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This report covers the responses House Committee on Appropriations received for their RFI on Charge #2 relating to the actuarial soundness of the Employees Retirement System and Teacher Retirement System pension funds. The RFI for this charge can be found here and a complete list of responses can be found here. 

The HillCo report below is a summary of information intended to give you an overview and highlight of the various topics included in the responses. This report does not cover the entirety of each response, but aims to provide an overview of the testimony submitted. 

 

Glenn Hegar, Comptroller (page 2) 

  • Firms with lower return targets and declines in investment performance require increased actuarily accounted contributions 
  • Unfunded pension liabilities have therefore become a greater focus 
  • Declines in state revenues and lower investment performance may also intensify pension liability; may require larger portions of the budget  
  • Defines pension liabilities and weak funding as a risk to the state’s credit rating  
  • Texas has under-contributed to Employee Retirement System actuarially sound contribution since 2003 
  • Funding fixed payroll below actuarily determined levels leads to underfunding of pension plans 
  • Rising pension liabilities increase carrying costs  
  • Failure to contain long term liability growth could pressure credit quality  

 

Employees Retirement System (page 3–11) 

  • Lists retirement plans administered by ERS: employees retirement system retirement trust fund, law enforcement and custodial officer supplemental retirement fund, judicial retirement plan 
  • ERS health insurance program remains financially strong  
  • ERS not requesting appropriations beside base level funding to maintain benefits 
  • Three pension plans administered by ERS are lacking state funding and on the path towards total depletion 
  • ERS could potentially become insolvent in a 30-40-year period 
  • Contributions must increase in next legislative session to secure benefits 
  • May 2020 Board opted to reduce investment rate of return to 7% 
  • Legislature has kept benefits affordable but has not met sound actuarial levels; has lead to to unfunded liabilities 
  • Efforts to address include increasing state and employee contributions and increasing earning potential via investments 
  • State decreased benefits for those who started in 2009 and again in 2013  
  • ERS pensions are not defined to aptly address negative investment performance and unfunded liabilities 
  • Bond rating agencies claims that the state of Texas is “stable”, but they need balanced budget solution for pension needs 
  • Considering general obligation bonds 
  • Have created new benefit structure with reduced cost; this initiative may not have actual impact on the state’s unfunded liability  
  • All in all, large part of nation’s money going towards unfunded liability  

 

Teachers Retirement System of Texas (pages 12-18) 

  • Object is to get 7.25% return on investment with low risk  
  • TRS was determined to be actuarially sound 
  • SB 322 required third party review of soundness; received best-among-peers review 
  • SB 12 requires increased contribution rates that end in 2025, even includes public school employers that contribute to social security 
  • Reduction in planned contribution rates increases liability 
  • According to evaluation, unfunded actuarial accrued liability will increase for a decade before beginning to decline 
  • Money held in trust must be in use specifically for the benefit of the TRS members 
  • Describes the six Board trustee members that govern process 
  • Board reviews asset allocation at least once every five years to ensure the 7.25 percent return on investment  
  • Board may delegate investment authority to director or staff of TRS 
  • IPS responsibilities include the following: asset allocation, risk management, monitoring, and rebalancing ranges and benchmarks 
  • Board meets five times a year to discuss investment opportunities via a transparency report  
  • IMD reports quarterly and provides focused summaries 
  • TRS Compliance monitors private investments, provides insights and due diligence to the investment committee, oversees information barriers with regards to nonpublic info, 
  • TRS leading edge in transparency; livestreams their videos and discloses fees and expenses 

 

The American Federation of State, County, and Municipal Employees, Texas State Retirees (page 19) 

  • Funds have not been actuarially sound since 2001; to address, recent contribution rates have been increasing  
  • Notes that retirees are having a hard time making ends meet as the value for their annuities has decreased 

 

Texas AFT (pages 20–22) 

  • Notes TRS is a stabilizing force for Texas economy; emphasizes the need for state contribution during economic turmoil 
  • Must plan for how to implement COLA with legislators 
  • Sunset Report found the following: 
  • Agency lacks formalized process for reviewing internal investments 
  • TRS could reduce risks by using automated or fully independent system to valuate inconsistencies 
  • Should provide information about alternative investments in its transparency report  
  • Increased contributions as designated by SB 12 are sufficient to address accrued liability if payroll grows as expected 

