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Future city employees may have a very different pension plan

Wednesday, March 24, 2010 by Michael Kanin

A city-hired consultant has recommended that the City of Austin make substantial changes to the pension plan it offers to most future employees. If enacted, the revisions could both redefine the number of years the city expects its workers to put in before retirement and grant participants in the Employee Retirement System (ERS) the right to determine what sort of investment vehicle they use for a portion of their city-sponsored retirement accounts.  


Any ERS restructuring would affect only future City of Austin employees.


The recommendations come as the city tries to shore up the solvency of ERS. According to staff figures, the amortization period for the system remains at infinity. In other words, if things remain as they are, Austin could never pay the full pensions of all of its ERS-funded employees.


ERS has been placed on the Texas Pension Review Board’s watch list.


Austin’s deputy chief financial officer, Jeff Knodel, told In Fact Daily that the city has a fiduciary responsibility to act as soon as it can. “The time for action, the time to fix the problem, is now,” he said.


The consultant, Public Financial Management of Philadelphia (PFM), delivered its suggestions to the Audit and Finance Committee on Tuesday. These centered around three main goals: To reduce the city’s amortization period from infinity to the maximum acceptable industry standard of 30 years; to lift the plan’s funding level from it’s current 72 percent to a minimum of 80 percent; and to make ERS sustainable, affordable to both the city and its employees, and sufficient to cover a large chunk of a retiree’s post-work income.


To ensure all of that, PFM’s Jeff Link told the committee that the city of Austin might have to correct a handful of what he termed “potential sources of funding problems.” According to Link, these include:


§       The city’s definition of a full career, the point at which city employees can retire with a full pension, as being 23 years. Link suggested that this was too short.

§       The fact that Austin has defined no minimum age for retirement. “So theoretically,” said Link, “someone could come to work for the city of Austin at age 18, work 23 years, and retire at 41.”


 “Somebody who retired after 23 years from the City of Austin who is less than about age 57 … will likely spend more time in retirement than in employment, and that can create an unstable scenario,” Link added.


He said that PFM considered the size of the city’s current retirement benefit “fairly rich” for the length of the career that it expected its employees to have.


Link then told committee members that the city should consider lengthening its definition of a career from 23 to 30 years, redefine its age and service requirements to more closely match those required by Social Security, limit or end employees’ current ability to buy service time, and make it so that early retirees collect the same total pension as those who retire on time. Early retirees would receive a lower payment on a monthly basis but could expect to receive the same total pension as those who retire later over the course of their lifetime.


He also suggested that ERS be restructured to offer a hybrid benefit plan. Under that scenario, the city would continue to control its contributions to its employees’ retirement funds, but the employees would determine how their ERS savings are invested.


Knodel said that his office would consider PFM’s suggestions. He also noted that a restructuring of ERS wouldn’t be enough to correct the current situation. He then called for additional city funding for the system.


“We’ll have projections that increase the city contributions (to ERS) for the next three years by two percent each year for the next three years,” he said. Each two percent increase will cost the city $9 million.


Those projections will come as part of Knodel’s five-year ERS forecast, which is scheduled for the Council in late April. No changes are expected until 2011.


ERS is one of three pension funds maintained by the city for its employees. Neither of the other two funds, one each for the police and fire departments, will be affected by changes to ERS.

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