The Austin Employees’ Retirement System is in crisis, with liabilities of more than $1 billion that it cannot pay with funding on hand, according to a new joint study by the Texas Public Policy and Reason Foundations.
Unreasonable return on investment projections have, for nearly two decades, allowed the Austin City Council to contribute much less than is needed to fully fund the retirement system, TPPF’s James Quintero, one of the study’s authors, told The Texas Monitor.
Austin isn’t alone and its largest pension program is by no means in the worst financial shape in the state of Texas. The 92 pension systems tracked statewide in the latest Texas Pension Review Board report are carrying $69.3 billion in unfunded liabilities and are, on average, 79 percent funded. Just six of the pension plans, all of them relatively tiny, are at least 100 percent funded, according to the report.
In November of 2016, Moody’s listed the 15 American cities with the largest pension liabilities. Dallas was second only to Chicago. Houston was fourth, Austin ninth and San Antonio 12th.
The Austin system’s $1.17 billion in unfunded liabilities means the system is 68.1 percent funded. By comparison, the Dallas Police & Fire Retirement System is just 45.1 percent fully funded, with $2.21 billion in unfunded liabilities, while the Houston Municipal Employees’ Pension System is 55.5 percent fully funded with $2.1 billion in unfunded liabilities, according to the Review Board report.
More than half of all unfunded liabilities — $35.5 billion — are being carried by the Teacher Retirement System of Texas, the report says.
“This is happening across the state and the seriousness of the situation is growing by the month,” Quintero said. “These are ticking timebombs that I believe are beginning to come to the attention of state lawmakers who don’t want to see any Texas cities become the next Detroit.”
Chris Hanson, executive director of the Austin Employees’ Retirement System, had only enough time to glance at the report after its release to The Texas Monitor, but he disagreed that the system was in crisis. “We’re not in any jeopardy of meeting our benefit obligations,” he told The Texas Monitor Thursday. “It’s problematic when it’s portrayed as a crisis, because it causes unnecessary concern.”
One of the chief purposes of the report is to demonstrate that pension problems in Austin and in other major cities in Texas have been a long time in coming, Quintero said.
In 1997, according to one of the tables in the TPPF report, Austin’s three pension funds — the Austin Police Retirement System and the Austin Firefighters Relief & Retirement Fund are the other two — had funding surpluses. By 2007, the employees’ fund was only 80 percent funded and by 2016 funding had dropped to 64 percent, the report says.
Local and state politicians in Austin, faced with those funding surpluses in the 1990s, embarked on a series of benefits increases and annual cost of living adjustment over a period of roughly five years, Hanson said.
Then came the technology bust of the early 2000s, followed by a global recession that began in 2008 and lingered for years. “We did not anticipate two serious downturns,” Hanson said. “We have not yet fully recovered from them.”
Quintero’s study argues that the pension systems in Austin and across the country did not properly adjust their expectations for their return on investments to the realities of the market.
During the years in the economic trough, when the city of Austin was suffering through losses on investment, the Employees’ Retirement System dropped its anticipated rate of return from 8 percent to 7.75 percent in the early 2000s to 7.50 percent today. The Teacher Retirement system remains at 8 percent, Dallas Police and Fire at 7.25 percent and Houston Municipal Employees are at 7 percent.
In 2012, the Austin City Council approved a two-tier system by reducing the benefits package for new employees without cutting benefits for those already on staff or retired. Cost of living increases for those retirees have been frozen since 2002. All cost of living increases must now be approved by the City Council.
Based on actual returns on investment so far in this century, 3-4 percent projections are much closer to reality, Quintero said. “Those 7, 8 percent rates on return are based on an economic era that no longer exists,” he said.
If the Employees’ System in Austin were to suddenly acknowledge that their investment returns might be half of what it has been projecting, the system would be faced with an unfunded liability of as much as $2.4 billion, Quintero said.
“They’re actually in a lot worse shape than what they’ve been showing,” he said.
The Laura and John Arnold Foundation came to many of the same conclusions when their researchers looked at Austin’s pension funds in “A Boomtown at Risk,” in November of 2016. Paulina Diaz Aguirre and Josh McGee, who is also the chairman of the Pension Review Board, concluded that Austin’s pension funds would not realize their projected returns.
Reducing that rate from 7.5 percent to 6.5 percent, Diaz Aguirre and McGee wrote would increase the total debt of the three local pension systems from $1.8 billion to $2.6 billion.
“If Austin experiences an economic downturn in the future, it might not be able to keep up with its payments,” according to the report.
The Texas Monitor contacted the Pension Review Board to interview McGee for this story, but had not heard back at the time of publication.
The Austin system has gotten the message, Hanson said. The board is in the process of a study that may take the rest of the year to determine if its return projection number should be reduced. He wouldn’t speculate if that meant a reduction was coming.
“We’re not looking at a number,” he said. “We’re going to let the process take its course and do our due diligence.”
Both Hanson and Quintero agree that politics will have a lot to do with the success of any reforms. A reduction in return on investments made by a pension system means either a reduction in benefits, deeper unfunded liability or increased taxes.
When asked why cities like Austin have so stubbornly resisted being more realistic, Quintero said, “Politics. Because these funds are managed at the local level they are always being affected by special interests. Generally speaking, these rosier assumptions are put in place to keep the cities’ contributions lower. It’s designed to make local politics easier.”
When The Texas Monitor contacted Austin Mayor, Steve Adler, to ask about the impact the TPPF report would have on unfunded liabilities and local politics, spokesman Jason Stanford replied with an email. “Mayor is in a Council meeting and won’t be able to discuss this with you, much less digest this report. We will, however, be looking into it.”
Although Quintero was optimistic that relief might come from legislation in the next session, lawmakers in the past session showed little urgency on the matter of unfunded liabilities.
“I see no need to fix what isn’t broken here,” state Sen. Kirk Watson, D-Austin, told the Austin Chronicle early in the 2017 session. State Sen. Paul Bettencourt’s, R-Houston, Senate Bill 152 which would have helped cities move from government benefit to employee contribution retirement plans never even got out of committee.
Quintero said one of the other major purposes of the report is to provide a roadmap for whomever will carry pension reform legislation in the coming session. “We think there will be legislation on defined contributions in the next session,” he said.
Mark Lisheron can be reached at [email protected].