Item 4- Companion Summary Document of Changes — original pdf

Backup

Companion Summary Document of changes for Commissioners Total Items Reviewed: 16 ● 🟢🟢 No Change: 3 ● 🔵🔵 Revised for Clarity or Scope: 5 ● 🟣🟣 Amendment Pending Vote: 3 ● 🔴🔴 Removed by Mutual Agreement: 6 ● 1 item added 1. November Recommendation: The City should establish a defined-contribution plan to pay for OPEB for all employees hired after the plan was created. This is a legal trust where a fixed percentage of wages should be put into the fund to pay for OPEB benefits during each employees’ retirement. 2. November Recommendation: The City should continue to explore the cheapest way to provide medical care to existing retirees. This includes studying Chicago’s plan to use the Affordable Care Act, known as ObamaCare, as a way to get medical coverage for retirees. April Recommendation: Items 1 and 2 from the November recommendation were consolidated and refined in the following April recommendation. The City of Austin should continue to explore the most cost effective way to administer the Other Post Employment Benefit (OPEB) plan and contractually guarantee high quality medical care to existing and new retirees. This provision is intended to allow the city to provide the same if not better level of medical care for retirees while utilizing cost sharing federal programs and subsidies to reduce city costs. This includes studying Chicago’s plan to use the Affordable Care Act, known as ObamaCare, as a way to get medical coverage for retirees. Rationale: Removes defined contribution plan (401k) provision. Separates the dedicated (Other Post Employment Benefits) OPEB fund into a separate recommendation, and removes that this plan funding should be from a fixed percentage of wages. Makes clear the intent of this policy. —---------------- 3. November Recommendation: The City Budget’s “Taxpayer Impact Statement” page should include the per-ratepayer change in the City’s “total governmental activities net position” for the previous year. April Recommendation AMENDMENT: This item is no longer a part of the resolution’s recommendation. It is an amendment and should it be voted by a majority of commissioners in favor, it will be included in the April recommendation. The april language reads as “To avoid similar problems in the future, the residents of Austin should be informed when the City is losing money and taxes will have to be increased in the future to pay it back. The amount per ratepayer should be included in the City Budget’s “Taxpayer Impact Statement” page. One potential way to calculate that the City is losing money is the change “total governmental activities net position” for the most recent year, but the City should explore better ways to calculate it.” —--------------------------- 4. November Recommendation: The pensions’ rules should be simulated under random expected conditions (for example, shuffled historical data) and varying assumptions. The output of those simulations should include the range of values for net pension liabilities in 2053. It should also include the range of employer contributions and the probability that the employer’s “maximum contribution rate” is exceeded at any point. The impulse response should be computed for a once-in-a-decade and a once-in-a- century loss. April Recommendation: The pension funds should be analyzed to estimate the probabilities of all possible future events. The technical term for this is “stochastic analysis.” So far, members of the Economic Prosperity Commission have only seen results from “scenario analysis”, which simulates a handful of specific possible futures. This is inadequate for planning by City staff and City employees. The laws for all 3 pensions include cutoff values (Firefighter’s 2024 report page 101: “maximum contribution corridor”, Police’s 2024 report page 116: “corridor maximum”, COAERS 2024 report page 82 “maximum contribution rate”). When these cutoff values are exceeded, two bad consequences written into the law might occur: employee contributions increase by up to 2% or the pension fund becomes underfunded. City employees and Austinites deserve to know the probability that these events occur. —--------------------------- 5. November Recommendation: If simulations show that there is a significant probability of exceeding the employer’s “maximum contribution rate”, City Council should work to specify what happens to each pension. April Recommendation: The pension funds should be analyzed to estimate the probabilities of all possible future events. The technical term for this is “stochastic analysis.” So far, members of the Economic Prosperity Commission have only seen results from “scenario analysis”, which simulates a handful of specific possible futures. This is inadequate for planning by City staff and City employees. The laws for all 3 pensions include cutoff values (Firefighter’s 2024 report page 101: “maximum contribution corridor”, Police’s 2024 report page 116: “corridor maximum”, COAERS 2024 report page 82 “maximum contribution rate”). When these cutoff values are exceeded, two bad consequences written into the law might occur: employee contributions increase by up to 2% or the pension fund becomes underfunded. City employees and Austinites deserve to know the probability that these events occur. —---------------------------- 6. November Recommendation: The City’s reports, such as the Budget and Annual Comprehensive Financial Report, should include a range of values for the pension liability based on the distribution of assumed returns, to remind readers that values are uncertain. The range of values should have appropriate context, such as the “likely ranges” of investment returns as calculated by Meketa. April Recommendation: The City’s reports should show more realistic ranges of how much the City might owe in the future for pensions. Right now, the City’s financial report only shows what happens if discount rates go up or down by 1%. But the discount rate is tied to stock returns and, in reality, the stock market can change much more than that. For example, experts at Meketa Investment Group predict that stock returns will vary by about 17% in