The TMRS Advisory Committee on Benefit Design met on Wednesday, December 1 in Austin and the TMRS Board met on Thursday, December 2. Both meetings were open to the public at the new TMRS facility in Austin and I was able to attend both in person.
At the TMRS Advisory Committee on Benefit Design Meeting, TMRS Board Member and Chair of the Advisory Committee, Jesus Garza, along with TMRS Board Member and Vice-Chair, Bill Philibert, led a discussion of various benefit design-related topics. First, the discussion focused on Cost of Living Adjustments (COLA’s) as it relates to whether or not to make the retroactive “catch-up” feature optional when increasing or decreasing the amount of a COLA benefit. The “catch-up” feature stipulates that annuity increases are calculated as if the COLA had always been in effect since the retiree’s date of retirement. For a city that has never adopted a COLA or has turned it off, the catch-up cost can be prohibitive. This particular item has been a topic of conversation for some time now. Since our last Advisory Committee meeting, TMRS staff did some phone surveys on this topic:
- They talked to 10 cities that adopted an ad-hoc COLA in 2021 to ask why they did not adopt a repeating COLA. The retroactive feature was not cited; the cost of moving to a repeating COLA was the reason reported. Retroactive feature plays a role in the decision to maintain annual ad-hoc COLA because of need to “catch-up”. Six cities said if they didn’t have to “catch-up”, they might skip years or change their ad-hoc COLA percentage.
- They also talked to 10 larger cities that have repeating Updated Service Credits but no COLA, to isolate the cost of the COLA. Once again, the retroactive feature was not a factor. The overall cost of adopting a COLA was the reason cited. Many of these cities report that they would like to increase other TMRS benefits before adding COLA’s as budgets allow.
- Finally, TMRS surveyed all 409 active cities that do not have a COLA to ask them why they have not adopted one. Response rate was 16 percent. Again, the retroactive feature was not a factor; cost, lack of retirees and lack of interest were the main reasons for not adopting a COLA.
In conclusion and based on the survey results, the retroactive feature does not play a role in most cities’ decision-making on COLA’s. Cities that do not provide COLA’s generally do not have an interest in adopting them or do not have the budget to do so. Based on the research and the fact that very few cities overall show an interest in this, the Advisory Committee voted not to move forward with any additional discussion regarding the retroactive “catch-up” feature.
Also discussed were COLA percentage options. The current COLA design options include the 30 percent, 50 percent and 70 percent CPI-based structure for both repeating and ad-hoc COLA’s. In recent discussions, questions have come up asking how the current 30 percent, 50 percent, and 70 percent amounts were derived as well as whether or not additional percentage options be made available to member cities. Once again, TMRS staff did some email surveys on this topic:
- They surveyed the 66 active cities that have a 30 percent or 50 percent repeating COLA to ask why they have not adopted a 70 percent COLA. Response rate was 21 percent. Cities did not feel limited by the current COLA percentage options. Cost was the main reason why they have not increased their repeating COLA to 70 percent.
- They also surveyed the 399 active cities that have a 70 percent repeating COLA to ask if they had any interest in a 90 percent option. Response rate was 22 percent. Results indicated that there is support for adding a 90 percent repeating COLA option.
In conclusion and based on the survey results, cities have little interest in adding more COLA options below 70 percent but there is support to add a 90 percent repeating COLA option. The Advisory Committee voted to move forward with pursuing adding a 90 percent repeating COLA option. This of course will have to be approved by the TMRS Board and if approved, go through the legislative process.
Another benefit design topic discussed was the Retiree Supplemental Death Benefit (SDB). TMRS currently offers a Retiree Supplemental Death Benefit (SDB) of $7,500. SDB was originally $2,500; and was increased to $5,000 in 1994 and $7,500 in 2004. A total of 773 cities currently offer TMRS Retiree SDB. To provide retiree SDB, cities must also provide SDB for active Members. Many TMRS cities provide life insurance to their retirees in addition to or in place of the TMRS SDB. Once again, TMRS staff did some email surveys on this topic:
- They surveyed all 886 active cities to ask if they provide life insurance to retirees outside of TMRS and if they pay for it. Response rate of 224 (25 percent). Of the 224 cities responding, 73 cities (33 percent) reported they provide coverage. Of those 73 cities, 39 (53 percent) pay the retiree premiums.
- They surveyed the 113 cities not offering TMRS retiree SDB to ask why they don’t provide retiree SDB. Response rate of 25 (22 percent). The main reason was that the city already offers its own retiree coverage outside of TMRS.
- Finally, TMRS surveyed the 773 cities currently offering TMRS retiree SDB. Response rate of 20 percent. Responses indicated support for increasing the SDB to $10,000.
In conclusion, after lengthy discussion amongst the Advisory Committee, it was decided not to pursue increasing the SDB from $7,500 to $10,000. Some of the points raised in our discussion not to pursue included that the SDB is intended to assist in the costs of a death situation – not fully cover all costs. Also, the fact that funeral costs on the average are actually decreasing based on the fact that more people are choosing cremation – which costs far less than the current $7,500 provided. Finally, increasing the amount to $10,000 would add an additional 0.05 percent (on average) of payroll. While this amount would be minimal, members felt that this would be just another item to add to the current overall pension costs to cities.
Finally, the benefit design topic of Updated Service Credits (USC) and COLA’s was discussed. Currently, any USC is tied to a COLA. A city cannot do a COLA without doing an USC. Chair Jesus Garza brought this topic up to the Advisory Committee as a future discussion topic. There was discussion amongst the Advisory Committee to possibly remove the requirement to have an USC in order for a city to implement a COLA. In other words, “de-link” the two. The Advisory Committee was in agreement to analyze and research this topic in more depth in the near future.
