Frequently Asked Questions About the 2019 Proposed Pension Changes
Updated Jan. 24, 2019
About the plan
1. What is a defined benefit plan?
A defined benefit plan promises a specified monthly benefit at retirement, traditionally for the lifetime of the retiree. The plan may state this promised benefit as an exact dollar amount, such as $100 per month at retirement. Or more commonly (and like the City of Fort Worth), it may calculate a benefit through a plan formula that considers such factors as salary and service. The City’s formula is: Average Wage x Multiplier x Years of Service. The chart below describes the average wage and multiplier depending on when the service credit was earned.
|Service before July 1, 2011||Hired on or After July 1, 2011||Service on or After Oct. 1, 2013 for those hired before July 1, 2011||Service before January 1, 2013||Hired on or After Jan. 1, 2013||Service on or After Oct. 1, 2013 for those hired before Jan. 1, 2013||Service before January 10, 2015||Service on or After January 10, 2015|
|Average wage||High 3 with Overtime||High 5 without Overtime||High 5||High 3 with Overtime||High 5 without Overtime||High 5 without Overtime||High 3 with Overtime||High 5 without Overtime|
The pension fund bears the risk of investment returns, improving life spans, assumptions about wage growth, etc.
In contrast, some cities have defined contribution plans that require contribution of a specific percentage of earnings by the employer and employee; however, the final monthly benefit depends on final total contribution, investment returns, and the employee’s age at retirement. The employee bears the risk of investment returns and other assumptions.
2. What are the concerns about the retirement fund?
You have probably read concerns about the Fort Worth pension’s “unfunded liability” that in some estimates may grow to more than $1.6 billion dollars. This means that the contributions that have been made to the fund, combined with anticipated investment returns, have not fully covered the cost of the benefits that are projected to already be owed. As a result, the City has an “unfunded liability” that we are paying over time, known as the “amortization period”, much like a mortgage on a house.
The City is constitutionally required to pay all benefits that have already been earned. As a result, the City Council must assess the risk of continuing the current benefit and contribution levels into the future, and the risk of not meeting assumptions, such as the long-term projected investment rate return. Either the City adopts changes locally, or the State will step in during the upcoming legislative session to impose their solution, which will likely include the practical elimination of the Cost of Living Adjustment (COLA). Without either of these measures, the fund will run out of money around 2040.
3. Is it necessary to pay off the unfunded liability?
Plans commonly consider a 30-year amortization period to be acceptable. This means that so long as you are projected to pay off the unfunded liability in 30 years, the plan is considered healthy.
4. Why have these changes occurred?
Throughout the 1990s when investment returns were good, a number of benefit increases were approved while contribution rates were decreased. (See chart below.) In a nutshell, benefits were increased by more than 50 percent in a seven year period, with many of the improvements being applied retroactively to existing employees.
|1990||2-2.5%||Decreased by 3% for City and 2% for employees||None|
|1993||2.5-2.7%||None||Police paid for "25 and out", giving them multiplier of 2.63%|
|1996||2.7-3%||Increased employee contributions and increases by the City, phased in over three years||"25 and out" changed to include 3.0 multiplier|
|1999||No change||Increase by employees||The "High 5" was changed to the "High 3" and codified 2% guaranteed COLA|
On Dec. 31, 1991, the Plan reported nearly full funding with $2 million of unfunded liabilities. The increases in unfunded liabilities since 1991 have largely been due to investment experience, the funding/contribution policy, and past benefit increases. The investment return assumption was increased from 7% to 8.25% in 1990. Investment returns below assumption (increased again in 1996 to 8.5%) and related reductions in the assumptions (reduced by 0.25% in 2011, 2013, and 2016) have resulted in over half the increase in reported unfunded liability.
5. What has the City done so far to address the issues?
The City has dramatically increased contributions and also reduced benefits for all employee groups. The actions already taken are outlined below.
6. What are the proposed changes and how could they affect me?
Information explaining the changes specific to your employee group is available on the main Pension page.
7. Does this solve the problem?
The goal is to amortize the unfunded liability over a 30-year period. The chart below assumes no investment returns in 2018 and that all assumptions are met thereafter. It is also anticipated that the full risk-adjustment features will kick in in 2022 and 2023 for a total contribution increase from the City and the employees of 4%, split on a 60/40 basis. It also depicts what is likely to happen as the Fund adopts lower, more realistic returns on investment this spring.
A rate of return as low as 7%, assuming the risk-sharing is implemented, is anticipated to put the Fund on a healthy trajectory. However, this is entirely contingent upon the accuracy of the assumptions that are made by the Fund regarding investments, wage growth, lifespans, etc.
