The Texas Pension Review Board Actuarial Committee met on January 25 and discussed updates to the Dallas Police & Fire Pension System, the TLFFRA, and a review of systems that offer lump sum options. A complete agenda of the meeting can be found here. A video of this meeting can be found here.
This report is intended to give you an overview and highlight the various topics taken up. It is not a verbatim transcript of the discussions but is based upon what was audible or understandable to the observer.
- Independent actuary analysis is required to deliver an update and high-level summary to improve the systems funding
- Board Member- Appreciate interest in trying to fund resolutions; this resolution is attempting to correct years of bad governance
- If the city cannot agree, legislators will impose; the solution requires corporation between the city and the Dallas Police & Fire Pension System
Â
Bill Hallmark, Independent Actuarial Analyst, Cheiron
- Drafted report and presentation based on 2022 actuarial evaluation
- Proposed solution balances competing objectives and focuses on 3 goals: benefit adequacy and security, generational equity and contribution stability
- Suggests including automatic adjustment mechanisms that are pursued incrementally to allow time to adjust budgets
- Primary recommendation is an actuarially determined contribution from the city, employee contribution changes adjusted upward to an amount higher than what we see across the state, and some form of COLA with the lowest cost possible
- Recommends an amortization schedule that gives 30 years of approximations using current fixed rate contributions that model a 5-year grading period
- By 2025, the city’s contribution should be split into two pieces; 1 part of the contribution should be based on payroll (city normal cost) and the 2nd should be a UAL that is on a fixed dollar schedule
- Board member- Why has 2025 current and the 2025 recommended current cost increased?
- The COLA is assumed to be zero, resulting in a lower normal cost; in the recommended, they are accounting for the COLA (the first cola would be paid around 2047)
- What are the possible negative effects on cash flow; should we be concerned about the diminishment of an asset base?
- Additional funding would be necessary
- Scenario 1: Contribution sensitivity to investment returns; the contributions would be higher and the cash flow much smaller
- Scenario 2: Recommends the gradual decreasing of the employee contribution rate and the city contribution, resulting in more members in the newer tier with lower benefits
- Scenario 3: Current COLA not payable until system reaches 70% funded ratio
- Board member- 30% funding of the COLA seems unrealistic. What percentage of the recent retirees participated in the drop?
- Older retirees saw no drop; they were in a more generous program that had more benefits
- Section 2.025 of HB 31 resulted in total change of the board through the mayor’s appointment
- Nick Merrick, Chairman of the Board of Trustees- We solidified the asset base of the pension fund; to progress, we must work with both stakeholders and legislators
- The board should attempt to give the city numbers asap; they plan to reach an agreement by July of 2024
- If there is a disagreement between the board and the city, the board has an obligation to adopt the plans proposed
- Merrick – Do you support an effort into not going into the FSRP?
- We plan to submit a 30-year funding plan that meets the requirements HB 38
- Merrick – So, your issue is determining if the COLA can be incorporated into the trust?
- It is the most significant difference between us and Cheiron
- Merrick – Does the city have its own actuary?
- Yes, and they have reviewed Cheiron’s plans
- Merrick – Is the city currently attempting to monetize some assets to meet some of the funding requirements?
- Yes, they are currently analyzing their ability to monetize certain assets; this is a great opportunity, but it does have the potential to reduce future contributions
Item 6. Update from Austin Firefighters Retirement Fund on potential plan changes
Anu Kumar, Austin Firefighters Retirement Fund
- Hired Cheiron in 2022
- Impacts apparent from 2021 to 2022 evaluation; the funding ratio has declined, but she remains confident they are in a good funding position
- From 2021 to 2022, the board made major changes because of actuarial suggestions
- The fund has been lowering its return assumption since 2016
- Since 2013, the PRB has been within the preferred range
- 7% contribution rate from employees and the city contributes 22%
- The fund was providing COLA based off board policy, but the fund has not received the proper contributions
- They are on the FRSP address list; they have not triggered it, but they may by 2025
- The city has already worked on EMP reforms
- Plan on going through the legislative process in 2025 to memorialize the changes
- Board member- What are the normal cost percentages for the plan?
- Over 30% according to the 2022 evaluation
- Board member- Is the city able to hire firefighters to meet growth assumptions?
