Committee takes on task of fixing two retirement systems
Thursday, June 4, 2020 by Jo Clifton
After hearing about impending problems with two of the city’s retirement systems, the employees retirement system (COAERS) and the Austin police retirement system (APRS), the City Council Audit & Finance Committee voted unanimously Wednesday to designate itself as a legislative committee to propose changes to state law governing the two systems. The vote came at the end of a sobering presentation on the financial status of the two pension systems.
According to a report from Public Financial Management, which goes by the acronym PFM, the two retirement systems had an unfunded liability of more than $2 billion at the end of 2018. That number is undoubtedly higher now, especially given the impact of Covid-19, according to Michael Nadal of PFM.
Nadal told the committee key metrics have only gotten worse since that number came out, and he was not optimistic about the financial sustainability of the two retirement plans without some significant changes.
Between 2010 and the end of 2018, the COAERS unfunded liability increased from $749.1 million to nearly $1.3 billion. For the police fund, the unfunded liability for the same period of time increased from $216.9 million to $581.7 million. The Austin Firefighters Relief and Retirement Fund is not under scrutiny.
Nadal said the reason the two systems are not keeping up is because investment returns over the past five to 15 years have not matched historic assumptions. That means the city and its future employees will have to put more money into the two systems to make sure they do not run out of money.
Nadal pointed out that retirement systems across the country have been revising their investment assumptions. City retirees and Austin police retirees have not seen a cost-of-living adjustment for years, so that is not why the system is underfunded, he said.
The boards of both systems have recommended changes to increase not only the city’s contribution to each of the systems but also employee contributions. Currently, both systems have liabilities stretching beyond what is considered the maximum prudent time period of 30 years (32 years for the civilian employee system).
According to the PFM presentation, the police retirement system “has an infinite amortization period; in other words, the current funding levels are actuarially projected to remain insufficient to adequately fund the benefits. As stated in the plan’s valuation: ‘The APRS’s funded ratio is expected to continue to decrease until it reaches zero when the assets of the system are depleted.’”
Nadal emphasized that while the two systems have problems, they are not insoluble. That doesn’t mean the city can afford to put off making changes, he said, and the city needs a specific plan to present to the Texas Legislature for the 2021 legislative session.
Council Member Leslie Pool, who serves on the board of directors of the city employees retirement system, told the Austin Monitor after the meeting that any changes to the system would not impact current retirees. Pool also suggested that the committee should work with AFSCME, the employees union, to come up with solutions to the funding problem.
As Chief Financial Officer Elaine Hart explained to the committee, the Texas Pension Review Board requires a “restoration plan” for retirement systems that have had amortization periods of more than 40 years for three consecutive years. Based on the valuation of the police retirement system on Dec. 31, 2018, that system is considered to be “at risk,” she said, and if the problem is not corrected before Dec. 31 of this year, the pension board will require a “funding soundness restoration plan.”
Hart said the Austin Police Retirement System board recommended that the city increase its contribution rate or provide a lump sum payment sufficient to secure funding for the system and reduce the liability period to 30 years or less. In addition, the board said the city should be responsible for 60 percent and officers be responsible for 40 percent of the pension money.
The board also recommended that each current officer pay into the retirement system an additional 2 percent of their salary beginning Jan. 1, 2021. That will require a vote by current employees who are members of the retirement system. Nadal said Austin would continue to be competitive with other Texas cities in terms of benefits for officers.
In addition, the board recommended benefit changes for new officers hired after Jan. 1, 2022. That might include a requirement that the officer put in more years of creditable service, as compared to the current requirement. Any changes would have to be approved by the Legislature. Austin is one of the few major cities in the state that does not have a lower tier of benefits for new hires, Nadal said.
Nadal said he thought the board’s recommendations were good ones and would help the committee arrive at solutions to the pension funds’ problems.
Council Member Jimmy Flannigan said, “I do think that it’s important to acknowledge that we’re discussing police pension systems given everything that’s going on right now, which makes this a very complicated conversation and a necessary one,” referring to the ongoing demonstrations over police brutality. But he said he supported the idea of the committee working on solutions, while pointing out that the Legislature, not the city, ultimately makes the rules for the pension systems.
Mayor Steve Adler addressed Nadal, reiterating Nadal’s statement that the challenge before them is not so great as to be impossible. Nadal responded that that was the case, adding, “I did not mean to imply that inaction would be advisable at this juncture … I think it’s important to recognize there’s absolutely time to make reasonable, prudent, corrective changes that ensure the sustainability of these plans and the continuity of these benefits. Nobody who’s out there relying on these for their retirement security should have any heightened state of alarm.”
Adler said he would take Nadal’s comment as the call to action it was intended to be. He added, “The financial position of the city is strong, as evidenced by the AAA rating that we have. … We should be doing everything that we can to try to stay in that place. Obviously that’s going to require us to adjust two pension programs that we have talked about here, taking something that’s more actuarially based, which seems to be the national trend, just makes sense for us to do. And we are in this together, us and the city generally and our employees. And I think that having everybody participate in the necessary course corrections to ensure that our pensions stay strong and that people can rely on them is clearly something that we need to do.”
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