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Below is the HillCo client report from the July 9 House Pensions Committee hearing.

The Committee met to discuss and examine the new reporting requirements proposed by the Governmental Accounting Standards Board (GASB). The Committee also conducted legislative oversight and monitoring of the agencies and programs under the committee’s jurisdiction and the implementation of relevant legislation passed by the 83rd Legislature.
 
Chairman Bill Callegari commented that HB 3356 (83R) would have established best practices for management of local pensions. The bill did not pass but hopefully the legislature will take the matter up again next session.  With new GASB standards in place, state and local officials will have to take steps to make sure proper standards are in place to protect pensions.
 
GASB
 
Christopher Hanson, Executive Director, Pension Review Board (PRB)

  • On June 25, 2012 GASB approved two new statements
    • GASB 67 for public retirement systems
    • GASB 68 for sponsors of public systems
  • Established a financial framework for reporting
  • New GASB statement significantly differ from old statements
    • Delinking of pension accounting and pension funding is the most recognizable change in new statements
    • Also require a liability for pension obligations (NPO) to be carried on the balance sheet
    • Use of fair market value of assets to assess fiduciary position
    • Single discount interest rate to be used; a combination of assumed rate of return and a high quality municipal bond index
    • Require a single actuarial cost method
  • PRB has adopted guidelines for actuarial soundness; originally adopted in 1984; recently updated in 2011
  • Currently the guidelines establish a minimum funding standard of 40 years to amortize unfunded liabilities
  • HB 13 was passed last session; required PRB to conduct a study of financial health of public systems in Texas
  • Final report is due by December 31, 2014
  • Systems receiving adequate contributions over time meet the 40 year or better guideline
  • Average non-investment cash flow is within reason for most systems
  • Ratio of active members to retired members has declined significantly since 2000
  • Most funded ratios have declined since 2000; steepest decline is for systems with amortization periods over 40 years
  • PRB has approved minimum training standards for managers of public systems

 
Tom Currah, Office of the Comptroller

  • Created a pension search tool in collaboration with PRB; available on Comptroller’s website
  • Working to make some revisions to the tool to make it easier to use and more intuitive

 
Matt Johanson, Citigroup Global Markets

  • Callegari asked how city bond ratings are considered
    • All ratings agencies have strengthened their reviews of pensions over the past few years; there is a high correlation between ratings downgrades and pension funding; health of systems accounts for 10% of rating scores in Moody’s reviews; in situations where credits are in the lower spectrum you will see that unfunded actuarial liabilities are quite high; there are many states and cities that were at 90% funded ratios but are in the 50% range now
  • Callegari asked if the market responds differently to a system that has high amortization periods
    • Yes; new accounting rules give a better feeling for what average liability life is
  • Callegari asked about how much more interest would be from a A rated entity over a AAA rated entity
    • AAA could see a 3.25% interest rate versus a 3.75% rate for an A rating over a 25 year period
  • Rep. Phil Stephenson asked if bond rating changes for pensions will affect debt structures of entire municipalities
    • The change in the industry and their views on pension liabilities has been very high in the last five years
  • Callegari asked about states going from defined benefits to defined contributions
    • Some states have moved to defined contributions; some states make it an option; if the transition is made, the unfunded liability is still basically on the books; also, by closing entirely, contribution flows for employees are cut off which puts more of a burden on the employer

 
Max Patterson, Texas Association of Public Employee Retirement Systems

  • GASB overall focuses on cities’ total debt
  • GASB is trying to show that when a city goes out for debt they need to have a plan to pay it back
  • Pensions are typically a small amount of a city’s debt
  • Pensions in general are doing pretty good in Texas; there are isolated problems that need to be addressed but all pensions should not be wiped out because of a few isolated issues
  • Rep. Roberto Alonzo asked if new standards and issues are leading to defined contribution plans
    • Hopefully not; defined contribution is really just pushing the problem down the road, existing obligations do not go away

 
Bob Scott, Assistant City Manager for Finance, City of Carrolton

  • There are several good reasons why public systems are a lot more material to the employer than in the private sector
    • In cities, the largest single balance sheet item is personnel expense
    • Many public employees do not pay social security
  • Private sector plans are insured and are regulated under the Employee Retirement Income Security Act
  • GASB 68 is very prescriptive in regard to calculations of funding; former GASB statements were more funding friendly
  • The new standard has caused a lot of angst among auditors because plans prepare the numbers which must be audited by the cities
  • There will be much more robust audit procedures being performed
  • Callegari sked how many cities are in social security
    • In Houston area most cities appear to be in social security; in the Dallas area most are not
  • Callegari asked how cities weigh pension debt versus other debt
    • The biggest asset of most governments are not on financial statements: personnel and taxing ability; if all of normal costs and unfunded liability can be paid in a reasonable period of time as part of the budget it isn’t such a big issue