- The high contribution rate is certainly a concern; the low retention problems and great incentives help, but it is certainly still a problem
- In the past, the city has increased the contribution rate; she hopes for a similar contribution in the future
- Employee contribution increase can occur; the board has the option to lower the interest rate for members who have not entered the drop interest rate previously
- The employee contribution rate is 18%+; will they need to approach the legislature?
- The board has many holistic discussions to ensure it is caring for the fund properly
Item 7. Texas Local Fire Fighters Retirement Act (TLFFRA) governance project
Mariah Miller, FROMB
- TLFFRA have historically underperformed, but have shown recent improvements
- TLFFRA sponsor engagement has increased in recent years because of plans such as the FSRP; FSRPS are jointly developed to improve funding status of financially distressed systems
- There have been numerous research projects performed to study TLFFRA governance; these projects have provided numerous recommendations
- Agency organized a stakeholder work group
- Recommends requiring the sponsoring entity to first approve prior to members’ voting
- Recommends that the PRB be allowed to issue guidance for conducing member votes
- Recommends that the PRB create a CE course on successful system reforms
- High performing systems have good communication practices; sponsoring entities and membership should have access to all materials
- Board member- If all boards have mayoral representation, how are they having trouble obtaining these materials?
- Legislation should require the sponsoring entity to post these documents on their website
- Some of the statute language requires revision; the PRB should implement a process to collect, share, and regularly update example policies and other educational information
- The PRB will be reviewed throughout the year by the board to ensure its proper function
Item 8. Review of the PRB Pension Funding Guidelines and Guidance for Developing a Funding Policy
Mariah Miller, FROMB
- Focused on updating documents to reflect statutory changes and updated best policies
- Proposes adding FSRP updates, supporting intergenerational equity, and limiting the duration of negative amortization
- Projects that final guidance, guidelines, and an example policy will be available to be presented to the board by July
- Board member- What is the enforcement of these guidelines? How do we require these changes?
- They do not have an enforcements
- Board member- How are the plans helping now?
- Currently, they are reviewing the plan to ensure it is fully adherent to the funding policies
- Actuaries have remarked their clients have brought up the guidelines
- Board member- So, are there four funding plans we are not utilizing? Do we just report noncompliance to the legislature?
- We contact the companies and request they adhere to the plans, but we cannot force adherence
- There should be a goal concerning employee contributions; employee contribution should not exceed normal cost
- There should be a difference between those employees that receive social security and those who do not
- The sponsor and the governmental institute could adopt the same policy
- There is a plan to send out potential drafts to stakeholders sometime next week
- Some members receiving lump sums were not getting equal distribution of benefits
- To receive an overview of Texas lump sum practices, they requested and received the latest plan documents from each special purpose district plan, identified key plan provisions, and asked questions
- 12 out of 34 systems offer full out cash sum options at termination
- To convert a member’s monthly benefit into a lump sum, systems need a way to determine an equivalent benefit; they must consider the interest rate and the mortality table
- Interest rates for lump sums works like a mortgage
- Mortality tables for lump sums approximate higher life expectancies than in the past, generating higher lump sums
- Many systems have been using lump sums interest rates that are too high; the actuarial evaluations reveal the interest rates should be much lower
- Board member- Does the IRS give instructions for how to calculate the lump sum?
- Yes, it is updated every year by the IRS
- Board member- Is the state subject to the IRS?
- No, the state is not subject to any requirements
- Texas public pension systems do not require a comparison of other options compared to a lump sum, but some systems do disclose the possibility that the lump might be less than value
- Some systems require the spouse to be notified if they would not benefit from a plan after their spouse’s death
- Only 2 out of 12 systems are using the best practices for lump sums; they plan on sharing these results with respondents, reporting research findings, and drafting guidance to aid these systems
- Board members are very supportive of this system; this plan brings about necessary equitable change
- Board member- Do systems choose to provide lump sums? Do they have to?
- They are not required to offer lump sums; there are 100 Texas public pension systems; 34 offer any lump sum with one 12 offering complete lump sums
- Concerned that providing this guidance and new guidelines will provide such a financial impact they will no longer be able to provide lump sums; some people wish to take lump sum even if it is less than they are entitled to
- If they receive less than they are entitled to, an actuarial gain has been made at their expense