Tuesday, August 20, 2019

Austin should freeze police hiring until pension problem resolved

Since the local press has ignored the topic, let's delve a bit deeper into the pension crisis at the Austin Police Department. As Grits reported yesterday, an audit released in July found that the city will never cover its police pension liabilities at current contribution rates.

Bizarrely, in response to this news, some at city hall have claimed they need to hire MORE police officers with exorbitant pension promises so they can pay for the retiring officers. This argument fundamentally misunderstands how pensions work, imagining the fund as some sort of Ponzi scheme. It is not. Instead, employees and employers make contributions for each officer into a long-term investment fund. More officers, the greater the required contributions. Moreover, Austin officers contribute far less than the city. So every new officer increases the city's cost and liability substantially (they become 100% vested after just ten years).

The confusion perhaps is somewhat understandable. Social Security works that way: Money which people pay into Social Security today is directly used to cover benefits for current retirees. There's no long-term investment fund tied to individuals' contributions. Pension benefits, by contrast, are paid from the investment fund, not from current employee contributions.

I don't know who's spreading this misinformation at city hall, but hiring more officers when the city can't afford pension costs for the current ones amounts to dousing a fire by tossing kindling on top. Will Rogers' advice Grits quoted yesterday remains apropos: "When you find yourself in a hole, stop digging."

The largest cohort of former police officers receiving pension benefits are under 60 years old, with an average annual benefit of more than $70,000! By contrast, retired Austin officers in their 80s receive about $47k per year. (All this on top of social security, any military benefits, etc..)

At present, Austin has 345 former officers in their 50s drawing more than 70k per year in benefits each, and more are added to their number all the time. (Median income in this city is only $63k!*) So things are about to get very expensive, very quickly. It's not sustainable to add more officers until that problem is fixed.

Calendar year 2018 was when the Austin police pension went from a status of problematic-but-salvageable to essentially broken. Unfunded liabilities ballooned from $415.5 million to $671 million. Exacerbating the problem, the pension fund is carrying about $89 million in losses on its books that will eventually require a downward adjustment.

Those combined trends are why actuaries say APD's pension plan will never cover liabilities at current contribution levels.

And let me say it first: The city can't and shouldn't cover all of the shortfall. City Council should open the contract back up and adjust these lavish commitments downward, or else have police officers themselves contribute more.

One final thought: Grits suspects there's an untold story behind the $89 million in un-recognized losses that deserves additional scrutiny, assuming any local reporters ever discover the story. According to the table in this 2017 MarketWatch story, Austin's police pension fund had 40% of its investments in "non-traditional" asset classes, which is the category that got the Dallas police fund in trouble. Are those the investments that are going south?

Further, a few years ago, the Statesman ran a story about the fund investing in several projects brought to them by two board members who were marketing themselves as consultants to companies seeking pension investments. They disclosed the relationships and abstained from voting, but the board had no rules barring such conflicts of interest and board members defended the practice.

Between the fund making relatively large investments in non-traditional assets, board members out hawking themselves to potential investment clients, and $89 million in un-recognized losses sitting on the books, my Spidey-sense tells me there may be a significant story behind how the fund went from (ultimately) solvent to not in calendar-year 2018.

*Underlying link changed after publication, amount corrected upward from $55k to reflect most recent available Census Bureau data.


Anonymous said...

Austin officers do not get Social Security benefits from the city as you stated and even if they worked the requisite number of quarters over their life, any outside benefit is cut by the federal offset program. Otherwise, it's pension system is in a similar bind as most large cities across the country courtesy of market returns and city under funding of contractual benefits. The easiest thing to do would be for the city to simply comply with it's agreements and start paying in the actuarially needed amounts each year though at this point, expecting employees to accept some benefit cuts as Houston and Dallas have forced (multiple times at that) seems most likely.
But like all municipal spending, the total cost of any additional officers must be weighed against exactly what needs they are supposed to address. Are the extra officers desired due to perceived domestic terrorist threats as seen in El Paso and other places or are more cops being demanded on patrol by residents in fear of specific threats or are they for dog & pony shows that amount to public relations upgrades. As APD cops are the best compensated in the entire state of Texas, I'm surprised their qualifications are as low as they are but blanket hiring freezes are not the best way to address funding shortfalls, the city just needs to scrutinize how they currently prioritize manpower and make decisions from there.

Gritsforbreakfast said...

Thanks for the social security clarification.

Otherwise, we must agree to disagree. Austin made a bad deal and can't afford its pension system. Expanding the number of officers it covers without addressing that will exacerbate long-term problems. The benefit cuts you speak of should happen before, not after, the police force is expanded. The long-term cost difference is significant.