At the TMRS Board Meeting, one of the first orders of business was to nominate and elect the TMRS Board Chair and Vice-Chair for 2022. Jesus Garza, current City Manager of the City of Victoria, will serve as Chair in 2022 and Bob Scott, current Asst. City Manager and CFO of the City of Carrollton, will serve as the Vice-Chair in 2022. Along with getting these positions in place, Board Committee appointments for 2022 were also decided. Budget and Compensation Committee: Chair – Bob Scott and Vice-Chair – Johnny Huizar (City Manager, City of Pleasanton); Audit Committee: Chair – Bill Philibert (Director of HR and Risk Mgt., City of Deer Park) and Vice-Chair – David Landis (City Manager, City of Perryton); and Advisory Committee on Benefit Design: Chair – Jesus Garza and Vice-Chair – Alani Alanis (Asst. City Manager, City of Pharr). Finally, appointments to the Advisory Committee on Benefit Design were recommended by TMRS staff and approved by the Board. In addition to me (Casey Srader) continuing to serve on this Committee representing GFOAT, along with Todd Simoneaux as alternate, the following appointments were made: Scott Leeton (City of Corpus Christi) will continue to represent the Combined Law Enforcement Associations of Texas (CLEAT); Mitch Landry will continue to represent the Texas Municipal Police Association (TMPA); and Cheree Bontrager (City of University Park) will represent the Texas Municipal Human Resources Association (TMHRA). In addition to Board and Committee appointments, the Board also decided that they would conduct six (6) regular board meetings in 2022 along with a board retreat. All board meeting dates will be determined in the near future. Also, all regularly scheduled board meetings will go back to a Thursday/Friday format.
TMRS Executive Director David Wescoe gave a report on some internal happenings, retirements, staff updates, etc. Specifically, he reported that TMRS just had its 900th participating city join – that being the City of Garrett. He also reported that TMRS received the Public Pension Coordinating Council Award again – making 18 years in a row! Finally, the move to the new location (The Grove) went remarkably smooth and downtime was kept to an absolute minimum. Also, Mr. Wescoe reported that hopefully, by the end of December, a new CIO will be named.
TMRS Director of Actuarial Services Leslie Hardy and Gabriel, Roder, Smith & Company (GRS) Representative Joe Newton gave the Board a report on Supplemental Death Benefit Fund Assumptions and 2023 Rates. They reported that during the first (9) months of 2021, active death benefit claims increased 166 percent as compared to the same period in 2020, and retiree death benefit claims increased 13 percent. Due to the increase, the Supplemental Death Benefits (SDB) Fund decreased by $6.7 million (from $12.6 million to $5.9 million). The SDB for active members is equal to their annual salary, and the retiree death benefit is $7,500. GRS recommended doubling the contribution rates for actives (2023 rates) and increasing the contribution rates for retirees by 10 percent. This includes removing the current small credit to active rates. Higher rates of mortality associated with the global pandemic may last longer than originally hoped. If this trend continues through the remainder of 2021 and into 2022, the Supplemental Death Benefits Fund will face a risk of asset depletion. Ms. Hardy will be coming back to the Board as part of the December 31, 2021 interest credit recommendation in March 2022 to recommend that the Board transfer money from the Interest Reserve Account into the General Reserves Account in case it is needed to cover any SDB Fund deficiencies. The recommendation will be based on updated information at that time and after all interest obligations have been met.
The Proposed 2022 TMRS Operating Budget was approved by the Board. The 2022 Operating Budget has an overall 9 percent decrease when compared to the 2021 Operating Budget due primarily to rental payments of the new facility lease. If not for the new facility lease amount, the 2022 Operating Budget would be flat. The 2022 Operating Budget totals $35.6 million and the Capital Expenditures Budget totals $1.4 million for a total 2022 Proposed Budget of $36.9 million. There will be a net increase of (8) FTE’s in the Member Services area at a cost of $789,000 and $2.7 million for rental payments on the new headquarter facility. The expected proceeds from the sale of the old TMRS building will help offset a significant amount of the new facility lease cost. An update on the Pension Administration System Modernization (PasMod) project was also given. A total of $10.5 million was authorized for the project. In 2022, $2.8 million is allocated for continuation of this project to complete the City Contribution System. Total PASMod Program budget savings are estimated at $5.8 million. The total 2021 Operating Budget was approved at $35,555,337. Finally, the Board approved a book entry only to transfer $33.1 million from the Interest Reserve Account to fund the 2022 Operating Budget.
The Board engaged in discussions on multiple topics including evaluations of all Board external consultants to determine the overall quality and value of services received. The Board also received the 3rd quarter Investment Compliance Report which showed compliance with the TMRS Investment Policy Statement. TMRS Investment staff gave the annual fixed income investment review. TMRS has made substantial progress towards its strategic fixed income objectives. Both the Core and the Non-Core Fixed Income portfolios have outperformed their benchmarks over the 3 and 5-year periods. In addition, the TMRS Board received an overview and gave approval of the projected 2022 Investment Pacing Plan.
Finally, it was reported that for the Quarter completed September 30, 2021, overall fund returns were 1.12 percent, net of fees. Year-to-date, overall fund returns are at 8.76 percent, net of fees. Total Fund value at the end of the 3rd Quarter was $36,423,407,051.
Casey Srader, TMRS Advisory Board Representative