House Committee on Pensions – October 12, 2018

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The House Pensions Committee heard invited and public testimony regarding interim charges related to oversight of legislation passed in the 85^th Legislative Session, funding soundness of

This report is intended to give you an overview and highlight of the discussions on the various topics the committee took up. It is not a verbatim transcript of the hearing but is based upon what was audible or understandable to the observer and the desire to get details out as quickly as possible with few errors or omissions.

Legislative Oversight: Review the state’s oversight of pension systems and implementation of relevant legislation passed during the 85th Legislature. In conducting this oversight, the committee should:

Identify concerns of governance or administration that may be appropriate to investigate, address, or eliminate;
Assess progression of local pension systems towards actuarial soundness and sustainability;
Review transparency, accountability and efficiency of oversight within the systems.

Sylvester Turner, City of Houston

Thanked the committee and the chairman for passing SB 2190
Prior to reforms the city estimated the net pension liability of the systems was approximately $8.21 billion
Houston estimated that the reforms reduced the liability by $2.9 billion without raising taxes
Latest data shows the reforms had the effect of lowering the liability by $3.2 billion lower than initially started with
The initial RSVS was completed in 2017
As of the pension reforms – the city has paid the full pension costs
City has budgeted $179 million for the municipal pension fund, $143 million for the police and $85.6 million for fire, totaling $408.9 million
- This is a modest increase over the prior year
Credit rating agencies have raised the city’s outlook from negative to stable
Noted a referendum by the fire fighter’s association (Proposition B) to raise pay for fire fighters
- Annual impact of $190 million to the city
- Noted no actuarial assessment required because it is a referendum, and not a union contract – potential to skip the due diligence process
Referendum does not include pension reform

Renu Khator, University of Houston

Welcomed the committee top the university
University system has 74,000 students in the system and graduates over 10,000 students from the central campus each year
Graduation rates have increased
Achievement gaps have been reduced
Flynn – thanked the university for hosting the committee
Huberty – thanked Mayor Turner for his efforts towards recovery after Harvey. Can you speak to what happens if the referendum passes?
- Turner – we need to check to see what the impact will be on the pension system as a whole, without the actuarial assessment we do not know what the actual implication will be
- The referendum calls for a substantial pay raise that will be difficult to get to under the revenue cap – It is likely it would call for layoffs to be able to afford it
Huberty – know that the negotiations broke down with the fire department at 9.5%, if it passes there is no negotiation between the 9.5% and 29%?
- No, short of action in the courts

Terry Bratton, Houston Police Officers’ Pension System

Thanked committee for efforts last session
One downside of the bill is that 382 officers retired as a result
HPOP has fully implements provisions of the bill
Have completed second actuarial assessment and the returns are favorable
- The plan is more sustainable than it was prior to the legislation

John Lawson, Houston Police Officers’ Pension System

Available as a resource witness

Sherry Mose, Houston Municipal Employees Pensions System

SB 2190 significantly revised the statute
Described changes made by the legislation
Have completed 2 RSVS under the new statutory process
- Have been provided to the PRB
Issued pension obligation bonds in December 2017 and paid $250 million of the net proceeds as provided in revised statute
Working to streamline processes within the system
HMEPS returned 12.7% on investment in 2017

Steve Waas, Houston Municipal Employees Pensions System

Available as a resource witness

Brett Besselman, Houston Firefighters’ Relief and Retirement Fund

Have been working with the city to implement the bill fully
Written testimony includes timeline for meeting required deadlines
Investments have added $760 million to portfolio
- Exceeding the target rates set by the legislature
Unintended consequences of the bill include 162 fire fighters retired while the legislation was being discussed, 115 young fire fighters retired and taking refunds, the need to take disagreement to the PRB related to value of the city’s contribution to the plan
Continuing the challenge, the constitutionality of the bill in court, which is still pending

