Financial Audit & Pension Liability

Armstrong Backus presented the results of their audit of the City of San Angelo's financial statements to City Council.  Two items struck me.  One, the city's deficiencies in accounting for federal grants and two, a looming financial hammer from unfunded liabilities.

The city's inadequate handling of federal grants was its third strike in this arena, given it was an audit finding twice before.  The root cause cited was lack of knowledge of federal accounting requirements, which would normally point to greater support from the finance department.  Yet, this did not happen.  Auditors expressly pointed away from having finance take over federal grant accounting due to gross under staffing.  This would seem a great reason to add accounting support staff.  Instead the city will look to name/hire a grant administrator.

The problem arose from the city investing federal grant proceeds.  The feds don't like grant recipients making interest off their money.  This provided a chuckle given the city's sitting on $343,000 in federal ERRP money for over a year.

The auditor spoke of a $38 million unfunded liability from Texas Municipal Retirement System, the city's pension provider.  This liability will hit the city's balance sheet in 2015.  Councilman Hirschfeld spoke of other unfunded liabilities, like retiree health insurance.  Mayor New shared his concern regarding the expected rate of return for the city's two pension funds.  Under a low return environment, the city must pony up more to meet pension obligations.

The pension topic arose later in the agenda when council entertained the idea of re-instituting a 70% cost of living adjustment (COLA) so retirees could conceivably get a bump up in their pension checks.   When the city cut the pension benefit by decreasing the COLA from 70% to 50%, it effectively froze many retirees pension checks, some permanently.

Retired Police Chief Russell Smith spoke to the tremendous difficulties many retirees face as their pay was 40-50% below area and benchmark cities.  This low pay is the basis for their retirement benefit, meager for many at $500 or less per month.  Smith stated, "Not one good thing came out of that committee."  The city took away the pharmacy, decreased the COLA and raised dependent coverage 10 times what employees paid for health insurance.

The cost to return to a 70% COLA is projected at just over $1 million per year.    The city's current cost for the retirement benefit is $5.99 million.  It would rise to $7.02 million, an increase of 17.2%.  If the unfunded liability increased similarly, the $38 million would rise to .$44.6 million.

This City Council isn't interested in adding to unfunded liabilities.  Mayor New wants to explore investment returns, which could lead to riskier investments like private equity.  I expect another committee.  Will be a redux, one where nothing good comes to retirees?  It remains to be seen, whether benefits are raised or razed..