NewsJune 9, 2020

Austin Takes Steps to Save Local Pensions

The city’s Audit and Finance Committee enables new legislative allowances to save its police and employees’ retirement systems.

Reported by Steffan Navedo-Perez

Austin’s City Council Audit & Finance Committee voted unanimously to roll out a plan that would help resolve the balance sheets of the the city’s troubled employees retirement system (COAERS) and the Austin Police Retirement System (APRS).

The pensions’ liabilities were already in relatively bad shape before the pandemic, but today’s situation necessitated legislative “flexibility” to cure it. According to a report presented to the council, the APRS and COAERS funding ratios at the end of 2018 were 58.1% and 67.6%, respectively, with both projected to sour in the near future.

To help, the city established a council legislative working group to guide the legislative process, provide policy direction on pension reforms, and develop the city’s legislative agenda related to any retirement system amendments and plan changes.

“No significant easing of these long-term funding challenges is expected from investment returns alone,” the report said. The council entertained a host of considerations that would help cure the funds, including enacting a flexible contribution policy to manage their risks and liabilities, amending benefit policies to help sustain the fund’s obligations, and risk-sharing between the city and employees. In the sharing program, the city of Austin would pay at least 60% and the police would pay 40%. The two funds together have about $2 billion in unfunded liabilities.

Moody’s downgraded its AAA credit rating to the city of Austin in 2019 from stable to negative, citing the city’s “inability to manage the growth of liabilities and costs associated with the retiree benefit systems.” Standard & Poor’s maintained a stable outlook, but it said the city’s pattern of raising contribution rates significantly “negatively impacts finances, or material deterioration in the long-term health of the plans could affect the rating.”

The council approved a substantial increase in the city’s contribution rate for COAERS in 2010, raising it from 12% of payroll to 18% of payroll by 2013. APRS’ contribution rate increased from 18% in 2009 to 21% in 2015.

“The COAERS Board of Trustees has been working proactively to address the System’s unfunded liability and shape its long-term sustainability,” COAERS Executive Director Christopher Hanson said. “The City Council’s Audit and Finance Committee embraced the Board’s policy recommendations to enact a more flexible contribution policy to manage the System’s risks and fund the unfunded liability, amend benefit policies to ensure that the System’s obligations are met, and utilize appropriate risk-sharing measures.”

The report also noted APRS “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.’”