8. Has the City considered moving to the Texas Municipal Retirement System (TMRS) plan?
The City explored the option of TMRS in 2010 and in 2016, and determined that it was not a viable option. TMRS required the participation of all City employees in the employee group, and also would cost the organization more than the plan’s cost for future service with our existing formula.
9. Has the City considered Social Security for new hires?
The City explored the option of Social Security in 2010 and 2016, and determined that even with reduced benefits, the City’s defined benefit plan was still a more financial feasible plan than social security.
10. Will the City consider a separate pension plan for sworn employees?
The City is not considering any options to split the plan. The City’s pension plan is a statutory plan. It would take an action by the Texas Legislature to split the plan.
11. When the State legislature stepped in and handled the pension solution in Dallas, what were the results?
A recent Roundup story addresses how the state Legislature dealt with the issues surrounding the Dallas Police and Fire Pension Fund.
Note: We are focusing on the Dallas Police and Fire Pension Fund, because its situation is most similar to what Fort Worth is facing, including constraints by the State Constitution regarding protection of accrued benefits. (In contrast to the City of Fort Worth, the Dallas General Employee Plan is not a statutory plan, so the state Legislature has no control over it to make any changes. That plan is also currently on more stable footing than the Police and Fire Plan.)
In 2016, the Dallas Police and Fire Pension Fund reported that it was on a path to run out of money soon. (General Employees are in a separate plan.) The Dallas fund reported a funded status of 36%.
Dallas had many provisions in the pension plan that made its plan vulnerable. For instance, Dallas allowed retirees to keep their DROP money in the fund and earn a guaranteed interest rate.
Dallas tried to solve its issues by asking members to vote on plan changes. The members voted them down. As a result, the plan went to the state Legislature, which implemented plan changes of its own instead.
What Dallas employees had before the changes, the changes that Dallas employees voted down, and the changes implemented by the Legislature are listed in this chart:
|Employee Contributions||8.5%||9% up to 12%||13.5%|
|City Contributions||27.5%||The City of Dallas did not agree to this plan, and would not commit to increase its contributions.||34.5% + $13 million/year for 7 years|
|Normal Retirement Age||50 for some employees, and 55 for others based on hire date||58 years old|
|Pension Formula||2.0% for years 1-20
2.5% for years 21-25
3.0% for years 26 until retirement
Average High 3 salary
|Members hired after certain date would get a 3% multiplier
Average High 5 salary
|COLA||4% Automatic COLA||Automatic COLA tied to the U.S. Treasury rate bond||Variable COLA (criteria means no COLA)|
12. Why do Group I General Employees have a higher contribution than Group II General Employees?
Group I General Employees have some years of Blue Service, which is calculated using the following equation: Average High 3 Years of Earnings x Years of Blue Service x 3% Multiplier. It also includes overtime pay.
This is a costlier benefit than the benefit that Group II members (only Orange Service) have, which is calculated using the following equation: Average High 5 Years of Earnings x Years of Orange Service x 2.5%. This does not include overtime pay.
Therefore, Group I members are being asked to contribute an additional 0.7% for a period of time that matches their years of Blue Service, or until they retire and separate from the organization - whichever comes first.
Example: If a Group I General Employee has five years of Blue service, they will contribute a grand total of 10.05% to the fund for five years. (This 10.05% is composed of the 8.25% contribution that all General Employees contribute now + 1.1% contribution as part of the proposed pension fix + 0.7% for their years of Blue Service.)
After paying the additional 0.7% for five years, that employee’s contribution will drop to a grand total of 9.35% for their remaining years at the city, or until they retire. (This 9.35% is composed of the 8.25% contribution that all General Employees contribute now + 1.1% contribution as part of the proposed pension fix).
If this same employee retires after three years, then their increased contribution will end when they retire.
Note: Increased contributions apply to any period that the employee may be in DROP – entering DROP does not release the obligation.
13. As part of the Risk Sharing Mechanism, am I voting to decrease the city’s contribution while my own higher contribution stays the same?
No. The Risk Sharing Mechanism provides the city with a way to automatically increase both city and employee contributions if the proposed pension changes don’t restore the health of the fund. When the Risk Sharing Mechanism kicks in, both city contributions and employee contributions will increase a maximum of 2 percent per year, for a maximum contribution of 4 percent over two or more years. (These increases will be split between the city and employees in a 60/40 ratio.)
But it’s important to note that these Risk Sharing increases are intended to be temporary. Once the unfunded liability is reduced and the fund becomes healthy - even if it is many years in the future - the City plans to reduce both its contributions and employees’ contributions back to the numbers proposed in the original plan: an additional 1.1% + 0.7% (for every year of Blue Service) for General Employees, an additional 3.8% for Fire, and an additional 3.8% (plus 0.6% for 25-And-Out) for Police.
