New Report: Austin’s Public Pension Problems Put Booming City at Risk

Austin, Texas — The Laura and John Arnold Foundation (LJAF) today released a new report on the pension problems facing the city of Austin. The report, titled ​“A Boomtown at Risk: Austin’s Mounting Public Pension Debt” shows that the city has accrued nearly $1.8 billion in pension debt. As a result, pension payments have increased by at least $81 million in the last decade. Now facing growing budgetary pressure, the city does not have enough money to pay for about one third of the benefits workers have already earned.

In the brief, LJAF Vice President Josh McGee and LJAF Sustainable Public Finance Analyst Paulina S. Diaz Aguirre explain that despite the strong local economy, Austin’s pension debt has grown faster than government revenue during the last decade. The city has been forced to dedicate more and more of its budget to pension payments each year, leaving less money to invest in critical public services such as public safety and infrastructure.

“Austin is one of the fastest growing cities in the country, and the local government has been recognized for the work that it has done to come up with innovative solutions to tough problems,” McGee said. ​“But despite its strong economy, the city is facing several underlying issues that could compromise its financial security in the future — the most pressing of which is the public pension debt. Without reform, the city’s pension problems will get worse. However, there is still time for local leaders to implement reasonable changes that will improve the stability of the pension plans and protect the retirement security of public workers.”

The increase in Austin’s pension debt over the last decade is due in part to the fact that as the population grew, demand for public services increased and the city added more than 1,000 public employees between 2010 and 2015. As the cost of providing benefits rose, the city failed to keep up with contributions to the system — skipping nearly $170 million in payments to the Employees’ Retirement Plan, which is the city’s largest retirement plan, over eight years. At the same time, it suffered a series of investment shortfalls system wide, which compounded the effect of the missed contributions and led to a widening gap between assets and liabilities.

Despite the fact that the city is paying more and more into the plans each year, unfunded liabilities are continuing to rise. In fact, Austin spends more than half of its pension payments on debt — rather than benefits for public workers. Yet even these payments might not be sufficient to pay off the unfunded liabilities, and if the city earns less than expected on its investments, debt will rapidly rise.

The brief explains that the city must take immediate steps to pay down the unfunded liabilities in order to improve the stability of its pension plans. Local leaders in Austin should take note of the pension crisis that is unfolding in Dallas. Two years ago, Dallas’ pension system was in a similar position to the one that Austin is currently in. However, Dallas’ pension debt doubled to $4 billion and its funded ratio plummeted to 56 percent after the plan administrators made a series of reckless decisions that have pushed the city’s largest plan, the police and fire fund, to the brink of bankruptcy.

The situation in Dallas should provide a cautionary example of how quickly debt can spiral out of control. In the brief, McGee and Diaz Aguirre call on Austin’s leaders to make the changes necessary to ensure that the city is able to uphold its retirement promises to public workers. The authors present a number of recommendations that would help stabilize the system and address the plan’s underlying structural flaws, including: 

• Making adequate funding non-negotiable and committing to pay down current unfunded liabilities in 30 years or less;
• Establishing prudent and realistic funding and investment policies;
• Establishing local control of the pension fund in order to improve oversight and accountability; and
• Consider enrolling new workers in plans that are simpler and easier to manage, like Defined Contribution or Cash Balance plans.

McGee and his team have worked with more than 50 jurisdictions across the United States to help them analyze the true magnitude of their pension problems and develop solutions that are affordable, sustainable, and fair.

The report issued today is the second in a series of reports that LJAF is producing on the state of local pension plans under state control in Texas. The first report, titled ​“The Dallas Public Pension Crisis: A Warning for Cities Across Texas,” describes the pension crisis in that city. The remaining briefs in the series will be issued in the next several months.