 

Department of Public Safety Officers Association (page 23) 

  • Supports funding the ERS and Law Enforcement and Custodial Officers Supplemental (LECOS) at actuarily sound levels 
  • Suggests Legacy Fund endowment is created; would create revenue for pension obligations  

 

Texas Classroom Teacher’s Organization (page 24) 

  • Notes success of SB 12; regardless, Texas still has one of the lowest contribution rates 
  • Recommends legislature increases contribution rates to ensure the safest pension plan 
  • Notes movement of investments to in house staff to reduce costs 
  • Recommend reexamining agency expenditures and transparency measures 

 

Texas Pension Coalition (pages 25-29) 

  • Claims ERS is in dire need of funding; cost not only from COVID-19 but also underfunding by the legislature 
  • Difference between actuarial sound rate and contributions from citizens underlies this disparity  
  • Cannot currently provide COLA for retirees because the system is so underfunded 
  • Commends ERS efforts to set efforts to earthbound levels 
  • Highlights that population of workers has remained static as retirees increase 
  • Advocates against offering tax breaks to companies who can afford to move here 
  • Suggests the creation of a Legacy Fund 
  • Warns against making pension financial decisions because the economy could make a V-shaped recovery 

 

Texas Public Employees Association (pages 30-32) 

  • Overviews out the negative cashflow position of ERS that reduces investment position 
  • Enumerates the reasons is not actuarily sound such as contribution rates, investment performance, and number of contributors versus retirees 
  • Recommends legislature make serious cash investment in the ERS Retirement Trust to slow downward spiral and unfunded liability  
  • Commend supplemental appropriations bill that contributes 150 million to ERS; want legislature to approach ERS in 2021 session as it did in 2019  
  • Legislature should develop an actuarially determined contribution formula that adjusts rates in accordance with investment performance 
  • This process facilitates constitutional accordance and helps to avoid the need for lump sum payments 

 

Texas State Employees Union (page 33) 

  • Is historic turnover at 19.3%; more important than ever to strengthen the pension system 
  • Years of significant underfunding is the root cause of the current state of the fund, not mismanagement or sustainability 
  • A total funding contribution of 25.33% is needed to bring the ERS fund to Actuary soundness 
  • After underfunded liability is dealt with, the fund requires a contribution of 14.24% to cover the normal cost 
  • ERS board lowered the expected rate of return from 7.5% to 7%; fund is now expected to reach depletion in 2061 
  • Legislature must include an increase of 5.83% in the next budget to put the ERS pension back on track to full funding 
  • Highlights AG’s response to Senator Nelson’s requested opinion; a contribution over 10% is sufficient if it is included in the budget and is signed by the Governor 

 

Pension Investments and Financial Services Committee (pages 34–35) 

  • Attributes pension issues to state underfunding (particularly 1991-2011)  
  • Recommends the Texas legislature include 5.83 percent increase in the next budget to put ERS back on track for full funding; employees have already had to shoulder the burden 
  • Warns that delaying action can add billions to overall cost 
  • Issuing pension bonds creates more state public debt 
  • DB to Dc would be costly upfront, incur funding challenges, and endanger long term health of DB 
  • Recommends long term state supplemental appropriations plan; many require an ERS emergency declaration 
  • Hopes to maintain funding plan increases as specified in SB 12 

 

Committee on Retirement & Aging (pages 36-37) 

  • Rejects conversion of TRS from DB to DC 
  • DB to DC Plan could result in increased unfunded liability, decreased investment income, and jeopardized annuity payments  
  • Commends current TRS amortization period 
  • Should establish a state supplemental funding appropriation plan to achieve ERS
  • Potential results from the lack of ERS Soundness: no COLA, state funding challenges, reputational risk with GASB Pension reporting, risk of lowered credit ratings
  • Notes that selling pension bonds creates more public debt and the state has consistently underfunded pension programs 

 

Stuart Greenfield (pages 38-44) 

  • Investing funds in VBIAX would have yielded far greater returns
  • Notes that ERS should have invested all resources in domestic equities
  • ERS board should place less money in alternative funds and more into a market index fund