Staff proposal would make city employees work longer before retirement

A series of proposed changes to the city’s pension program would require new employees of the City of Austin to work longer before they can retire with full pension benefits.

 

According to city financial staff, the city’s pension fund is under growing strain, and a supplemental funding plan, approved in 2005, won’t be sufficient to sustain the fund’s current benefit level. The city’s Employee Retirement System, or ERS, is on the Texas Pension Review Board Watch List. 

 

To stabilize the pension system, staff is recommending developing a new tier of benefits to new city employees. Under the current system – one that some believe is too generous – employees age 55 and older with 20 years of service, age 62 with five years of service, or any age with 23 years of service are eligible for unreduced benefits. As a result, approximately 15 percent of current retirees were under age 50 upon retirement.

 

The new tier would require that the minimum age to retire with unreduced “full career” benefits would be either 60 or 62 years old. By definition a full career would be 28 or 30 years, up from 23. Employees over the age of 55 who have worked for 10 or more years would be eligible for reduced benefits, with an actuarial reduction.

 

In addition, staff recommends that the city reduce ERS’s amortization period (the length of time it would take to pay off the system’s unfunded liability) from infinity to 25-30 years. It also recommends improving the system’s funded ratio from its current level at 71.8 percent to 80 percent. In other words, the fund only currently has 72 cents for every dollar it owes workers in pension money. Staff says 80 percent is necessary for the fund to be solvent.

 

Staff’s long-term goal is to make the system fully funded.

 

The recommendations followed many of the suggestions made by a consulting firm earlier this year. (See In Fact Daily, March 24, 2010)

 

Under the plan, the city would also contribute $9 million each year for the next three years to the fund. That money would come from fees and taxes paid by citizens.

 

Deputy Chief Financial Officer Jeff Knodel told In Fact Daily that he believes staff’s recommendations will stabilize the ERS and get the fund off the review board watch list. “These recommendations meet the criteria the board has established for solvent pension funds,” he said. “So we would expect to get off the list around 2012.

 

“It won’t happen on Day One, but the mere fact that we’re taking action is the significant event.”

 

The next step for staff, according to Knodel, will be to get the approval of the ERS board and City Council, which will take up the matter as part of the budget process. “There’s still one final step,” he said, “which is the legislative process, and we have a Texas legislative session next year so we would expect the benefit side of it – the additional tier – to be legislatively approved in that 2011 session.”

 

Ideally, Knodel said, the plan would go into effect January 1, 2012.