 
Troy Elliott; Director of Finance, City of San Antonio

  • A challenge for the city has been future contributions and how to control those costs
  • Have had to make a lot of concessions in trying to reduce costs
  • San Antonio is the only of the top 10 largest cities in the USA to have a AAA rating; have been on negative outlook because of fund balances decreasing over the years
  • Callegari asked why San Antonio is the only city with the AAA rating
    • Sound management, pensions, current funding are three large areas that impact that rating
  • Callegari asked how many total employees there are
    • 7,200 civilians and 4,000 uniformed employees
  • The civilian plan has an unfunded liability of $174 million, an 89% funded ratio; for uniforms the unfunded liability is $232.8 million, a 91% funded ratio
  • Should not be a whole lot of change considering the new GASB standards
  • Working with auditors to determine what the audit impact will be from new standards; most changes will not have to be made to the funding side but rather on the accounting and reporting side
  • Callegari asked what the ratio is between pension debt and total debt
    • Total debt without pension is around $1.9 billion; pension debt is around $400 million
  • Pension plans are well managed and well-funded; continuing to look at ways to address contributions and benefits in the future from a ratings standpoint
  • For future sessions, the city advocates for greater transparency between the city and the Texas Municipal Retirement System
  • Callegari asked what the legislation would do
    • Decrease barriers in the pension statutes that would give the city the ability to have access to benefit information; because it is public money going into the funds, governments should be able to access that information
  • Callegari asked how the city’s 35% contribution rate compares to other cities
    • It is fairly high in comparison

 
JT Trevino, Vice Chairman, San Antonio Fire and Police Pension Fund

  • Fund established in 1919 and codified in 1941; over $2 billion in fund
  • Do not received social security benefits; pension fund is sole source of income for retirees
  • Funded ratio is now at 92%
  • Their amortization rate is lowest in taxes
  • Changes they have made in statute are cornerstone to success but other items contribute as well such as investments made, etc.
  • There is no way in plan that an employee can earn more with retirement than they did as an employee
  • Employees not eligible to receive benefits before 20 years of service
  • Committed to 100% funding of the actuarially required contribution (ARC)
  • New GASB rule changes should not have material effect
  • Their transparency has been praised by Combs and fund does not divulge information on individual members and will continue working with city
  • Employees contribute 12.32% to fund and not contributing to social security
  • Planning to be funded at 100% in 7.25 years and then will discuss next steps
  • Callegari thinks the relationship between city and fund is good and is a model for others

 
Betsy Price, Mayor, City of Fort Worth

  • HB 3356 had great goals for local pension plans and Fort Worth totally supports those values
  • Previously proposed bill HB 3356 and many GASB rules will do much harm
  • Taxpayers have reached limit on what they can provide and should not be asked to contribute anymore to payroll
  • Period of funding is now at 49 years instead of infinite liability
  • More transparent than ever before
  • Chair asked how guidelines in HB 3356 could be a negative thing
    • It was more of a mandate and would interfere with local control and strip their ability to manage the fund
  • HB 3356 was giving policy making authority from those who could have personally and financially benefit from decisions being made
  • The city is the appropriate authority to ensure contributions/amounts
  • Callegari noted some of the legal problems could be avoided if there were more transparency such as suggested in the bill

 
Susan Alanis, Assistant City Manager, City of Fort Worth

  • Making changes to ensure the city can pay its obligations going forward
    • City has doubled its contribution to the fund since 2008 from 10% to 20%
    • Reduced multiplier from 3% for each year of service to 2%
    • Changed compensation base from high 5 to high 3 years of service
    • Changed survivor benefits
    • Changed cost of living adjustment options
  • Unfunded liability has grown from just over $600 million to just over $1.1 billion; went from an infinite funding period to a funding period of around 49 years
  • Reduced fund rate of return assumption
  • The cost of living adjustment (COLA) is now more transparent
  • Concerned that the new GASB will assert new calculations; will require the use of market value of assets from a smooth asset value
    • Will cause more volatility, lower funded ratios and more confusing reports
  • Stephenson asked what the city total debt is
    • About $1.5 billion; will be $2.6 with the new GASB pension reporting
  • Do not believe the global legislation will further the goal of making pensions more transparent and sound
  • Contributions are made as a percentage of payroll rather than the ARC; hard to determine how the city would achieve the 25 year goal without being able to adjust contribution percentages
    • Contribution cannot increase without consent of the employees
  • Do not believe an omnibus solution is possible because each plan has different legal restraints and financial issues
  • Rep. John Frullo asked if there are situations where an employee can earn more in retirement than they did when they worked
    • There were some situations where overtime pay and bonuses caused employees to earn more; working to resolve those situations

