculated under private sector rules would be at least 50-60% higher, or $700-800 million. Pension debt dwarfs the GO debt.

Borrowers like the City of Tempe are fee-paying clients to the bond rating agencies, so their ratings always lag reality. AAAs can become Bs very quickly, but only after the market closes to the bonds. In an extraordinarily low-interest rate environment where all lenders are chasing yield, no one looks hard at credit risk. The cities of Prescott and Bisbee explored bankruptcy as a defense against their pension debt. Story here. Tempe is neither Prescott nor Bisbee, but in order to remain a premium credit, it must fund its pension debt more realistically.

Of the modest contributions asked annually by the retirement systems, the cost is shared between the City and the police and fire employees about 6:1; ASRS employees pay half of the levy. If the retirement plans were funded according to private sector actuarial assumptions, employees might balk at paying more or demand raises to compensate. Either way, the City will have to find room in its budget for perhaps another $30 million annually, unpleasant but not impossible.

A better solution would be to pay it off now. The City attempts to structure its GO debt so the cost of repaying it is in the same time period as the use of the asset. (A building that lasts 20 years will be funded with 20 year debt.) Applying that logic to pensions would require very nearly paying off the debt.

A ‘No’ vote on these bonds is a request to the City to put its pensions in order.