CSHB 2829 addresses three new significant revisions for the Austin Firefighters Relief and Retirement Fund (Article 6243e.1, Vernon’s Texas Civil Statutes).  The provisions of the bill, to be effective September 1, 2009, include the following:

1. Providing additional flexibility for the Board of the Fund (the Board) in the granting of a cost-of-living-adjustment (COLA) for retirees 
2. Incorporating a prudent investor standard with respect to the investment of plan assets 
3. Providing a requirement that the Board adopt an investment policy

The prudent investor standard replaces a specific enumeration of acceptable investments.  Properly managed, increasing investment opportunities could reduce risk through diversification and increase returns.  However, there is also a chance that new investment opportunities will increase risk without much additional return.  The recent economic tightening has illustrated that many investment opportunities presented as diversification did not really provide diversity as much as just additional variance.

The current law regarding COLAs is found in Section 9.04 of Article 6243.1 of Vernon’s Texas Civil Statutes.  Under current law, contingent upon the actuarial soundness of the contributions to the Fund, retirees shall receive annual increases of at least 1% per year. Members receiving an early retirement pension cannot receive a post-retirement adjustment until the member would have met the requirements of a normal service retirement benefit.  The bill would amend Section 9.04 related to the COLAs and add Subsections (a-1), (a-2), (a-3), (a-4), and (b-1).  The proposed Section 9.04(b-1) states that in determining whether an adjustment would impair the financial stability of the fund under Subsection (b) of this section, the board’s actuary shall take into consideration the cost of future adjustments under this section.  If a full COLA cannot be granted by failing to pass the requirements under Subsection (b-1), then an adjustment could be made to reduce any proposed COLA.   Subsection (a-2) describes making an adjustment to reduce the COLA to be less than the full increase in the Consumer Price index (CPI).  Subsection (a-3) allows for the COLA to be for a partial year of an increase in the CPI.  Subsection (a-4) states for the purposes of the adjustment under Subsection (a-2), the board’s actuary shall not take into consideration the cost of future adjustments under this section.  The reduced COLA calculated would then be tested again under Subsection (b-1), which requires the actuary to consider future adjustments.  The bill tightens up the COLA language and adds flexibility for the board to grant a partial COLA if a full COLA is not affordable.

The bill, if enacted, should not have a significant actuarial effect because it does not directly propose to change the funding or obligations of any public retirement system.  The changes to the mechanism for computing COLAs could provide either actuarial gains or losses, depending on how they are implemented.  The changes appear most likely to produce actuarial gains due to the inclusion of future COLAs in the calculation of financial stability.  The standard used by the plan- that a COLA does not impair the financial stability of the fund- could fall short of requiring that a COLA would not cause the fund to become actuarially unsound.  This bill would not change that standard.

SOURCES: 

Actuarial Analysis by Richard A. Mackesey, Actuary, Buck Consultants, March 23, 2009

Actuarial Review by Martin McCaulay, Deputy Executive Director/Actuary, Pension Review Board, March 23, 2009