The City of Flagstaff is hoping to fully address the $112 million Flagstaff owes to the public safety pension and save money in the process.
In February, the council said paying the debt the city owes to the fund, which pays the pensions for public safety personnel such as firefighters and police officers, was a top priority.
Paying off the unfunded pension has been a consistent drain on the city’s general fund, said Management Services Director Rick Tadder. And as the unfunded portion grows, the city’s payments have increased from $1.4 million to a projected $11 million in next year's budget, he said.
“This has consistently put a strain on our operations and providing the services and operations that our citizens deserve,” Tadder said.
But during previous discussions, the solutions at hand were not appealing to many members of the council, essentially boiling down to various forms of new taxes.
That changed during the budget retreat last month when City Manager Greg Clifton and city staff pitched an alternate strategy and the council agreed with it. Working with the investment banking company Stifel, the city would refinance the debt Flagstaff owes for the pension plan.
In doing so, the city would borrow enough money to repay fully the $112 million Flagstaff owes before working to repay the new debt at what they say would be a much lower rate.
Instead of borrowing the money using a traditional bonding mechanism, Tadder told the council the city could then use what is called a certificate of participation.
In such an agreement, the city uses facilities to back the loan, similar to a mortgage on a house. The city would still retain ownership of the facilities but would then reroute the money the city is currently paying into the pension debt to pay off the new debt.
If the city defaulted on the loans, ownership of the facilities would transfer to the investors.
Omar Daghestani with Stifel told the council that based on their calculations, he and his colleagues could save the city as much as $55 million over the next 20 years when compared to staying the course, and reduce current annual payments from the city’s general fund by about $1.8 million.
“Rather than effectively having a loan from the Public Safety Pension Retirement System at 7.3%, have a loan to [investors] at 4%,” Daghestani said.
Additionally, the city could do this without having to get approval from voters as it would by using a traditional bond.
During the meeting, the council did discuss the potential of using a bond to be paid off by use of the secondary property tax. But most councilmembers were hesitant to put any new tax on the November ballot given the current economic downturn.
“I think we have an opportunity to do this without putting a tax on the ballot,” Mayor Coral Evans told the rest of the council. And in the end, the majority of council agreed to use the certificate of participation instead.
Tadder said the city has made such arrangements to borrow money against city facilities in the past, including on the current municipal courthouse. In that case, he said the city paid off the debt using court fees.
The measure was supported unanimously by the council, and many members said after facing the unfunded liability for so long, it was good to see some light at the end of the tunnel.
“We have the opportunity to do it now; I think we just need to do it now. Let’s put this behind us, and I think the community is ready to put this behind us and create certainty with this liability with what we have,” Councilmember Charlie Odegaard said.
City staff will now bring an agreement with Stifel and approval of a certificate of participation to the council later in the year.
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