Much of the air has been let out of the public pension balloon, with the most imminently at-risk systems – Dallas and Houston – being addressed last legislative session, but many smaller pension systems are still struggling and far from solvency or stability.
The state’s pension review board recently took a look at the Beaumont Fireman’s Relief and Retirement Fund as well as the Galveston Employees’ Retirement Plan for Police and found much of the same cause for concern that spurred legislative action last session.
The PRB is concerned that the Beaumont Fireman’s Relief and Retirement Fund, BFRRF, can face significant hurdles if their members decide at any time to begin withdrawing funds.
Employees vested in the BFRRF post-retirement option plan, PROP, are able to put a lump sum of their retirement annuity into the PROP and earn a guaranteed rate of return of roughly 6%. Employees can withdraw from the account if they give a 30-day notice, according to the PRB. This is where they are concerned. The PRB feels that the rates of returns and assets held by the BFRRF puts it at risk if enough members were to decide to begin withdrawing from the fund.
“In an era of extremely low interest rates, offering a guaranteed 6% rate of return on accounts that can be withdrawn on short notice is virtually unheard of and presents a great risk,” reads the PRB’s actuarial review. They continued to say that if this were to happen it would force the plan to sell off a significant amount of its assets at an inopportune time. Another shocking find in the PRB report is that BFRRF’s amortization period was 39 years in 2014 and skyrocketed to 104 years by 2016. This is the amount of time it would take to pay down the plan’s unfunded liabilities.
To fix the plan, the PRB recommends that they reassess the guaranteed rate of return and consider the impact that any changes could have on PROP behavior, like employees automatically withdrawing. They also advise that the city and fund should create a risk or cost sharing agreement that requires a payment of an actuarially determined contribution from the city.
The PRB shared similar concerns about the Galveston Police Pension.
“Currently, Galveston Police’s ability to meet its long-term obligations, measured by a number of indicators in addition to amortization period, may be threatened and warrants closer scrutiny,” reads their report.
The GPP funded ratio fell from 99% in 2000 to less than 42% as of 2017, making their fund among the least funded in the state. In that same time, their accrued liability increased by 103%.
As with many other pension systems, growth is due largely to investment returns that paced well behind over-inflated assumed rates of return. Up until January, Galveston was using an assumed rate of return of 8 percent, which is one of the highest in the state. As of the new year, it has been reduced it to 7.5 percent, which is still higher than realistic returns.
While Beaumont has an unreasonably high amortization period, Galveston also has one of the highest amortization periods – 48.7 years – of any of the 94 defined benefit pension plans in Texas.
The Galveston police plan has been underfunded for 17 years which has led to $29 million in unfunded liabilities. As seen in many pension standoffs, Galveston’s municipal administration and the police board seem unable to agree on how to move forward with reforming the plan. As of April, the city was discussing the option of asking voters to weigh in on plan fixes. The city is waiting for an independent actuarial analysis and said they will determine how to proceed after that.
“Ultimately if we can’t reach some kind of agreement, we’ll ask the voters if they want to raise taxes to pay for an increase,” Galveston’s Mayor told a local paper.
As public employee workforces age, local pension funds continue using overestimated investment returns, and cities fail to make full contributions to plans, liabilities will continue to grow. For many cities and funds that can’t find agreement, the solution will look something like Houston and Dallas – meaning the legislature will decide. With $66.5 billion in state and local pension debt in Texas, officials soon won’t have a choice but to address the issue head on.