An Arizona town plans to sell $21.21 million of debt next week to reduce or eliminate its unfunded liability with the state's public safety pension fund.
The deal comes as an elevated interest rate environment has made pension obligation bond issuance rarer and riskier.
Payson, a town of about 16,700 northeast of Phoenix, plans to sell taxable pledged revenue obligations to reach an as much as 100% funded ratio for its Tier 1 and 2 participants in the Arizona Public Safety Personnel Retirement System (PSPRS), and achieve "generally level debt service to provide for future budget certainty," as well as present value savings, according to the preliminary official statement.
"We're not adding debt. We're exchanging debt for debt," Mayor Stephen Otto said ahead of the town council's Aug. 12 approval of the deal.
Payson's Assured Guaranty-insured issue, which is backed by a first lien on excise tax revenue and the town's state shared revenue, was given an underlying AA-minus rating with a stable outlook by S&P Global Ratings.
In its rating report, S&P said the town is issuing the debt "to achieve savings following expected PSPRS cost increases and to allow for a smoother, accelerated payment stream for budget affordability."
It pointed to risks from refunding pension liabilities for present value savings that could generate "new liabilities that are greater than projected and have a varying impact on performance, including market timing risks, or changes to benefits or actuarial assumptions."
Payson mitigated these risks with a back-loaded savings structure, which maximizes capacity — relative to the unfunded accrued actuarial liability amortization payments that would otherwise be due to the pensions system — for potential payments that could emerge, according to S&P.
"To further mitigate this risk, the town has adopted a formal policy requiring a contingency reserve fund sized at $1.35 million to be funded with bond proceeds or annual savings," the rating report added.
The debt, which is structured with serial maturities between 2027 and 2037, will be priced through Stifel, according to the POS.
The Government Finance Officers Association
Issuance of the debt by states and local governments
Current higher interest rates make it more difficult to achieve investment returns that exceed the cost of borrowing, according to analysts.
During a June 10 presentation on
The city council in August declined to place the general obligation POBs
This summer, Red Oak, Texas, a city of nearly 20,400 south of Dallas,
Red Oak's unfunded pension liability was nearly $15.16 million as of Dec. 31, according to the official statement.
S&P said bond proceeds would increase the city's pension funding to over 96% from about 59%.
"The city implemented benefit improvements in 2025, including a cost-of-living adjustment, adopting an unfunded service credit, and removing the statutory maximum on benefits, which drove nearly $11 million (over 50%) growth in liabilities reported on the Dec. 31, 2024, measurement date," S&P's rating report said.
The bonds, which carry serial maturities between 2031 and 2041, were priced by Piper Sandler & Co. with rates that ranged from 4.803% to 5.646%.
