City of Austin Actuarial Analysis Based on the December 31, 2023 Actuarial Valuation.

 
ACTUARIAL EFFECTS
The bill would change the employer portion of the Austin Firefighters Retirement Fund (AFRF) financing from a fixed rate to an actuarially determined contribution (ADC) subject to a corridor calculated annually. Both AFRF and the City of Austin provided actuarial analyses, and according to those analyses, the funding period would decrease from infinite to 26 years. According to the actuarial review, the normal cost under the current plan is presented by AFRF as a range, since the AFRF actuary presented results assuming both a zero percent cost of living (COLA) assumption and a 0.5 percent COLA assumption. The zero percent assumption is consistent with a system with insufficient funding to pay ad hoc COLAs, while the 0.5 percent assumption is consistent with a system with projected sufficient funding to pay ad hoc COLAs. The city did not provide any scenarios with a COLA assumption for which to compare.

 
The actuarial review states under the current Pension Review Board (PRB) Pension Funding Guidelines, funding should be adequate to amortize the unfunded actuarial accrued liability (UAAL) over a period which should not exceed 30 years as of September 1, 2025, and not to exceed 15 years after September 1, 2040. Under state law, systems with funding periods over 30 years for too long are required to prepare a Funding Soundness Restoration Plan (FSRP) to make changes to the pension plan to put the system on a path to eventually achieve full funding.

Because 2022 and 2023 actuarial valuation reports showed funding periods above 30 years, AFRF will become subject to an FSRP if the December 31, 2024, funding period is also above 30 years. It is projected to be infinite if the current statute relating to AFRF is not changed.  Under the provisions of the bill, the funding period would be projected to decrease to 26 years as of December 31, 2024, meeting the PRB Pension Funding Guidelines as well as statutory funding requirements under Section 802.2015 of the Texas Government Code.

 
SYNOPSIS OF PROVISIONS
The bill would make significant changes to Article 6243e.1 of Vernon's Texas Civil Statutes updating the board, administration, and governance aspects of AFRF.  The bill would make changes so that AFRF would no longer be able to increase the benefit multiplier without approval from the city.  AFRF could only provide ad hoc COLAs over the next 30 years if funding is ahead of schedule at the time the COLA is issued. After 30 years, ad hoc COLAs would be permitted only if the system remained 100 percent funded.

 
The bill would create a second benefit tier (Group B) for new hires beginning January 1, 2026. Group B proposed by the bill would have reduced benefits compared to Group A, such as a lower benefit multiplier, no option for a retroactive deferred retirement option plan (DROP), and a lower DROP interest rate.  The bill would establish a statutory funding policy for AFRF, consisting of fixed contributions for employees and a variable contribution rate for the city. 

The city contribution rate would consist of a payment designed to amortize the UAAL as of December 31, 2024, the legacy liability, over a period of 25 years beginning January 1, 2026 and establish a minimum and maximum contribution rate corridor to fund future benefit accruals while preventing large swings in the city contribution associated with unanticipated gains and losses. The bill would also add statutory guidelines for updating actuarial assumptions including reconciliation steps for any potential assumption disagreements between AFRF and the city.

Additionally, the bill would make updates to the board composition. The mayor would no longer be a board member, replaced instead by a city council member designated by the mayor. The city treasurer would no longer be a board member, replaced instead by the chief financial officer or a person designated by the chief financial officer. There would be two additional board member positions appointed by the city council, both 5-year city residents with financial or pension experience, with one potentially having governmental finance experience.

 
FINDINGS AND CONCLUSIONS
The actuarial analysis notes AFRF's financial stability tests currently require that actuarial valuation results and projections for each of the next 10 years, reflecting any COLA to be granted, result in funded ratios exceeding 80 percent and no more than 25-year funding periods. Under current statutes and policies, the valuations use a zero percent future COLA assumption and would not expect a COLA payable in the next 20 years as it would not meet the financial stability test.  AFRF's actuarial liability under that zero percent COLA assumption may be understated if conditions change such that COLAs could be granted.

