As the Addison City Council begins its budget meetings, one thing to quite surely be a major topic of discussion will be COLA (Cost of Living Allowance). During the July 17 Council meeting, Eric Davis, Deputy Executive Director of the Texas Municipal Retirement System explained that should the Council decide to approve a 70% COLA for the next year, it would have to be funded with approximately $155,000 with a similar amount required to be paid for the following 14 years—putting the total cost at approximately $2.3M. It would also increase the Town’s unfunded liability.
Whether or not the Council votes to fund a COLA, it is important to understand the reality and consequences of it. The question FM hears most is, “Why, if COLA is funded this year, will the Town have to pay the approximate $155,000 for the next 14 years? And, if COLA is approved again next year, will a similar cost be added to the budget?”
Why does the Town have to pay approximately $155,000 for the next 14 years?
Because should the Council vote to do a COLA this coming year it in essence will be giving retirees a one-time raise that increases their retirement benefits at the new rate for the lifetime of that retiree. Therefore, the total amount would in essence be financed over a 15-year period with a payment of approximately $155,000 this year and each year for the next 14 years.
The approximate figure accounts for not just this year, but the past two years when no COLA was given because under the TMRS system if a town chooses not to pay COLA and then later decides to pay it, the town must make up for the years it did not pay COLA.
If COLA is approved again next year will a similar cost be added to the Town’s budget?
Yes, a new annual COLA cost would be added at that time which would in essence be another raise in the retiree’s pay. It too will have to be financed over the same period of time. Thus, in addition to the Town’s contribution increasing, each year’s COLA keeps adding to the Town’s unfunded liability.
All of this is based on these assumptions:
- That the actuarial assumptions are accurate
- That the projected investment return is correct (TMRS is projecting a 6.75% return)
- That the projected retirement rate stays the same (that more do not retire than projected)
If these assumptions are not met, the Town’s contribution increases.
As a comparison, Social Security does not guarantee anyone an annual cost of living raise. When it does grant a COLA it does not include funding for years in which no COLA was given.
Here’s the catch-22! If Council decides to determine annually whether or not to do a COLA, when they do, the Town must play catch-up and pay for all the years it did not do a COLA. If the Council decides to do an automatic COLA, which automatically funds the COLA every year, automatically giving retirees a raise in their retirement each and every year for their lifetime, there are some savings over the catch-up, but they are small. So either way, costs increase, as does the Town’s unfunded liability. The Town’s current unfunded liability is $4.85M.
The bottom line is, any way you cut it COLAs are inevitably akin to a retirement raise every year for the lifetime of the retiree. And, as a result it creates a mounting financial commitment to the Town forever and ever. So, while it is the decision of each year’s Council, it is also important to view the long-term financial impact of COLAs in general—not just each individual year.
What are the budget consequences?
Whether COLAs are given this year or next, the long-term consequences are that COLA costs, along with other necessary costs like Midway Road, the Athletic Club renovations and any other yet unidentified infrastructure costs, will most likely result in a tax rate increase. That’s reality.
It’s not a question of whether COLA is a good idea or not. The important thing is to understand the full budgetary impact so that there are no budget surprises down the road and that taxpayers fully understand what it will take to cover all future necessary costs.
Wednesday, August 2
First Wednesday Coffee with the Mayor
Tuesday, August 8
Thursday, August 10
4 p.m. – 8 p.m.
Council Budget Retreat
Photo Courtesy Dianne Lacourciere/Flickr