 
Joelle Mevi, Executive Director, Fort Worth Employees’ Retirement Fund

  • Funding ratio stands at just under 64% funded; amortization period is 49 years; unfunded liability is $1.1 billion
  • Impact of GASB on accounting is hard to determine at this point

 
Tyler Grossman, Chairman, El Paso Firemen and Policemen’s Fund

  • Fund currently has just over 3,400 members and $1.3 billion in assets
  • Steps have been taken to help funding status
  • Now at 23 and 32 year funding statuses for the two funds
  • Have made changes to strengthen the fund’s management practices
  • Cut operating expenses by renegotiating contracts
  • Currently still do not meet the ARC which is a concern regarding the new GASB rules
  • If the fund goes over 40 year amortization, contribution levels will increase both from employees and the city
  • GASB affects the unfunded liability because of the fund not meeting the ARC; could jump significantly if the ARC is not met
  • Police and firemen do not pay into social security

 
Arif Rasheed, Deputy Director of Finance, City of Houston

  • There will be a budget gap by 2018 of $200 million for the city
  • Houston has three plans for police, firefighters and other city employees
  • Prior to 2007 all funds were funded sufficiently
  • Police and firefighters are not contributors to social security
  • There have been problems with bonuses and overtime being taken into account for benefit assumptions
  • To mitigate increased pension funding obligations, the city has increased age eligibility, made agreements regarding contribution decreases, increased assets with a fund transfer,  made agreements to increase employee contributions
  • The city contribution is being increased by 2% per year until it reaches the ARC to meet GASB standards

 
Todd Clark, Manager, Houston Firefighters’ Relief and Retirement Fund

  • The city hasn’t paid the ARC into the funds in 14 years
  • Firefighters pay 9% into their pension system
  • Never used pension obligation bonds
  • Houston firefighters are ranked 139th nationwide in pay and have the fifth highest number of calls in the nation
  • The fund is around 90% funded
  • Between the last three and the next three years, the contribution rate from the city will have decreased saving them near $70 million
  • GASB is using a lower assumption rate for investment returns which automatically shoots unfunded liabilities up
  • GASB will not affect the fund’s funding policy
  • Will cause some confusion with the new GASB statements and will shine a negative light on systems that are underfunded
  • GASB is opening the door for plans to move toward defined contribution in the future which does not provide adequate retirement security

 
Legislative Oversight
 
David Gavia, Executive Director, Texas Municipal Retirement System (TMRS)

  • Unlike the Employee Retirement System and the Teacher Retirement System, TMRS is a voluntary system
  • Do not operate a healthcare plan
  • Assets value was around $22.5 billion at the end of 2013
  • Have had 850 cities choose to participate
  • Paid out around $950 million to beneficiaries last year
  • San Antonio is the largest city participating but TMRS does not include Austin, Houston, Dallas, Fort Worth or El Paso
  • Average contribution rate for all cities is around 12.5%; highest rate being around the low 20% range
  • Believe that around 86% of cities are contributing to social security
  • TMRS is a hybrid plan
  • Funded ratio is around 84.4%
  • Investment return assumption is 7.5%
  • Amortization period is measured differently than many cities; currently around 25 years or lower
  • According to the TMRS Act, cities must pay the ARC
  • Cities with low funded ratios generally are newer cities or have just increased some aspect of their benefit package
  • Require amortization periods of no more than 30 years
  • More conservative requirements are imposed on cities with 20 employees or less

 
Gene Glass, Executive Director, Texas County and District Retirement System

  • Do not operate a healthcare plan
  • Each plan is independent and only pays for the benefits of their employees
  • Asset size is around $24.5 billion
  • Operating costs are around ¼ of 1%
  • Average funded ratio is 89.4% across the system
  • 20% of plans are funded at 100% or greater
  • The fund holds a 20 year amortization period
  • The fund is a savings plan so there is no opportunity for benefit spiking at the end of a career
  • Average annual benefit is $19,548
  • Employers are required to pay 100% of the ARC

 
Brian Guthrie, Executive Director, Teacher Retirement System (TRS)

  • Pension fund balance is currently $128 billion
  • Annual rate of return over 25 years is just over 9%; assumed rate of return is 8%
  • The fund is now actuarially sound
  • Member contribution rate is at 6.4% this year but will reach 7.7% by 2017
  • Funding period is 28 years
  • Good investment returns and continued contribution rate increases as planned are the keys to maintaining good financial health
  • School districts who do not participate in social security are asked to contribute 1.5% of payroll each year which is expected to increase the fund by around $330 million each year
  • Provided almost 200,000 retirees with a COLA for the first time in a decade; 3% COLA capped at $100 per month; this was able to happen because of the fund being sound
  • Minimum retirement age is being raised to 62
  • GASB 67 impacts the way unfunded liability is reported; TRS meets the test that allows the 8% rate to be used
  • GASB 68 will require school districts to report a portion of the unfunded liability of the system