The actuarial review states that the employer contributions would be projected to increase by 7.19 percent under the bill according to the city and by 8.95 percent to 14.09 percent according to the system, depending on the COLA assumption used to calculate results under the current and proposed plans. In essence, the required contributions would increase due to becoming better funded to pay ad hoc COLAs allowed under the current plan when funding allows, and would decrease due to the proposed benefit changes.
 
METHODOLOGY AND STANDARDS
The AFRF analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the AFRF actuarial valuation for December 31, 2023.
 
According to the PRB actuary, the assumptions and methods are reasonable for the purpose of this analysis, except the mandatory use of a zero percent COLA assumption in the initial actuarial valuation. As the system's actuary points out, the PRB encouraged this system to include a COLA assumption when it was better funded. Now that the system is projected to become better funded again, it would make sense to assume a COLA will be paid at some point to better ensure accuracy of the liabilities.
 
The system's actuary made some reasonable additional assumptions related to retirement rates and DROP participation rates by age for new Group B participants. All actuarial projections have a degree of uncertainty because they are based on the probability of occurrence of future contingent events. Accordingly, actual results will be different from the results contained in the analysis to the extent actual future experience varies from the experience implied by the assumptions. This analysis is based on the assumption that no other legislative changes affecting the funding or benefits of AFRF will be adopted. It should be noted that when several proposals are adopted, the effect of each may be compounded, resulting in a cost that is greater (or less) than the sum of each proposal considered independently.
 
SOURCES
AFRF Actuarial Analysis by Elizabeth Wiley, FSA, EA, MAAA, FCA and Heath Merlak, FSA, EA, MAAA, FCA, Cheiron, March 31, 2025.
City of Austin Actuarial Analysis by Adam Reese, FSA, EA, MAAA, FCA, PRM, March 31, 2025.
Actuarial Review by David Fee, ASA, EA, Staff Actuary, Pension Review Board, April 17, 2025.
 
GLOSSARY
Actuarial Accrued Liability (AAL) - The current value of benefits attributed to past years.
Actuarial Value of Assets (AVA) - The value of assets used for the actuarial valuation. The AVA can be either the market value (MVA) or a smoothed value of assets.
Amortization Payments - The portion of the total contribution used to reduce the unfunded actuarial accrued liability (UAAL).
Amortization Period - The specified length of time used when calculating the amortization payment portion of an actuarially determined contribution, or as the time it would theoretically take to fully fund the UAAL or fully recognize a surplus. The State Pension Review Board recommends that funding be adequate to amortize the UAAL over a period which should not exceed 30 years as of September 1, 2025, and not to exceed 15 years after September 1, 2040.
Actuarial Cost Method - An actuarial cost method is a way to allocate pieces of a participant's total expected benefit to each year of their working career. In other words, it is a technique to determine how much of the present value of future benefits (PVFB) to assign to past service (AAL) vs. future service (present value of future normal costs, or PVFNC).
Funded Ratio (FR) - The ratio of actuarial assets to the actuarial accrued liabilities.
Market Value of Assets (MVA) - The fair market value of the system's assets.
Normal Cost (NC) - Computed differently under different actuarial cost methods, the normal cost generally represents the current value of benefits attributed to the present year. The employer normal cost equals the total normal cost of the plan reduced by employee contributions.
Present Value of Future Benefits (PVFB) - The current value of all benefits expected to be paid from the plan to current plan participants.
Present Value of Future Normal Costs (PVFNC) - The current value of benefits attributed to the present year and all future years (includes the normal cost as the first year).
Unfunded Actuarial Accrued Liability (UAAL) - The difference between the actuarial accrued liability and the actuarial value of assets; therefore, the UAAL is the amount that is still owed to the fund for past obligations.