a single year. If we use some basic assumptions (like half the money being in stocks and half in very safe investments), a more realistic range covering 95% of possible returns would be about plus or minus 4.45%, not just 1%. Because of this, the current estimates of pension debt (between $2.6 billion and $4.7 billion) are probably too narrow and don’t show the full picture. The City should include a wider, more realistic range in its reports so that elected officials—and the public—can better understand the possible risks without having to do complex calculations themselves. —---------------------------------- 7. November Recommendation: When negotiating contracts, City Council should be informed about the effect on the pension liabilities. April Recommendation: No changes —----------------------------------- 8. November Recommendation: Each pension fund should track the effects of mispredicted assumptions since the ADEC was implemented for the pension. Each pension should report the sum of increased liabilities since the ADEC was implemented that were caused by each class of prediction. The prediction classes are: investment returns, actuarial predictions (lifespans), employee behavior (quitting, etc.), and others. April Recommendation: Because pension calculations depend on assumptions and bad assumptions have cause problems in the past, each pension’s report should track the performance of each assumption. Assumptions include investment returns, actuarial predictions (lifespans), employee behavior (quitting, etc.), and others. Each pension report should also report the sum of increased liabilities due to each misprediction from each kind of assumption. The sum should start from when the most recent state law regulating the pension came into effect. —---------------------- 9. November Recommendation: Pension funds should report correlations with well- known risks that cross multiple investments. These are risks like inflation, interest rates, S&P 500, VIX, individual currencies, oil, and geographic proximity. The City should also measure these correlations with its other assets and incomes, such as sales tax. April Recommendation: This provision has been removed by mutual agreement of Commissioner Nahas and Chair Gonzales —-------------------- 10. November Recommendation: Once each decade, the City of Austin should adjust the pension retirement ages, to account for longer lifespans. This may need to be a recommendation to the state legislature to adjust the appropriate state laws. • When pensions predict future wages to calculate liabilities, they should use the wages that the City has already contracted for. April Recommendation: This is an amendment to be voted on by the commission on whether or not it should be included. The language reads as “Once each decade, the City of Austin should adjust pension retirement ages for new employees. Medicine keeps making advances and life spans get longer. This predictably increases the cost of benefits, which last as long as the employee lives. This known effect should be accounted for on a regular basis. Once a decade, the City should evaluate data on lifespans and adjust retirement ages for new employees to keep the ratio of benefits costs to wages stable.” —--------------------------- 11. November Recommendation: The City voluntarily pay-off pension liability layers with losses over a 7 year period, instead of a 20 year period. • The City voluntarily pay-off pensions’ legacy liability faster than is required, in order to get more from our investments and lower residents’ taxes. April Recommendation: This is an amendment to be voted on by the commission on whether or not it should be included. The City should voluntarily pay-off pension “liability layers” with losses faster than the required 20-year period . After a loss, the investment fund makes less in interest that must be made up by taxpayers. A $100 shortfall in a fund that earns a 6.75% return on investments when paid off over 20 years results in $50 of missing investment returns. That $50 must be made up by taxpayers. Corporate pensions pay-off shortfalls over 7 years, which result in just $22 of missing investment returns. By voluntarily paying off most liability layers quickly, the City will significantly lower the burden on tax payers and, in a crisis like the Great Recession of 2008, can choose to spread exceptionally large losses over 20 years. —---------------------------------- 12. November Recommendation: Explore replacing the defined-benefit pension plans with defined-contribution plans. April Recommendation: This provision has been removed by mutual agreement of Commissioner Nahas and Chair Gonzales —---------------------------- 13. November Recommendation: Base pension benefits on career average pay, rather than on the highest salary earned. April Recommendation: This provision has been removed with mutual agreement of Commissioner Nahas and Chair Gonzales —---------------------------- 14. November Recommendation: Request that the Government Accounting Standards Board (GASB) require a prudent, financially conservative discount rate and use it for the liabilities used to calculate the City’s total governmental activities net position. April Recommendation: This provision has been removed with mutual agreement of Commissioner Nahas and Chair Gonzales. Another provision has been included that covers broader range of discount rates in financial reporting. —------------------------- 15. November Recommendation: Pension funds should report the external sources for their predicted investment return rates and other predictions. April Recommendation: No changes to this provision. —------------------------------ 16. November Recommendation: Pension funds should all use the same predictions of inflation rate, predicted return rates for asset classes, etc. April Recommendation: Removed —---------------------------- Full List of April Provisions 1. The City of Austin should continue to explore the most cost effective way to administer the Other Post Employment Benefit (OPEB) plan and contractually guarantee high quality medical care to existing and new retirees. This provision is intended to