Evaluating Solutions for Austin’s Billion Dollar Pension Crisis

Executive Summary

Austin’s largest municipal retirement system is mired in financial trouble, even by its own standard.

Based on a discount rate of 7.5 percent, the City of Austin Employees’ Retirement System’s (COAERS) unfunded liability was $1.3 billion in 2016, an increase of more than $875 million over a 10-year period. The system’s funded ratio hovered at 64 percent in 2016, a decrease from its 80 percent mark in 2007. When more realistic actuarial assumptions are applied, the system appears even more distressed. Based on a discount rate of 6.5 percent, COAERS’s unfunded liability amounts to $1.8 billion and its funded ratio is only 57 percent. Using a discount rate of 5.5 percent, the system’s unfunded liability totals $2.4 billion and its funded ratio declines to 50 percent.

COAERS’s fiscal deterioration is evident, and the causes are many, such as subpar investment returns, failing to properly anticipate how long workers would stay in the system, and mortality assumptions. And while the city has taken certain steps to shore up the plan’s finances, such as creating the Supplemental Funding Plan, those actions have proven insufficient.

As such, COAERS remains a troubled plan and questions persist about its longterm sustainability and stability. To calm these concerns and ensure that the plan remains solvent well into the future, state and local policymakers need to take decisive action that may include:

• Moving away from funding the plan based on a statutory contribution rate and adopting an actuarially determined contribution rate policy;

• Using more conservative assumptions, particularly with regard to a lower rate of return; and

• Creating a primary retirement defined contribution plan and allowing new employees the option to participate, such that there would be slower growth in liabilities exposed to unrealistic assumptions.

In combination, these reforms have the potential to significantly improve the fiscal condition of the COAERS system, especially if reality exceeds expectations. Resolving COAERS’s fiscal issues may not be easy or painless, but implementing the proper policy prescriptions now means a better tomorrow for retirees and taxpayers alike.

Full Report: Evaluating Solutions for Austin’s Billion Dollar Pension Crisis