Calls to reform the Austin Police Department have manifested in very real ways, as the Austin City Council unanimously approved a $150 million cut to the department’s budget this summer. The move reallocated nearly one-third of the police department’s total budget by shifting the funding for things like forensic sciences and victims’ services to other agencies instead of traditional law enforcement. But, even as the city cuts its police budget, the costs of the city’s police pensions are still increasing.
Earlier in 2020, public pension actuaries warned the Austin Police Retirement System (APRS) board of trustees that the public pension plan is facing serious underfunding. Austin has only 58 cents out of every dollar it needs today to be able to deliver retirement benefits promised to current and former Austin Police Department officers. That’s down from 2017, when the city had about 66 cents of every dollar needed, according to the plan’s latest reports. The Austin Police Retirement System’s total unfunded liabilities reached $582 million in 2018, up from $406 million in 2017.
Because of this growing public pension debt, Moody’s Investor Services recently downgraded Austin’s issuer rating and outstanding general obligation limited tax debt rating to Aa1 from Aaa. Ultimately, this downgrade will lead to higher borrowing costs for the city and taxpayers. It also signals that credit rating agencies are concerned about the declining solvency of the city’s public pension systems.
While the police department’s annual budget can be quickly reformed by the City Council, that’s not the case for public pension benefits, which are constitutionally protected and taxpayers remain on the hook for these rising unfunded liabilities and their associated costs.
On a positive note, earlier this year Austin City Council’s Audit & Finance Committee deployed a new working group to address the increasing costs of both APRS and the City of Austin Employees Retirement System (COAERS). Two years ago, the Pension Integrity Project at Reason Foundation and Texas Public Policy Foundation published an actuarial analysis of COAERS that identified underperforming investments, inaccurate demographic assumptions, and flawed funding policies as major contributors to the plan’s then-$1.8 billion debt. The analysis aimed to bring city stakeholders together around a common understanding that action was needed to ensure the long-term viability of the public retirement plan. It’s good that experts from both city pension systems are now echoing the report’s findings.
A public pension system relies on contributions from employers and employees as well as investment returns to grow assets to pay for future benefits. Insufficient contributions from underperforming investment returns today lead to unfunded pension benefits tomorrow. Similarly, when a pension plan’s investment returns fail to meet expectations, it requires additional contributions from taxpayers and/or from plan members to ensure the pension fund has enough assets to pay for future retirement benefits. As Pensions & Investments reported:
Austin (Texas) Police Retirement System returned a net 1.3% for the year ended June 30, trailing the $809 million defined benefit plan’s 4% benchmark return, an investment report showed.
The fund’s net return for the year ended June 30, 2019 was 4.3%, while its benchmark was 6.9%.
The fund’s net annualized performance also trailed the fund’s benchmark over longer reported time periods ended June 30 with a 4.6% return over three years (benchmark, 6.9%); five years, 4.7% (7.1%); seven years, 5.3% (8.1%); and 10 years, 6% (9.4%).
Failing to meet those return benchmarks adds debt to the city’s retirement systems. In recognition of growing unfunded liabilities, trustees from APRS and COAERS have already recommended that the state legislature set higher contribution requirements for both the city and plan members (state law controls the city’s pension system design, not the decisions of local elected officials), which would be a good first step. That said, raising police contributions would require a vote by current members of the retirement system—a difficult hurdle, but one that Fort Worth recently successfully pulled off.
But, increasing payments into structurally-flawed systems that the city’s own actuaries and financial advisors have flagged as financially unsustainable isn’t enough. Without major technical changes, including reforms that limit both pension systems’ exposure to market volatility, the systems are likely to continue to accrue debt.
Actuaries are already warning that pension benefit changes will likely be needed in the coming years and advisors have urged the City Council and pension trustees to recognize that time is not on their side. Austin needs to quickly take action to address the structural problems in its pension systems to protect the city, taxpayers, and retirement plan members.