However, just as state law requires an employee vote to increase employee pension contributions, it also requires an employee vote to approve any decrease or reduction to the City’s pension contribution. Therefore, when employees vote to approve the pension reform plan during this election, they’re also voting to give City Council the authority to unilaterally reduce the city’s contribution – and employee contributions as well – without having to hold a second employee vote to do it. That will enable Council to reduce everyone’s contributions back “to normal” without having to worry about getting the ever-important “half-plus-one” of employees to vote for it.
Another important point is that this doesn’t work both ways – if employee or City contributions need to be increased again following the Risk Sharing fix, then that plan will most definitely go before City Council and require another employee vote under current State law.
About the investment returns
14. Why is the City concerned about the assumed investment rate of return?
The Employees’ Retirement Fund and its Board oversee how the pension funds are invested in the stock market, bond market, etc. As part of this responsibility, they also set an investment rate of return assumption, meaning a projection of how much the fund will earn in the future. The City and member contributions, combined with the investment returns, result in the funds available to pay benefits. The Fund uses a 7.75% rate of return, which is down from 8.5% in the past.
As of November 2018, the most recent investment returns are:
|Market Value||MTD||QTD||CYTD||1 Year||3 Years||5 Years||10 Years||Since Inception||Inception|
|$2.2B||1.02%||1.93||-0.19%||0.68%||6.87%||5.52%||8.43%||8.49%||Sept. 1, 1983|
Investment returns are a critical component to the health of the fund because they provide a majority of the resources needed to pay benefits. While the Fund has exceeded the assumed rate of return as a whole since 198, the last ten years have been devastating. Every percent the fund doesn’t earn that it should is currently the equivalent of $22 million. The current year is projected to end flat at 0%, which is the equivalent of missing earnings of $170 million this year alone.
15. What is the City doing to fix investment returns?
The City’s Fund is considered a statutory plan, which means that the state Legislature has determined who administers the Plan and who controls the assets and investments. The State has given the responsibility of administering the Fund to the Board of the Employees’ Retirement Fund (ERF).
The State has determined how many members are on the Employees’ Retirement Fund Board, and how they get on the Board. The ERF Board has 13 members: 4 Active Employees (2 General Employees, 1 Police Officer and 1 Firefighter); 3 retirees (1 retired General Employee, 1 retired Police Officer, and 1 retired Firefighter); and 6 appointees (5 Council appointees and the Chief Financial Officer of the City of Fort Worth.)
The ERF Board is responsible for setting the assumptions and determining how to invest employees’ contributions. The City has used more conservative assumptions than the Fund uses in evaluating the Fund, so that we can more accurately assess what changes need to be made.
About the Cost of Living Adjustment (COLA)
16. What is an ad hoc COLA?
Prior to 2007, the City pension gave a 2% annual increase to all retirees. However, in 2007, the City offered the opportunity to members to change to an “ad hoc COLA.” In other words, rather than receiving a 2% annual increase automatically, the retirees who opted into the ad hoc COLA could get between 0% and 4% each year, depending on the Fund’s amortization period each year. The intent was to reduce the cost to the Fund for when the markets are down but allow employees to share in the reward when the markets are up. A little over 60% of our employees opted for the ad hoc COLA compared to the 2% simple COLA; employees hired between 2008 and 2011 (Generals), 2013 (Police) and 2015 (Fire) were automatically assigned to the ad hoc COLA. After those dates, there was no COLA for future hires.
17. Why did we allow people to switch back from the ad hoc COLA to a fixed simple COLA of 2%?
Adoption of the ad hoc COLA allowed the Fund to remove the future cost of the ad hoc COLA from the books. In other words, since the ad hoc COLA wasn’t guaranteed, accounting standards did not require us to record the expected cost of the ad hoc COLAs that were likely to be granted in the future. While this made the health of the fund look better, it also allowed us to avoid some of the hard facts about the affordability of our pension benefits.
In addition, the way the ad hoc COLA was structured, ad hoc COLAs were triggered by the “amortization period.” Unfortunately, as an unintended consequence, all of the steps taken by the City Council to contribute more to the Fund and to reduce benefits for future employees improved the amortization period and triggered an ad hoc COLA at the same time the fund lost significant value.
In order to resolve these challenges, the first step is to address the structural problem of the ad hoc COLA. We did this by returning to a fixed COLA that provides a realistic view of the future cost. Having a more realistic and consistent view of the liability allows the City to more effectively evaluate the affordability of benefits. At the same time, we eliminated the COLA for hires after certain dates as outlined in the table below.
