Item 4- Draft Recommendation — original pdf

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. RECOMMENDATION TO COUNCIL Economic Prosperity Commission Recommendation Number: [YYYYMMDD-XXX]: Revision to Pensions and OPEB Benefits Recommendation Rationale: The Economic Prosperity Commission previously issued a recommendation regarding pensions. After further discussion among commission members and the receipt of additional information, the Commission determined it appropriate to revisit and refine its prior recommendation, including the addition and removal of provisions. Retirement pensions are of significant importance to the community. In light of questions raised by members of the public, the Commission believes clarification and refinement of its earlier recommendation are warranted. The purpose of this recommendation is to reduce risks to the City’s future budgets, thereby strengthening the City’s financial position as the guarantor of employee benefits and ensuring that the greatest possible share of public funds is directed toward benefit payments rather than interest costs. This document constitutes a recommendation only. It is not binding and does not establish or modify City policy in any way. It represents the advice of volunteer commissioners to the Austin City Council. Any action to adopt, modify, or reject these recommendations rests solely with the City Council. These recommendations were developed based on the information presented to the Commission. Because the members of the Commission are not all financial professionals, the Commission strongly advises that each recommendation be reviewed by qualified financial professionals before being implemented in law. As with any recommendation, legal counsel should be consulted to ensure the City of Austin has the lawful authority to implement any action it may choose to pursue. WHEREAS, City Council created the Economic Prosperity Commission to advise the council on matters related to job creation and the City of Austin is one of the largest employers in Austin and retirement benefits make up a large percentage of the compensation of City of Austin employees. WHEREAS, City Council created the Economic Prosperity Commission to advise the council on matters related to job creation and the financial health of the City of Austin’s government is a signal used by employers to decide where to create jobs. . WHEREAS, the City of Austin’s retirement liabilities are large and have grown over the last decade. Annual Comprehensive Financial Report (ACFR) for FY2025 on page 4 says “The deficit in governmental unrestricted net position is largely due to the net pension liability of $2.2 billion and other postemployment benefits (OPEB) liability of $771.7 million.”. While the absolute value of the net position is not inherently good or bad, the change is cause for concern. The ACFR from FY2015 says “The deficit in governmental unrestricted net position is largely due to the net pension liability of $844.1 million and other postemployment benefits payable of $484.9 million.” In a decade, retirement liabilities have increased by over $1.6 billion or over $1,600 per Austinite. WHEREAS, the Legacy Liability of all 3 pensions is expected to increase. The police pension’s increases until 2030, COAERS until 2031, and the firefighter’s until 2032. WHEREAS, the City of Austin currently plans to increase pension liabilities. The details of the Legacy Liability are found on Police Pension Annual Report 2024 page 94, COAERS Pension Annual Report 2024 page 90, and Firefighters Pension report 2024 page 97. The police pension’s Legacy Liability increases until 2030, COAERS’s until 2031, and the firefighter’s until 2032. WHEREAS, the City of Austin’s pension liability payments are large and will exist for decades. By 2028, the payments to reduce the Legacy Liability will exceed $190 million annually. Those payments will continue until 2051 for the police pension, until 2053 for COAERS, and until 2055 for the firefighters’. WHEREAS, the City of Austin has historically paid OPEB but no legal commitment and obligation exist nor has a dedicated fund been established to guarantee these benefits such as medical care WHEREAS, the Police pension annual report for 2024 lists 3 funds with the description matching Private Credit (“Actively managed private investment fund of private loan investments”). The COAERS annual report for 2024 says, “This allowed an expansion of the Fund's allowable investments to include private market assets such as Private Credit, Private Equity, and Private Real Assets.” WHEREAS, the asset of “Private Credit” has been covered by multiple news sources with troubling words like “panic” (Forbes, April 7th 2026), “afraid” (NPR, March 31st 2026), “worry” (Bloomberg, April 7th 2026) and others. WHEREAS, we acknowledge the excellent work to reduce OPEB liability by $1.9 billion as noted on the Austin ACFR FY2025, page 112. NOW, THEREFORE, BE IT RESOLVED that the Economic Prosperity Commission makes the following recommendations: 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. . 2. When negotiating contracts, City Council should be informed about the effect on the pension liabilities. 3. When pensions predict future wages to calculate liabilities, they should use the wages that the City has already contracted for. 4. Pension funds should report the external sources for their predicted investment return rates and other predictions. 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. 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. 7. Because pension calculations depend on assumptions and bad assumptions have caused 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. 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. 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. 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. Seconded By: Date of Approval: Motioned By: Vote: For: Against: Abstain: Off the dais: Absent: Attest: _____________________________________________ Glossary of Terms Appendix A: Glossary of Pension and Financial Terms Annual Comprehensive Financial Report (ACFR) A detailed yearly financial report issued by a government entity. It includes audited financial statements, long-term liabilities, revenues, expenses, and other financial data. Actuarial Assumptions Estimates made by actuaries about future events that affect pension costs, such as life expectancy, retirement age, salary growth, investment returns, and employee turnover. Asset . Anything owned that has financial value. In pensions, assets are investments used to pay future benefits. Contribution Corridor / Maximum Contribution Corridor A legal limit that sets how much employer or employee contribution rates can increase or decrease within a certain range. If funding falls outside the corridor, contribution rates may automatically increase. Defined Benefit Pension A retirement plan that promises a specific monthly benefit in retirement, usually based on salary and years of service. The employer bears the investment risk. Discount Rate The assumed rate of investment return used to calculate the present value of future pension obligations. A higher rate lowers reported liabilities; a lower rate increases them. Governmental Activities Net Position The difference between a government's total assets and total liabilities for its core governmental functions (Net Position = Assets – Liabilities). Unrestricted Net Position The portion of net position that is not legally restricted for specific uses and is available for general operations. A negative amount means long-term obligations exceed unrestricted assets. Legacy Liability Unfunded pension costs from past service that are being paid down over time. Liability A financial obligation or debt owed in the future. Liability Layer A specific year’s pension gain or loss that is tracked separately and amortized over a fixed time period. Marked to Market An accounting method where investments are valued at their current market price rather than an estimated value. Net Pension Liability The difference between total projected pension benefits owed and the value of pension plan assets. OPEB (Other Post-Employment Benefits) . Benefits provided to retirees other than pensions, most commonly retiree health insurance. Pay-As-You-Go A funding method where benefits are paid from current revenues instead of from a pre-funded investment account. Pension Liability The total projected amount needed to pay all promised pension benefits based on actuarial assumptions. Private Credit Loans made by private investment funds rather than traditional banks. These are not publicly traded and may be harder to value accurately. Private Equity Investments in privately held companies that are not publicly traded on stock markets. Private Real Assets Physical investments such as real estate or infrastructure held privately. Scenario Analysis A forecasting method that evaluates a small number of specific possible outcomes. Stochastic Analysis A modeling method that simulates thousands or millions of possible outcomes using probability distributions to estimate the likelihood of different financial results. Subsidy Financial assistance, often from the federal government, that reduces costs for participants or employers. Underfunded When a pension plan does not have enough assets to cover its projected future benefit obligations. Unfunded Liability The portion of pension or OPEB obligations that are not currently backed by assets. Volatility The degree to which investment returns fluctuate over time.