Ralph Marsh, Houston Firefighters’ Relief and Retirement Fund

Available as a resource witness
Huberty – your basis today is 85%, correct?
- Besselman – correct, during session were 89% funded because our consumption rate was different, 2190 mandated we drop the consumption rate which raises unfunded liability
Huberty – even if you are performing better?
- Besselman – yes, 8.5% to 7% is a massive swing
Huberty – at the end of legislation there was a difference between your data and the city’s data can you speak to that?
- Marsh – there was a difference in the understanding of the timeline, we learned after the fact that it was your intention to receive that information at the time you requested it and filed the amendment and not upon passage of the bill, there was just a communication issue
Huberty – to that, we documented that in a letter specifically requesting that, if it had been provided would it have shown that the reduction could have been taken into effect?
- Marsh – it could have been less I believe
Huberty – if the chairman of the pension board had responded it would have shown that the $200 million of additional reduction would not have been needed?
- Marsh – the amendment is what we were working off of, you would have had to look at that document to get a better idea of the timeline
Huberty – did you see the letter that was sent?
- Marsh – am sure I did, but do not have a direct recollection
Huberty – the letter said that you had five days to get that information to the committee
- Marsh – having an original timeline and a subsequent letter with a different timeline led to some of the confusion
Huberty – if the data had been provided, would we have been able to have saved the $200 million?
- Marsh – I believe that is correct
Huberty – can you give us your perspective relative to the pay parity?
- Besselman – Proposition A is bad, and Proposition B is good
- Besselman – the fireman has been kicked many times, and moral is about as low as it can get right now, this is the fire fighters reaching out to the public for help
Paul – going back to he data thing, is that all resolved now?
- Marsh – yes
Paul – related to returns, what are the returns you are getting?
- Marsh – a little over 12% the first year and at 8%
Anchia – given the fact that you have the data now, is there a way to fix the situation?
- Marsh – depending on the perspective, the situation has been fixed

Funding Soundness: Evaluate ways to strengthen and improve Texas public pension systems.

This includes studying the effectiveness of corrective mechanisms, such as the Funding Soundness Restoration Plan and Pension Review Board Funding Guidelines.

Anumeha Kumar, Texas Pension Review Board (PRB)

Gave presentation
PRB is mandated to oversee public retirement systems in Texas regarding their financial soundness and compliance with state law
Have 346contribution and defined benefit retirement systems in Texas registered with PRB
- 99 are defined-benefit plans
Mission is to provide information and recommendations to ensure that the 99 systems remain actuarily sound
Highlighted 3 current activities at the PRB:
- Online pension dashboard – appropriated funds by the legislature and designed to give better data insight into the systems
- Interim Studies: funding policy for fixed rate plans, and a review of benefits to small systems related to pooling assets
- Conducting actuarial reviews of multiple systems that are in danger of not having actuarial soundness into the future – have reviewed 7 systems including Galveston police, Greenville fire, Beaumont Fire, Longview Fire, Marshall Fire, Irving Fire, and others
Board updated the funding guidelines for systems – lowered the amortization threshold period from 40 years to 30 years with 10-25 years as a preferable timeline
- Not required that plans comply with this in statute
- Noted that most are close to 30 years already with only a few outliers
Systems have been lowering their return assumptions
Paul – is this number of 7.5% is a realistic view of what the returns will be over the next 30 years?
- The board does not recommend a return rate range
- Noticing trend in Texas and nation wide that return rates are being lowered
- In the near term the systems are not expecting to make as much
Rodriguez – unfunded liability has gone up since 2011, is that attributed to lowering assumption rates?
- That is correct, the lowering of return assumption is inversely related to liabilities
- There are other factors, like systems with assumptions they aren’t meeting
Rodriguez – requested comparative data between Texas and other states relative to assumption rates and liabilities
- Will provide that to the committee
Flynn – is some of that attributed to the changing environment from the accounting groups?
- That is a factor but on the accounting side, not the actuarial side
- Can provide that information
Huberty – related to the TRS change, I thought they voted not to make any significant changes at the last board meeting?
- The Pension Board made the decision to lower the assumption rate to 7.25%
- Kenny Herbold, PRB – in July the board did not make that change, but in September they voted to make that change
- Because of the change, the unfunded liability for TRS would go up to $10 billion
Huberty – the latest numbers seeing are that they are far exceeding those numbers at this point
Alonzo – said that the vote was a tight vote in July, what was the vote?
- Herbold – the board is made up of nine members, and one member was absent leaving a split vote
Alonzo – what was the vote in September?
- Herbold – do not know the actual numbers, can provide that to the committee
Flynn – how does the PRB view that?
- The board does not have a position at this point, but when systems make these changes to assumptions rates they are protecting their systems against risk
Related to the funding soundness restoration plan bill passed 2 sessions ago by Rep. Paul, it is working very well
- Currently have 15 systems that have submitted plans, of those, two have achieved their goal and are below 30-year amortization target

Kenneth Herbold, Texas Pension Review Board

Available as resource witness

State Retirement Systems: Evaluate the governance structures of the Employees Retirement System, Texas Municipal Retirement System, Texas County and District Retirement System, and Texas Emergency Services Retirement System. This includes identifying best practices and making recommendations to strengthen oversight within the systems.

