Pension Plan Financial Sustainability and the 88th Legislative Session Proposal
Following comprehensive discussions between City of Austin representatives and COAERS, the Board of Trustees moved to approve a proposed framework for legislation for the 88th Texas Legislative Session to enhance the System’s long-term funding and health.
Over the past two years, a joint City of Austin and COAERS working group has been deeply engaged in productive, meaningful, and collaborative efforts to develop solutions to improve the retirement system’s long-term financial health and sustainability. As part of its proposal, the working group crafted key legislative concepts as they relate to changes in the Plan’s existing benefit and contribution policies, plan governance, and administration.
*Update as of May 2023*
On May 29, 2023, SB1444 was approved by the legislature and signed into law by the governer. The provisions of the bill are expected to have a significantly positive impact on the funding of the System in future years. Most notably, the legislation will retire the System’s unfunded liability over a fixed 30-year period, increase employee contributions to the System, and move the System to a flexible actuarially determined employer contribution rate to keep the plan on a steady path toward full funding and continue to provide members their promised benefits. The law went into effect on September 1, 2023. However, the provisions related to benefits and contributions will take effect January 1, 2024.
COAERS will continue to work in partnership with the City to keep all members well informed of the progress on plan sustainability and the legislative proposals related to the retirement system.
While the retirement system is financially sound and not in crisis, the COAERS Board wants to adopt best-in-class pension system practices for funding the retirement plan and optimize the System for the extreme and historically unprecedented market environments to protect the future lifetime benefit promised to COAERS members.
The legislative proposal framework touches on several policy areas, including funding, benefits and contributions, and governance. The key concepts proposed for consideration include:
- Moving to a flexible actuarially determined employer contribution rate, which can increase to keep the plan on a steady path toward full funding;
- Implementing a phased-in payment schedule for the City of Austin to pay off the Unfunded Actuarial Accrued Liability, or “legacy liability,” within a 30-year period;
- Increasing employee contributions by 2%, from 8% to 10%, over a two-year phase-in period.
- Modifying benefit policies such as service purchases and sick-leave conversions that will mitigate the risk of future costs to the System
- Converting one elected active member COAERS board position to a City of Austin appointed position; and
- Requiring support from both COAERS and the City of Austin for future cost of living adjustments.
Service purchases and sick leave conversion benefits will continue to remain in place. However, here is a summary of the changes that will be in the proposed legislation:
- Military service purchase: remove the 75% subsidy and allow purchase only at retirement
- Supplemental service purchase: allow purchase only at retirement
- Non-contributory service purchase: allow purchase only at retirement
- Prior service buyback: Change the interest rate from the current statutory rate (member interest credit rate divided by .75) to the assumed rate of return (currently 6.75%). Members can purchase this at any time.
- Sick leave conversion: This purchase remains the same with the employee paying their contributions for the hours of sick leave converted at retirement based upon the employee contribution rate in effect at the time. The legislation would change the City’s costs
The proposed changes will impact all current active members in both Group A and Group B.
No, retirees will not see any reductions or changes to their monthly benefit as a result of the legislative proposal.
If approved, the benefit policy changes will take effect starting January 1, 2024.
No, the legislation provides a two-year phase-in for the increase in the employee contribution rate. The rate will increase from 8% to 9% on January 1, 2024, and then from 9% to 10% on January 1, 2025.
COAERS’ ability to provide a COLA is determined by actuarial standards of practice and State of Texas funding guidelines. The Texas Pension Review Board “Funding Guidelines” state that “Benefit increases should not be adopted if all plan changes being considered cause a material increase in the amortization period and if the resulting amortization period exceeds 25 years”. Texas actuaries utilize the PRB “Funding Guidelines” to meet their industry’s standards of practice. According to the actuary’s most recent valuation report, the amortization period of COAERS is 34 years.
The legislative proposal would set the System on the pathway to actuarial soundness, bringing COAERS closer to the feasibility of considering future cost-of-living adjustments.
The plan sustainability legislative proposal bill numbers are SB 1444 and HB 4000.