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Independent audits find pension assumptions reasonable; recommend more public DROP disclosure and longer-term monitoring
Summary
An independent actuarial audit of Houston’s three pension systems found the valuation assumptions and methods reasonable and consistent with actuarial standards but recommended monitoring retirement patterns for newer hires and publishing aggregated DROP account data; council will consider adopting the audits and filing them with the Texas Pension Review Board.
Finance Director Melissa Dubasky and the city’s contracted actuary, Definity LLC, presented independent actuarial audits of the city’s three pension systems and reported the methods and assumptions used in the valuation studies were reasonable and in line with generally accepted actuarial standards.
Dubasky said Definity conducted an independent replication of valuation results using confidential census and plan data and that the audits reviewed the Houston Firefighters Relief and Retirement Fund, the Houston Police Officers Pension System and the Houston Municipal Employees Pension System. "The assumptions and the methods that were used in the evaluation reports were reasonable and consistent with the generally accepted actuarial standards of practice," the presenter said.
The audits did identify two recurring themes. First, auditors recommended ongoing monitoring of retirement-pattern assumptions for groups that were restructured by pension reforms—specifically hires after 06/30/2017 for firefighters, hires after 10/09/2004 for police officers, and hires after 2008 for municipal employees—because those cohorts are not yet fully retirement-eligible and actual behavior may differ from assumptions over time. Second, the auditors recommended increased public-facing disclosure of DROP (Deferred Retirement Option Plan) balances in an aggregated form (for age-service grid cells with at least 20 members) so the public can better understand DROP liabilities without exposing individual data.
Council members asked for clarification about how DROP changed after 2017. Definity and Dubasky explained that DROP eligibility was narrowed by reform and that DROP interest-crediting rules changed: the interest credit for DROP accounts is now limited to 65% of the five-year average of plan returns (reducing guaranteed credits compared with the pre-reform structure), and COLA adjustments no longer accrue to DROP accounts until after a member actually retires.
Funding ratios reported in the presentation improved under the audited valuations: Dubasky and council members cited improved funding measures for the systems presented at the meeting; the finance director said the improvements reflected a combination of pension reform, higher investment returns in recent years and significant city contributions. The committee was told the three actuarial audits will be placed on the council agenda for adoption and subsequent filing with the Texas Pension Review Board.
The committee received the presentation and staff committed to provide additional detail and follow-up materials; no committee-level vote was recorded at this meeting.