Porter Wilson, Employees Retirement System of Texas

Gave presentation
Members contribute 9.5% of salary to the plan, also participate in social security at 6.2%
Flynn – what does the TRS contribute? Knows that it is significantly different and have had many people suggest that we combine the two
- About 7.5%
- Kumar – employees contribute close to 6.8%
Flynn – TRS does do pay into Social Security?
- Understand that about 97$ of teachers do not pay into social security
Created automatic enrollment in the TaxSaver plan years ago
Employees are also automatically enrolled in the 401K plan
- About 97% hold on to that
Described demographics of members
- Half come from two state agencies: TDCJ and HHSC
- Over 100,000 retirees (up from 70,000 10 years ago)
- Almost another 14,000 contributing members that are eligible to retire today
Alonzo – knowing that there are 13,000 that could retire, do you take that into consideration in planning?
- We plan for those retirees and that is a part of the assumptions and actuarial calculations
- The things we cannot account for are when there are things that push people to retire before expected or eligible – things like early retirement eligibility
Did go through sunset last session
- One area of focus was on governance of investment – presentation shows governance structure
- As part of sunset, went through governance audit
- Have designated a position and hired a compliance officer for investment compliance
Internal investment committee has added external investment advisors
Revisiting overall investment policy – will be reworking that policy
Investments make up significant portion of returns and returns have been very high – 9.7% for last year
Committed to broad diversification of the portfolio
60% of money is managed in house
- Noted lower costs of managing in house
Flynn – are foreign investments/investors a part of the portfolio?
- We are still believers in the domestic economy and are well diversified within domestic markets, but do have global investments as well
- We do not invest in scrutinized companies listed by the comptroller
ERS recently adjusted return assumption to 7.5% from 8%
- Required to review that assumption every 4 years
Flynn – you heard the discussion about that earlier, do you agree with that?
- I do, the board thought that 7.5% was reasonable
- The board did decide to revisit the return assumption in two years to be sure the data supports it as opposed to waiting the full 4 years
Funding policies have had discussion in the pension world – ERS board adopted guidelines in May
Described historical trends of the plan in presentation
- The legislature has made changes to benefits in 2009 and 2012 – those in group and group 3
As return assumptions have changed, the need for contributions has gone up – Shortfall projected to go into next session is 3.83% more in funding – 23.33% contribution rate – $530 million
- Numbers based on last actuarial evaluation – new evaluation will be presented in December – should get marginally better
Flynn – you do not expect the legislature to need to take any specific measures?
- $531 million is the LAR request to get the fund actuarily sound
Alonzo – is there constant communication with the associations you work with, so they have a complete understanding of the benefits, needs, and position of the plan?
- We speak many of the retired employees’ associations and keep them advised that we need to get the fund sound, and 100% funded and then keep it there
Alonzo – it is in the interest of the plans to let the association members know what is going on and how the process works. Also encouraged diversification in the governance strategies chosen
Paul – the constitutional question you mentioned, have you spoken to the attorney general?
- There has not been a formal opinion
- In fall of 2014, when the conversation and legislation related to the 9.5%, there was a request for a letter from the AG – noted that is not an opinion only an informal letter
Flynn – that is something we can consider

Amy Bishop, Texas County & District Retirement System

Serve almost 300,000 Texans – 760 employers
89% funded, 92% funded if reserves are counted
1%, 35-year return
Managed by 9-member board of trustees
Receive no money from state of Texas, operating off investment earnings
Described the operating method of a cash balance plan
Paid out $1.4 billion in benefits last year
- 96% goes to Texas addresses
Many employers are paying more than required to plan for future benefit enhancements or to offset future problems
Average amortization period is 12.3 years
Each employer plan is evaluated separately because it is funded separately
Reviewed evaluation – from presentation
have a system wide reserves fund that the board can use to offset future adverse experience
- helps keep rates more stable
- reserves are estimated $720 million
employers set the level of benefits and can adjust those benefits each year – allowing for high degree of flexibility

