Georgetown uses the Texas Municipal Retirement System(TMRS) as the vehicle for funding the retirement of city employees. This system is known as a defined benefit system as the benefits are payed to retirees based on their length of employment and highest annual base salary. The contributions to TMRS are invested in stocks, bonds and other financial instruments so that the funds grow enough to be able to pay the promised retirement. The growth and size of the fund is not a consideration when the retirement payments are payed out to the retirees. That is why it is called a defined benefit retirement plan.
If the retirement funds managed by TMRS do not grow sufficiently, the plan is said to have an unfunded pension liability. In the event the funds are exhausted, then the city will have to raise taxes or divert spending from other functions to make up the shortfall.
Every year TMRS calculates the unfunded liability based on expected growth of the funds, payout rates, number of expected retirees and other factors.
The TMRS Actuarial Valuation as of December 31, 2014 provides the following information.
Actuarial Accrued Liability $104,163,491
Actuarial Value of assets 86,743,754
Unfunded Liability $17,419,737
Funded Ratio 83.3%
Within the public sector retirement plan community, a funded ratio of 80% or better is considered "golden". Georgetown reports that its funding ratio of 83.3% is 4th best among of a community of peers.
An over-riding factor in determining the unfunded liability is the growth of the funds deposited by the city. TMRS assumes an investment return, system-wide, of 7%, net of all investment and administrative expenses.
A net investment return of 7%, especially after taxes would be truly fantastic! It is highly unlikely that TMRS will achieve such a return in the future without investing in high-risk and speculative financial instruments.
Using a more realistic growth rate of 5%, which can be achieved by investing in selected Texas school bonds, the unfunded liability is approximately:
Unfunded Liability $46,000,000
Funded Ratio 65.4%
Using the most conservative risk-free rate accorded by the US Treasury of approximately 3% for a 15 year bond, the unfunded liability for Georgetown becomes:
Unfunded Liability $171,000,000
Funded Ratio 50.1%
Thus it can be seen that the unfunded liability and funded ratio can be significantly manipulated to show favorable results. At the risk-free rate of return of 3%, the unfunded liability is 10 times higher than the TMRS assumed rate of 7%.
The city staff, councilpersons, and the citizens need to be aware of the real potential pension liabilities facing them in the future as the city and city staff grows.
Do not be complacent about this hidden liability that threatens the future of all our local communities!
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