This committee met to discuss the implementation of House Bill 9 (84R) and study updated projections towards actuarial soundness of the Employees Retirement System. Examine issues and costs associated with granting a cost of living adjustments or “13th Checks” to retired state employees.
Emily Morganti, Analyst, Legislative Budget Board
- Presented handouts on the Employees Retirement System.
- 83rd legislature passed tiered statutory increases to member contribution rate. It was set at 6.9% in FY 2015 increasing to 7.2% in FY 2016 and 7.5% in FY 2017.
- There have been across the board pay raises because of this tiered increase in member contribution rate by 2.5%. Despite this increase in overall pay, employees saw a decrease in take home pay because the member contribution increase was larger than overall pay raise.
- Last session (84R) removed a 90 day waiting period for contributions to begin. Contributions now begin day one of employment.
- Last session also reduced pensions funding time from infinite years to 32 years which is just a year above what is considered actuarially sound or 31 years.
- Last cost of Living adjustment (COLA) to pensions was in January 2002. In 2002 there was no cost to the state because increases came out of the Trust fund.
- 83rd legislator passed a COLA that is currently in statute. It would provide a COLA of 3% for those who have been retired for 20 or more years. It is to be implemented only if the COLA would not cause funds to become actuarially unsound. COLA is not expected to be implemented.
- Any additional appropriations to ERS would exceed constitutional maximum of 10%.
- Rep. Otto– last session they discussed there was another provision that if the Governor declares an emergency, could go above the 10% contribution. Is that the only avenue we have to increase funding?
- Any additional appropriation to the fund would constitute an increase in contributions and would therefore exceed the constitutional 10%.
Porter Wilson, Executive Director, Employees Retirement System
- ERS administers four main pension funds, one of which is pay as you go (Stating at p. 14).
- Included in the main fund, ERS, are general state employee population, law enforcement, elected officials and state employees. Other funds are: LECOS, JRS 1 & 2.
- The ERS is on the path to actuarially soundness.
- Before last session the funds were on a path to depletion but H.B. 9 & HB 1 raised state contribution to 9.5%, etc
- But path set last session needs to be maintained
- Rep. Otto- Can we contribute more money to LECOS without breaking the 10% constitutional rule?
- Already are paying more – 9.5% from state, .5% from agencies and then there is an additional .5% for LECOS and 1.2% from dedicated funding source from court fees.
- On current path the $8 Billion of liability will be paid off by 2048 and it would have cost $29 billion. If the state wanted to pay it off faster with a $1 billion lump payment, it would save the state $ 8.3 billion in interest payments.
- Rep. Otto- But a lump sum payment would still be over the 10%?
- Opinion differs from LBB on whether a lump sum payment is part of the 10% contribution or payroll.
- Rep. Otto adds the discussion about the 10% rule needs to happen.
- ERS has legal briefs on the subject.
- COLA funding period slide was reviewed.
- The 80’s and 90’s added benefits without contributions leading to the current situation.
- ERS has diversified its portfolio between traditional and alternate assets. Its assets are valued at $24.8 billion as of March 31st 2016.
- Investment programs are long term in nature. Long term returns are expected to be about 8%.
- Rep. Otto- How is the 8% benchmark return set?
- Professional investment staff examines risk tolerance of board. Then they decide how to allocate assets and what a reasonable rate of return is based on the allocations. It is done every 5 years. There is some concern about the assumption of 8% return. Investment asset return rate will be adopted February 2018.
- Rep. Otto- If that amount of return was to change, how would that impact the funding and asset value of ERS?
- We’re looking into it. If that rate is lowered it increases the rate of unfunded liability.
- Rep. Otto- do you also look at the actuarial length of life?
- Yes, we look at all the variables embedded in the liability calculator.
- Reviewed the value of a diversified portfolio and recent gains.
- Goal is to produce returns with lower volatility because funds are subject to risk from global market.
Keith Brainard, Research Director, National Association of State Retirement Administrator
Reviewed available public pension plans and funding levels for ERS, TRS and TMRS (Starting on p. 38).
- Reviewed adjustments to TMRS in 2008 due to recession but has TMRS improved vastly by FY 2014.
- Percentages of annual contributions actually received by ARC have decreased over the past five years.
- Among social security eligible workers, Texas state employees contribute 9.5% to pensions above the national average and the state of Texas contributes 10% just below the national average of 11.5%.
- Rep. Otto- Is that contributions that are called for or actually being made?
- There’s a mix. In some cases the employers are not making that much of a contribution.
- In some cases employers are paying more because of large unfunded liability.
- 10% constitutional cap- Texas is 1 of 5 states that mentions employer contribution in its state constitution. Texas is the only state that limits ability to adequately fund pension plan. Other state’s focus on fully funding pension plans.
- Suggestions for Cap-Calculate pension contributions over multiple years, measure costs over multiple years and allow pension contributions to exceed 10% for one year as long as it does not exceed that amount for multiple years.
- Alaska made one time lump sum payment to pay down their liability and it was successful.
- Rep. Otto- But they don’t have a 10% rule in there constitution…
- Correct.
- Rep. Miles-Has there ever been a time without this 10% limit? And if so how did that turn out?
- Limit came about through an amendment in the 1970’s and employer contribution rate to ERS and TRS always been between 6 and 10%
Public Testimony
Mary Escobedo, Retiree, Office of Attorney General
- Cost of living can be difficult especially in conjunction with medical expenses.
- Increase cost of living.
Maura Powers, President, Retiree Chapter 12, American Federation of State County and Municipal Employees
- Offers support and resources to help create a COLA and create actuarial soundness.
- Rep. Miles- Do you have any ideas at this point?
- We like the lump sum idea or the government declaring an emergency.
Jerry Wald, Self, Member, Texas State Employees Union
- Waiting for an adjustment COLA disadvantages those who currently need one.
- Amount received from ERS is insufficient to pay for basics.
Anitra Patterson, Self, Member, Texas State Employees Union
- Lower payed workers have lower pensions and medical expenses are growing.
- COLA is needed to provide for these workers.