Once in danger of running out of funds, the pension plan for City of Fort Worth employees is now in good shape, and according to an informal report delivered on May 21 to the Fort Worth City Council, there is even more good news.
The report provided an update on the effect of benefit changes, along with actuarial assumption changes adopted by the Fort Worth Employee Employees’ Retirement Fund (FWERF) Board of Trustees (Board).
On Dec. 11, council approved an increase of employer’s contributions to retirement, made various changes to retirement benefits and called a special election for employees to vote on changes to their contributions. These actions were taken to eliminate the Unfunded Actuarially Accrued Liability (UAAL) – the difference between the actuarial values of assets owned by the plan and the total benefits due to be paid – and set a course for the FWERF to become financially sustainable.
The employee election was held in February, and the increase was approved. The Board also adopted changes to actuarial assumptions used to calculate the UAAL at its March meeting.
The Board commissioned an Actuarial Experience Study from their actuary firm Gabriel, Roeder, Smith and Company (GRS) covering the period 2016-2018. The Board then adopted new assumptions.
The net effect was a slight increase in UAAL from $1.67 billion to $2.11 billion. However, the study determined this unfunded liability will be eliminated in 44 years if all assumptions are achieved.
“This is good news for the city, the fund, employees and retirees,” said the city’s Interim Chief Financial Officer Kevin Gunn.
Economic Assumptions
*Decrease the price inflation assumption from 2.75% to 2.50.
*Decrease the nominal investment return assumption from 7.75% to 7.00.
*Set ultimate salary scale assumption of 3.25% and update service-based salary increase rates for each employee group consistent with actual experience and step schedules.
*Increase the assumed overtime pay for firefighters to 18% of base pay and increase the average earnings overtime load on blue service benefits for firefighters to 6%.
Mortality Assumptions
*Adopt healthy retiree mortality tables published in the Pub-2010 Public Retirement Plans Mortality Tables Report, separately applied for general employees and public safety personnel.
*Adopt disability retirement and employee mortality tables based on the appropriate Pub-2010 mortality table by employee group.
*Update termination rates and retirement rates consistent with FWERF member experience and future expectations.
*Every member who reaches normal retirement eligibility prior to age 65 is assumed to enter the Deferred Retirement Option Plan (DROP), leave active service in accordance with the assumed retirement rates, and participate in DROP for the maximum possible period upon departure from active service.
*Members who terminate with a vested benefit are assumed to choose the most valuable option available to them at the time of termination: withdrawal of contributions or deferred annuity employees’ retirement fund of the City of Fort Worth.
Actuarial Methods and Policies
*Modify actuarial cost method to base the normal cost rate on the benefits payable to each individual active member, generally referred to as Individual Entry Age Normal (IEAN), which will require the funding period and Actuarially Determined Employer Contribution (ADEC) rate to be determined based on an open group projection.
A summary of major study findings includes:
*The period to eliminate the UAAL is reduced to a closed, 44-year amortization when considering the risk-sharing contributions.
*Assumption changes are reasonable and appropriate, being based on actual experience and include a margin for conservatism.
*The city’s goal of funding unfunded liability over a closed 30-year period was adopted by the fund.
*Investment returns pose the greatest risk to achieving the funding goals.
*Results of the valuation indicate that the risk sharing contributions will be required in 2022 and 2023.
The Texas Pension Review Board (PRB) requires a funding soundness restoration plan when three consecutive annual actuarial valuations indicate that unfunded liabilities will not be funded within 40 years.
The restoration plan is required to achieve the 40-year target within 10 years of implementing a plan. The 44-year amortization period is expected to satisfy the minimum requirements but continued dialogue with the PRB will be required, city officials said.