Otherwise, APD kept expanding its force even as crime has declined, so the idea that they need more officers to handle less crime is dubious at best. The better tack is to begin to offload some APD duties to other, less expensive social-service agencies, as has been suggested for mental health first response. That should be the city council's focus this budget cycle.

Anonymous said...

Grits, Austin PD expanded its force during a nationwide decline in crime because it expanded their responsibilities outside of previous norms. While I agree with you that it would make more sense to hire cheaper civilians to handle many of the tasks, I can't help but wonder how much the savings would really be? If someone who is mentally ill starts shooting up a location, those social service workers aren't going to handle the matter and the turnover for such positions is markedly higher. Still, Austin would likely do well to prioritize spending to suit what constituents want, just keep in mind that every large city in the country has pension funding problems left unaddressed.

Gritsforbreakfast said...

@12:44 I don't think you could name expanded responsibilities over the last 20 years in Austin that would justify the increased number of officers. More officers are handling less crime, is the crux of it.

Obviously, police would still be called to deal with shooters under the MH first-response proposal. If you're who I suspect you are, you know that.

Finally, savings is both short term and long term; less wages now, less pensions later. Over time, every little bit adds up. By the time they retire and those 30 officers are collecting pensions $22k+ higher than their elders, the difference matters quite a lot.

Anonymous said...

Grits, rather than single out officer hiring, the city of Austin should halt all hiring, including any for reforms, until they come up with a comprehensive plan to address all underfunded liabilities. Sure, they'll get more bang for the buck with officers but the liability problem goes well beyond just that group so I agree with you on stopping expansion of them but go further to suggest addressing the entire picture. Once a sensible plan is in place, if they want more classified officers and can afford them, they can discuss the merits independent of city finances for specific need.

Anonymous said...

"Grits, rather than single out officer hiring, the city of Austin should halt all hiring, including any for reforms, until they come up with a comprehensive plan to address all underfunded liabilities."

Translation: "Until I get what I want, nobody gets anything."

Thanks for reminding us that hostage-taking is the weapon of first resort for right-wing authoritarians.

Anonymous said...

2:58, if city finances are bad enough to prevent any hiring, they are bad enough to revisit in all areas to stabilize. By freezing reform measures, you force those councilmen to prioritize fixing things from the left while freezing hiring of public safety will bring the more conservative types to the table. If that amounts to hostage taking in your mind, please get help from a trained professional.

Gritsforbreakfast said...

"the liability problem goes well beyond just that group"

Not really, the police pension is in MUCH worse shape than firefighters and regular city employees. Police officer hiring and committing to more, excessive pension benefits are the issue.

Anonymous said...

The retirement funds response to this situation is classic misdirection. It's really all about their flawed investment strategy.

For 2018 the Vanguard Balanced Index fund lost 2.97%. This is MUCH better performance than the Police pension fund with significantly less risk. If it can't do better than that they should get out of the way and quit putting the system at risk by trying.

The fund will say "Wait. That's an aberration. We have to invest for the long term." This is true but it's still malarkey. Table C-7 in their annunual actuarial report proves this. The Police Pension fund had cumulative annual returns of 3.2% & 5.1% over the preceeding five & ten year periods compared to the Vanguard Balanced Index Fund (a proxy for a pension fund similar 60%/40% Stock/Bond allocation) cumulative annual returns of 5.9% & 9.6% over the same periods. For comparison the State of Texas Employee Retirement System returned 8.27% & 7.02 and the Texas Municipal Employee Retirement System returned 5.03% & 6.63% over the same periods..

To me, the real story is the failure of the fund board, or city, or whoever makes these decisions, to address this fact. Because it looks to me like the fund would be fully and completely funded (and then some) if it had come close to matching ANY of these alternatives. IMHO almost every story on this topic should include this. For example, for my three alternatives, the worst 10 year return was TMRS. Just matching its 6.63% ten year return would have resulted in 16.4% extra returns (1.5%/yr compounded) over the 10 year period. Which adds around $60MM - $90MM and is in EXCESS of what's needed to be fully funded.

Anonymous said...

According to the Austin Observer, APD lost $43.6 million in 2018 and AFD lost $44.6 million, the police fund "The Austin Police Department’s retirement system is in considerable trouble, with actuaries predicting that the fund will run out of money within 50 years". This sounds like the requirement slapped on the US Post Office to fully fund it's obligations for generations longer than anyone else is doing, there being plenty of time for course corrections.
Also notable is that the other city pension, the one that covers everyone else, had a loss of over $153 million per its report. So keep focusing one just one report all you like but the numbers are there for people to see, changes needed in all three systems, not just one.