18. Wasn’t a 2% fixed annual adjustment more expensive than the ad hoc COLA?
In short, yes, since the ad hoc was projected at the time of the last reforms to be 0% for at least 21 years without any changes. Those who currently remain on the ad hoc COLA are projected to never receive an adjustment. This is why the correction to the COLA issue was only appropriate in combination with the other benefit reductions to pay for it.
At the end of the day, however, the 2% fixed simple annual adjustment is predictable for the Fund, retirees and employees. It was preserved as the City’s effort to provide the best benefit it could afford. Unfortunately, the Fund continued to earn far less than its assumed rate of 7.75%.
19. What are the criteria for a variable COLA payout?
The variable COLA will pay out when the following conditions are met:
- The City’s actual contributions must be equal to or more than the Actuarially Determined Contribution for the last 2 years based on the market value of the Fund’s assets.
- Minimum 30 years closed amortization period, based on a reasonable rate of return assumption
- Full cost of the benefit must be funded.
20. Is the City eliminating the ad hoc COLA altogether?
No. Retirees and active employees who retire or enter DROP by January 1, 2021 and previously selected the ad hoc COLA will continue to be subject to the prior rules of the ad hoc COLA.
About Sick Leave and Major Medical Leave
21. How will the major medical leave (General Employees) or sick leave (Civil Service) be calculated when I retire?
Any unused major medical or sick leave accrued after July 20, 2019 will no longer be applied as service credit. Upon retirement, unused major medical or sick leave hours will be calculated and applied as service credit based on the salary formula when the Major Medical leave or Sick leave hours were earned.
- 1,040 hours (6 months) earned during Blue Service = ½ of one year x 3.0% x high 3
- 520 hours (3 months) earned during Orange Service = ¼ of one year x 2.5% x high 5
- 130 hours (1 month) earned after July 20, 2019 = 0
While the employee is still working, they will be allowed to use their post-July 20, 2019 service accrual first. Once exhausted, they will be required to use Blue before Orange.
22. In what order will my sick/major medical leave be used?
Major medical and sick leave will be divided into two major buckets: Old Leave (acquired through July 20, 2019, during Blue and Orange Service) and New Leave (acquired after July 20, 2019.)
If an employee needs to use their Major Medical/Sick Leave, it will come out of the New bucket first - i.e. the leave acquired after July 20, 2019. Once that leave is used, additional leave will come out of the Old bucket, with the leave acquired during Blue Service being used first, and the Orange Service leave being used last.
At retirement, only the unused Major Medical/Sick Leave in the Old Leave bucket will convert to service credit and be applied to your pension. Any unused Major Medical/Sick Leave in New Leave bucket will not be applied toward your pension.
About the Deferred Retirement Option Program (DROP) - Active Employees Only
23. I am currently in the DROP, how will these changes affect me when I retire?
As a current member in the DROP, you have already frozen your multiplier, salary formula, and years of service. The impact that these pension changes will have on you will include your higher contributions, and the elimination of service credit for any future major medical/sick leave that you will accumulate after July 20, 2019, before you actually separate from the City.
24. How will the COLA be calculated for me?
As a DROP member, you are eligible for your current ad hoc or 2% COLA retroactively for the period you are in DROP so long as you work at least two years and thereafter.
25. Will the DROP be eliminated?
Currently, the elimination of the DROP is not under consideration. In fact, the maximum DROP period will be increased from 5 years to 6 years if the contribution increases are successfully approved by the members.
About the vote
26. What do I do if I lose or don’t receive my ballot with my voter ID number on it?
Ballots should arrive at employees’ home addresses during the first week of February. If the first week of February passes and you still haven’t received your ballot, contact the Fort Worth Employees’ Retirement Fund at 817-632-8900.
27. What is the breakdown of employees who will be voting on the proposed pension plan?
This number will fluctuate depending on the number of employees working for the City when the election begins on Feb. 4. However, the following breakdown is accurate as of Aug. 15, 2018:
- General Employees
- Group I (Blue+Orange Service): 1,927 employees
- Group II (Orange Service only): 2,082 employees
- Police Officers
- Group III (Blue+Orange Service): 1,222 employees
- Group IV (Orange Service only): 488 employees
- Fire Fighters
- Group V (Blue+Orange Service): 802 employees
- Group VI (Orange Service only): 122 employees
- Pension Glossary and Frequently Used Terms
- Pension Frequently Asked Questions
- Fort Worth Employees' Retirement Fund - Financial Report Center
- History of the Fort Worth Retirement Fund - 1945 to Present
Pension Lunch and Learn
Contact your Human Relations Coordinator to request a Lunch & Learn presentation.
View a history of previous proposals and communications about earlier drafts of the pension solution.