allow the city to provide the same if not better level of medical care for retirees while utilizing cost sharing federal programs and subsidies to reduce city costs. This includes studying Chicago’s plan to use the Affordable Care Act, known as ObamaCare, as a way to get medical coverage for retirees. Status: Clarified Refined 2. When negotiating contracts, City Council should be informed about the effect on the pension liabilities. Status: No change 3. When pensions predict future wages to calculate liabilities, they should use the wages that the City has already contracted for. Status: No change 4. Pension funds should report the external sources for their predicted investment return rates and other predictions. Status: No change 5. The City’s reports should show more realistic ranges of how much the City might owe in the future for pensions. Right now, the City’s financial report only shows what happens if discount rates go up or down by 1%. But the discount rate is tied to stock returns and, in reality, the stock market can change much more than that. For example, experts at Meketa Investment Group predict that stock returns will vary by about 17% in a single year. If we use some basic assumptions (like half the money being in stocks and half in very safe investments), a more realistic range covering 95% of possible returns would be about plus or minus 4.45%, not just 1%. Because of this, the current estimates of pension debt (between $2.6 billion and $4.7 billion) are probably too narrow and don’t show the full picture. The City should include a wider, more realistic range in its reports so that elected officials—and the public—can better understand the possible risks without having to do complex calculations themselves. Status: Clarified/Refined 6. The City should voluntarily pay-off pensions’ Legacy Liability faster than is required, when possible, in order to reduce large interest payments, get more from our investments and lower residents’ taxes, while preserving ability to meet community needs. Status: Amendment 7. Because pension calculations depend on assumptions and bad assumptions have cause problems in the past, each pension’s report should track the performance of each assumption. Assumptions include investment returns, actuarial predictions (lifespans), employee behavior (quitting, etc.), and others. Each pension report should also report the sum of increased liabilities due to each misprediction from each kind of assumption. The sum should start from when the most recent state law regulating the pension came into effect. Status: Clarified/Refined 8. The City should establish a plan to pay for OPEB for all employees hired after the plan was created. The plan should prohibit any persistent, and chronic underfunding. The plan should designed to minimize the risks to the City’s future budgets, so that existing employees benefit by having a more financially sound City pay for their OPEB on the existing pay-as-you-go basis. By gradually increasing funding of OPEB, this process will avoid shocks to the City’s budget. Status: Clarified/Refined 9. The pension funds should be analyzed to estimate the probabilities of all possible future events. The technical term for this is “stochastic analysis.” So far, members of the Economic Prosperity Commission have only seen results from “scenario analysis”, which simulates a handful of specific possible futures. This is inadequate for planning by City staff and City employees. The laws for all 3 pensions include cutoff values (Firefighter’s 2024 report page 101: “maximum contribution corridor”, Police’s 2024 report page 116: “corridor maximum”, COAERS 2024 report page 82 “maximum contribution rate”). When these cutoff values are exceeded, two bad consequences written into the law might occur: employee contributions increase by up to 2% or the pension fund becomes underfunded. City employees and Austinites deserve to know the probability that these events occur. Status: Clarified 10. The City’s pensions should not invest in Private Credit. City staff and the people should always know the City’s financial position. This means that the City’s pensions funds should mostly invest in assets that can be priced accurately, which is known as “marked to market”. For other investments, they should only be in assets with a long history so that performance is known. Private credit is not marked to market and it does not have a long history and, thus, it should not be invested in. Status: Added Proposed Amendments 1. To avoid similar problems in the future, the residents of Austin should be informed when the City is losing money and taxes will have to be increased in the future to pay it back. The amount per ratepayer should be included in the City Budget’s “Taxpayer Impact Statement” page. One potential way to calculate that the City is losing money is the change “total governmental activities net position” for the most recent year, but the City should explore better ways to calculate it. 2. Once each decade, the City of Austin should adjust pension retirement ages for new employees. Medicine keeps making advances and life spans get longer. This predictably increases the cost of benefits, which last as long as the employee lives. This known effect should be accounted for on a regular basis. Once a decade, the City should evaluate data on lifespans and adjust retirement ages for new employees to keep the ratio of benefits costs to wages stable. 3. The City should voluntarily pay-off pension “liability layers” with losses faster than the required 20-year period. After a loss, the investment fund makes less in interest that must be made up by taxpayers. A $100 shortfall in a fund that earns a 6.75% return on investments when paid off over 20 years results in $50 of missing investment returns. That $50 must be made up by taxpayers. Corporate pensions pay-off shortfalls over 7 years, which result in just $22 of missing investment returns. By voluntarily paying off most liability layers quickly, the City will significantly lower the burden on tax payers and, in a crisis like the Great Recession of 2008, can choose to spread exceptionally large losses over 20 years.