David Gavia, Texas Municipal Retirement System

similar to Texas County and Districts system in that is it a cash balance plan
do not cover Houston, Dallas, Austin, Galveston or El Paso
- they have unique issues that don’t fold well into TMRS
do not receive any state funding or administer a health plan
city councils determine benefit levels for each plan
- Are able to modify that when needed
Governed by a 6-member board of trustees that are appointed by the governor and confirmed by the Senate
Board exercises fiduciary responsibility by utilizing committees and investment consultants, as well as adopting and implementing the strategic plan
887 cities that participate in TMRS, with 5-10 cities that join each year
111,000 contributing members and over 55,000 retirees
Benefit structure: on average members retire in late 50s after about 22 years of service receive an annuity of 19,000 per year
Discussed actuarial funding
- An actuarial evaluation in conducted each year for each city to determine the rate each city must pay to fund the plan benefits selected by that city – each city pays the rate for those benefits without exception
- Began making actuarial changes in 2008 like closing the amortization period, changing the actuarial cost method, adopting generational mortality tables, etc – the funded ratio has been increasing from 76.7% to 87.4%
- 207 cities have a funded rate of 100% or more
- More than 700 cities have a funded ratio of 80% or higher
Current weighted amortization period is 18.8 years
Have reserves of roughly $800 million in deferred gains to offset future adverse conditions
At the end of 2017 – administered $28.4 billion in assets and paid out $1.3 billion in benefit payments last year
Assumption rate is 6.7% and one of the lowest in the country
Ended calendar year 2017 with an investment return of 13.78%
Provided assistance to City of University Park las session – HB 3056 to allow the city to close the local fire plan to new members and put new members into TMRS
Have been conducting extensive reviews to determine if any changes are needed to the TMRS Act – has been a long time since any changes were made
- Study will be completed in December of this year
Noted recognition by multiple outside entities on the efforts of the plan
Flynn – congratulated TMRS on the good work
Paul – what is your process for getting new cities in that want to join?
- We have a lot of medium and large cities in TMRS – starting to see more cities with 10 or less employees joining
- Have a team that travels and is able to respond to inquiries by cities
- Do not have many cities that join with a current plan – this is often the first retirement plan that the city is able to offer their employees
Paul – discussed the situation with University Park and how it compared to other cities joining TMRS
Rodriguez – with respect to the asset allocation, there is a point at which it was strictly income, when did that change?
- In 2008, following a review in 2007
Rodriguez – is it fair to say that the diverse allocation is contributing to the high funded rate?
- That is correct, without the move to diversify we could not have maintained rates or improved funded levels

Jim Parrish, Texas Municipal Retirement System

Available as a resource witness

Frank Torres, Texas Emergency Services Retirement System

Represents about 4,000 members
Available as a resource

Kevin Deiters, Texas Emergency Services Retirement System

75% of fire protection in Texas is provided by volunteer fire fighters
Pension system was created in 1977 to consolidate funds
238 volunteer fire departments
Described diversity of volunteer fire departments in Texas
Program is intended to allow communities to maintain a volunteer fire presence
The savings to a city is huge for unpaid fire fighters
3,927 active volunteer fire fighters
A paradox is seeing an older average age of volunteer fire fighters
Average payment is $141 dollars – many of the pensions are very small
Benefits are approved locally and governed by a board
- Have a fund balance of $113 million
Net fiscal return for fiscal year 2018 – 11%
Funding:
- Fund is funded through contributions by participating entity up to 15% toward unfunded liability
- Supplemental contributions from cities
- State contributions
Conducts actuarial evaluations every 2 years, the last in 2017
Expecting to have cleanup legislation to reduce administrative burden and make the plan more streamlined
Paul – noted this is a huge service for rural Texas
Huberty – related to survivor benefits, have you talked about changing some of those benefits along the way, so the surviving spouse receives more of a benefit?
- The way that benefit works is if a fire fighter is killed in the line of duty, the surviving beneficiary is eligible for $60,000
- The fire fighter would immediately vest with the system and the surviving beneficiary would get the pension due after 15 years of service
- Believes it would be appropriate to look into expanding that
- Would like to do a comparison to get a better idea and get back to the committee
Huberty – one thing that have heard is that it is not adequately comparative to other departments, would like to look at that, assuming the legislature would need to help with that
- Under statutory authority the state can set the floor through the state board which is appointed by the governor
- Will certainly get back to the committee related to this matter
Paul – thanked the volunteer fire fighters for their work