I hope that you enjoyed your Holiday break. As promised in my last communication, today I will discuss the Actuarial Determined Contribution (ADC) and Normal Cost. Article XVI Section 67(a) (1) of the Texas Constitution states: “Financing of benefits must be based on sound actuarial principles. The assets of a system are held in trust for the benefit of members and may not be diverted.” In order to satisfy this requirement, each benefit enumerated in a retirement plan must be calculated into the “ADC” in order to ensure there will be sufficient funding when retirees start collecting their retirements. This is done by calculating the “Normal Cost” of benefits. The Reason Foundation defines Normal Cost “as the actuarially determined amount that needs to be contributed to the pension fund today for it to grow over time and be enough to pay out benefits in the future.” In the case of DPFP, members’ contributions pay a portion of the Normal Cost and the plan sponsor (City) pays an additional amount as part of the ADC. These contributions when combined with expected investment returns should actuarially assure that all future promised benefits can be paid, and any unfunded liabilities are paid off in a reasonable time.
In the run-up to passage of HB3158 it was often said that the City had paid all it was “required” to pay. That is true with respect to the state statute which previously required the City to pay 27.5% and now requires 34.5% of the aggregate computation pay. The problem appears to be that these calculations were not determined “based on sound actuarial principles” because they continually fall short. In 2021 and 2022 alone the DPFP saw a shortfall in the ADC of approximately $114 million.
The City needs to pay the calculated Actuarial Determined Contribution instead of the inadequate statutory amount or our pension plans will continue to build larger and larger unfunded liabilities. In 2021 Segal, the DPFP actuary reported that DPFP could be 100% funded in 25 years if the ADC was paid.
Thank you for your time and service to our City.
Dallas Retired Officers Association