 
Ann Bishop, Executive Director, Employees Retirement System (ERS)

  • The ERS main fund is not actuarially sound
  • Law enforcement and custodial officers are part of a supplementary fund as well as the main fund
    • The supplementary fund is not actuarially sound
  • Also have two funds for justices; JRS 1 is a pay as you go plan, JRS 2 is for judicial officers who took the bench after 1985, it is prefunded based on contributions and investments
    • JRS 2 is actuarially sound
  • ERS has not received the ARC in 19 of the past 20 years
  • ERS holds a 77% funded ratio which is projected to be 74% by the end of this fiscal year
  • Unfunded liability is projected to be $8.8 billion by 2015
  • The fund is scheduled to run out of money in 2052
  • GASB requires ERS to use a blended interest rate which consists of actuarial assumptions for benefits that can be paid; for the unfunded part, a AA 20 year bond rate must be used
    • The liability on the balance sheet will go from $7.7 billion unfunded to $14 billion
  • Options to balance the fund include higher contributions from employee or employer, lump sum cash deposits, decreasing benefits
  • By 2019, every year the fund does not receive its ARC, $53 million will be added to the request to balance the fund
  • In order to become actuarially sound on just investments, an 11% rate of return would be necessary every year over the next ten years then 8% every year after that
  • ERS currently assumes an 8% rate of return
  • SB 1459 (83R) asked ERS to look at splitting up law enforcement and custodial officers from the main fund; the contribution for law enforcement would increase because their contributions are higher; the contribution rate for the main fund would have to go up and the law enforcement contribution rate would go down
  • The legislature would have to get IRS clearance to split the funds

 
Jimmy Jackson, Vice President, Department of Public Safety Officers Association

  • Supports bringing contribution funding up to 10%
    • It would take $292 million to do that
  • Separating law enforcement and custodial officers would be fine if it could help to close the gap
  • The wisdom in separating lies in the design features and the cost of making the split happen
  • It could put a 14% contribution burden on the backs of the employees
  • SB 1459 raised the minimum retirement age of a law enforcement officer to 57; currently have employees that will achieve 100% contribution where they can quit contributing to the system but will not be able to retire

 
Claude Hart, Executive Director, Texas State Troopers Association

  • State troopers have a hard time staying with the state when they can move to work for a city and get better benefits, higher pay and earlier retirement
  • Troopers would be willing to make a higher contribution to the retirement fund if they knew they would see needed changes made within the fund
  • Some retirees from the Department of Public Safety have not received a COLA in 15 years

 
Don Zavodny, Executive Director, American Federation of State, County and Municipal Employees Texas Corrections Council

  • It is time to put the focus on long term solutions to fix the existing problem in ERS
  • There is no use in having two systems if they are both broken at the end of the day
  • Not sure members are ready to make higher contributions in order to keep the same level of benefits they currently have

 
Christopher Hanson, Executive Director, Pension Review Board

  • One of the most significant changes because of the PRB Sunset bill was the change it made to the board membership; all members are now gubernatorial appointees
  • Were directed to make a list of companies doing business with Iran; that list is being updated
  • Were directed to focus efforts on online training
  • The moving of the Texas Local Firefighter Retirement Act (TLFFRA) responsibilities to PRB is happening; have been providing technical assistance to TLFFRA members; fulfilling educational requirements etc.; have assigned an employee to only work on TLFFRA matters

 
Michelle Jordan, Executive Director, Texas Emergency Services Retirement System (TESRS)

  • SB 220 (83R) abolished the Firefighters Pension Commission and established TESRS as a stand-alone agency
  • Currently have 222 participating departments ; over 6,000 active members
  • The transition has gone very smoothly
  • Due to a change in the contribution structure, will have a 30 year amortization period in the near future
    • Funding period is currently infinite

 
Public Testimony
 
Leroy Haverlaugh, Texas State Employees Union

  • Commenting on implementation of SB 1459
  • The state contribution increase was a step in the right direction
  • The employee contribution increase was accepted by employees with the assumption that problems with the fund would come to a resolution
  • Without continued pay increases employees will see continued problems with their pension system
  • The 62 age limit is not completely realistic for a lot of employees including for CPS workers who go to homes to perform investigations

 
Elizabeth Blount, Retired State Employees Association

  • The unfunded liability of the retirement fund needs to be addressed as soon as possible
  • Support a state contribution of 10% in the base appropriations bill
  • Have had no increase in pensions since 2001 and inflation has eaten away most of the pension purchasing power
  • If the health insurance system is not fully funded it is projected that the fund will run out in 2015; this would mean benefit changes which make the problem for employees even worse