Plan Sustainability

As of the 2022 Actuarial Valuation, the Fund’s amortization period, which is the amount of time required to pay off any unfunded liability (like paying off a credit card debt), increased from 17.7 years to 35.6 years. The funded ratio, which is the amount of assets available to pay off the liability, remained strong at 86.9%. Therefore, the Fund is not in a crisis. However, the Fund's actuaries have projected that the plan would start facing funding issues in the near future unless changes are considered and implemented to help maintain the long-term financial health of the plan.

The increase in the amortization period was primarily due to two factors. First, struggling financial markets led to a poor investment return of -10.8% for the Fund in 2022, which caused the plan’s asset value to drop from $1.3 billion to $1.1 billion. Second, the Fund’s new actuary, Cheiron, recommended updating and tightening some of the actuarial methods and assumptions to reflect plan costs more accurately and to better situate the Fund for long-term funding stability. The Board approved those changes. Cheiron has since performed an actuarial experience study to ensure that the Board has a solid starting point for understanding and evaluating plan costs moving forward.

The Funding Soundness Restoration Plan is a requirement under state law that is monitored by the Texas Pension Review Board, the State’s oversight entity that helps to ensure the financial soundness of all public pension systems in Texas.

A retirement system triggers the FSRP requirement if they receive three consecutive actuarial valuations with amortization periods exceeding 30 years. If a retirement system becomes subject to the FSRP requirement, they are required under the law to work with their plan sponsor to develop and jointly adopt a corrective action plan to address the long-term funding health of their system.

AFRF has not triggered the requirement yet. So far, the Fund has received only one such valuation with an amortization period of 35.6 years. However, the PRB placed AFRF along with four other retirement systems on their watchlist for being “at-risk.” The Board was presented with the option to either take no action until the requirement is triggered, which is projected to happen in 2025, or to consider a proactive Voluntary FSRP. The development of a Voluntary FSRP is viewed favorably by the PRB and would enable state law to allow some concessions for the Fund down the road, if needed.

The City of Austin is a key stakeholder as contemplated in state law and by the Texas Pension Review Board. The FSRP “At-Risk” notice from the PRB informed the AFRF Board that if the amortization period remains above 30 years for two more consecutive valuation cycles, the Fund along with its plan sponsor, the City of Austin, would have to jointly develop a corrective action plan to lower the amortization period below 30 years. The Board decided to develop a Voluntary FSRP in advance of triggering the requirement and the Working Group is now engaged in formal negotiations with the City of Austin regarding the draft proposal for a pension reform package. 

Over the course of next few months, the Working Group will continue to engage with the membership and the City to develop a solution to maintain the long-term financial health of the Fund, while honoring its core mandate to provide benefit security to current and future members. The Board aims to file a Voluntary FSRP/pension reform bill for AFRF by the early bill filing deadline in November 2024. If the Board is able to meet that deadline, the bill would go through the legislative process during the 2025 session with a targeted implementation date of January 2026.

The FSRP requirements state that the amortization period should not exceed 30 years. Under the current fixed rate contribution structure, to achieve a 30-year amortization period, the City’s contribution rate would have to go up to 23.92% effective with the 12/31/2023 actuarial valuation (to meet the FSRP requirement at the valuation date) and then to 28.92% by 12/31/2026. The contribution rate increase can be explained as follows:

Without significant asset returns of over 7.3% over the next couple of years, and as the remaining difference in the smoothed actuarial value of assets and the market value of assets are recognized, the City's ongoing contribution commitment is expected to need to continue to increase further with each valuation through the 12/31/2026 actuarial valuation when the 2022 asset loss will be fully recognized in the actuarial value of assets. If other losses emerge, such as actual investments being less than the 7.3% assumed or demographic experience resulting in increased liabilities compared to the assumptions, the City's ongoing contribution commitment would have to be increased further to ensure an amortization period that does not exceed 30 years. Note that changing the funding arrangement could include increasing the member rate, in part or in whole, instead of the City's rate. However, due to the liability impact related to the refund of contributions with terminations, the equivalent increase for the members will be slightly higher than that calculated assuming that the City is paying the additional contribution. As outlined by the PRB, this type of fix would be more of a band-aid than a long-term solution. The Fund had tried this back in 2003 and then again 2011-2016.

Additionally, considering the increasing fund costs and the potential for an amortization period near 30 years, we could find ourselves in a precarious situation, especially if we grant a COLA under our current ad hoc COLA structure, in the near future. Therefore, we must consider targeting a lower minimum amortization period, which would require even higher increases in the funding arrangement. A 25-year amortization period, for example, would necessitate the contributions to increase to 25.01% of pay beginning with the 12/31/2023 actuarial valuation. And that is with continuing to assume that all future COLAs are 0%. Similar to the 30-year amortization period case, once the 2022 asset loss is fully recognized, it is projected that the increase in the funding arrangement would need to increase further, by another 5% of pay, plus further adjustments based on any other experience gains and losses that emerge to ensure that the amortization period continues not to exceed a 25-year amortization period.

The actuarially determined employer contribution model (ADEC), which the City has expressed would be considered for AFRF as well, offers a more permanent solution to ensuring AFRF does not trigger an FSRP. It would carve out the legacy liability to be paid off on a closed 30-year basis (like a fixed 30-year mortgage). Moving forward, under this ADEC model, the City's contribution rate would also adjust to address any future gains and losses, subject to the specifics of the adopted funding policy.

The Austin Monitor article published on May 14, 2024, contained information that was discussed at the City Council’s Audit and Finance Committee meeting held on May 10, 2024. The information shared at the meeting lacked context, was misleading, and only provided the City of Austin’s perspective without inclusion of any input from the Working Group trustees or the pension office. The Austin Monitor has since amended their article to reflect the clarification provided by AFRF. Please see the attached letter for further information.

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