A response to the city of Phoenix's 'invalid' claim

Sheila Weinberg  |  February 10, 2020

Phoenix Chief Financial Officer Denise M. Olson should be commended for issuing the most transparent and accurate financial report ever issued by the city. For the first time in history, Olson reported all of the city’s liabilities on the face of Phoenix’s Statement of Net Position, which is similar to a corporate balance sheet. By implementing two accounting standards, Olson is now reporting the city’s pension and retiree health care liabilities. Now citizens and their elected officials can review the city’s audited Statement of Net Position to determine Phoenix’s financial condition. 

The most important number included in this statement is the city’s Unrestricted Net Deficit, which refers to expenses the government has elected to fund as they come due rather than when they are incurred. The majority of Phoenix’s $2.5 billion of Unrestricted Net Deficit relates to unfunded pension debt. As is explained, however, in the financial report of Columbus, Ohio, “The obligation to sacrifice resources for pensions is a present obligation [emphasis added] because it was created as a result of employment exchanges that already have occurred.” 

Pension debt is similar to credit card debt, not a mortgage, because it is debt accumulated to cover costs that have already been incurred. Evidently Phoenix has a plan to pay the pension debt off over the next 22 years, but this does not negate the fact that this debt exists today. To explain this concept on a personal level, someone who plans to pay off a credit card balance over time by paying the minimum payments still has outstanding credit card debt now. 

Truth in Accounting’s Financial State of Phoenix indicated the city had a $2.7 billion shortfall, designated by the “money needed to pay bills,” which is analogous to the city’s $2.5 billion unrestricted deficit. The majority of the difference between these two numbers results from the fact that the city defers recognizing losses related to changes in the assumptions used to calculate the pension liabilities; Truth in Accounting recognizes these losses in the pension liabilities when they are identified.

Neither of these amounts includes capital assets because just as someone shouldn’t sell their house to pay off their credit card debt, the city shouldn’t sell its buildings, land and other infrastructure to pay off its pension debt. Both amounts also do not include debt related to capital assets. Truth in Accounting’s analysis and the city’s unrestricted deficit do not treat pension debt and debt related to capital assets the same. Unlike pension debt, which is similar to credit card debt, debt related to capital assets is similar to a mortgage because once the debt is paid off the city will possess those assets. 

Phoenix’s financial report indicates, “The City continues to maintain its high-quality credit ratings on General Obligation, Excise Tax, Water Revenue, Sewer Revenue and General Airport Revenue Bonds.” The ratings are not grades of the government’s overall financial condition and financial stewardship. These grades assess the credit risk of its bonds, which tend to be of higher priority than most other obligations. So as long as the rating agencies believe the government will collect, or can collect, enough taxes to pay the bond payments, the government’s bonds will have a high credit rating. Credit ratings are mostly concerned about the risk to the bondholders, not the taxpayers.  

Phoenix’s Taxpayer Burden of $5,500 and grade of D given by Truth in Accounting refer to the current fiscal position of the government and the burden on future taxpayers, who will not receive any services for the money they will have to pay for previously incurred costs.

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