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The House Committee on Pensions met on March 30 to hear updates from the state pension systems and review current issues and concerns facing their pension systems.
 
 
Chairman Dan Flynn’s Opening Remarks:
This hearing provides as an opportunity to check in with the various systems and to hear current issues other than needing money. The committee will conduct pension hearings in other parts of the state to give everyone an opportunity to participate. The presentations will be about 5 minutes due to time constraints of other committee meetings of the day. Welcomes members and asked Vice Chair Alonzo to make remarks.
 
Vice Chair Alonzo’s Opening Remarks:
Emphasized the importance of the pensions knowing we are remaining up to date. Ask the committee for a moment of silence for a recently deceased firefighter in his district.
 
PANEL 1
 
Todd Clark, Chairman of Houston Firefighters’ Relief & Retirement Fund

  • Represents 7,000 members (4,000 active; 3,000 retired)
  • Assets of $3.9 billion
  • 87.03% funded
  • Firefighters pay 9%
  • High double digit returns in the last four years
  • Never used pension obligation bonds
  • Pension fund is strong and well managed
  • Houston has a spending problem which turned into cash flow problem
    • Revenue cap – city of Houston lost $100 million because of cap
    • TIRZ taking hundreds of millions of dollars out of the general fund
    • City of Houston has debt service and repayment structure has added to cash flow problem
  • Issues have caused pressure on the pension systems
  • City is using pensions as a scapegoat
  • City of Houston has underfunded pensions, and used the money for other things in the city
  • Flynn – does not want to get into the political discussion and encourages witness to work out with city instead of legislative action
    • Witness agrees

 
Tyler Grossman, Executive Director of the El Paso Fire & Police Retirement System

  • 3,600 active and retired members
  • $1.2 billion in fund
  • Has good communication with the City of El Paso
  • Funding increases are mandatory that come from both side
  • Mixed and balanced board (appointees from city, firefighters, policemen, etc)
  • 2014 is the last actuarial study
    • The next study should be completed by next session

 
Chuck Campbell, Austin Firefighters’ Relief & Retirement Fund

  • Established in 1935
  • Governed by Board of Trustees (city and firefighters)
  • 100 current members and 700 retirees
  • 91% funded
  • Increased contribution rates in 2011, demonstrated good community relations
  • Doesn’t participate in social security
  • They look at actuarial assumptions and have dropped assumed rate of return from 8% to 7.7%
  • Concerns is talk about governance structure and how it could change because they feel current structure works great

 
Michelle Jordan, Executive Director of the Texas Emergency Services Retirement System

  • Funds are currently at $86 million
  • 229 member departments
  • Added recruiting staff recently
  • In 2012 fund was not actuarially sound and board took steps to remedy – now funded at 76% and actuarially sound
  • Chairman Flynn asked about the  residence of most of members
    • Around metropolitan areas, in smaller rural areas but outline metro areas
  • Actuarial audit was clean
  • Recently conducted an asset liability study and board is reviewing
  • Assets are at $86 million and down from end of 2015, rate of return last year was negative 3.5% compared to previous year of 14.9% but hoping market will settle down 
  • Composition of board includes members of the system, pension professional, firefighters, etc. which is outlined in statute

 
PANEL 2
 
Chanley Delk, Firefighter in Big Springs, Pension Liaison of the Texas Local Firefighters’ Retirement Act

  • 42 paid departments
    • Funds are in cities all over the state
  • Account balance of $3 to $185 million
  • Total balances is $1.8 billion
  • Each local funds have board of trustees (city members, public members, and firefighters)
  • Each fund is separate from municipality and can adopt a higher ordinance than the statute
  • Funds under the act were under the oversight of the Firefighters Pension Commissioner which was Sunset in the 83rd legislative session. Provisions of the Sunset legislation:
    • Created a TLFFRA Specialist to review funds
    • Met minimum education trustee training curriculum (nationwide education opportunities, national conferences, etc.)
    • Created a referral of TLFFRA appeals to the State Office of Administrative Hearings
  • Chairman Flynn asked about the board makeup
    • 7 member board: 3 firefighters, 2 appointed trustees, 2 civilian members

 
Kelly Gottschalk, Executive Director of Dallas Fire & Police Pension System

  • 10,00 active and retired members
  • 100 year anniversary
  • Members don’t participate in social security
  • Members contribute 8.5% of pay, city contributes 27.5%
  • $2.7 billion in assets
  • Preparing a new actuarial evaluation. Last year’s actuarial value is 63% and market value of 53%
    • Has told the City, members, and media of this prediction
  • Made new changes since last year to rectify situation
    • Lowered rate of percent from 8% to 7.25%
    • Funding period is infinite
    • Change in fund structure; CIO reports to Kelly for more oversight
    • New executive staff
    • Terminated real estate council
    • New asset allocation
    • New investment policies
    • Asset liability study
    • Changed reporting, transparency, budgeting, accounting, etc.
    • Chairman appointed a subcommittee to work on funding issues (subcommittee has 6 board members – 2 council members, 2 policemen, 2 firefighters)
  • Board is 12 members: 4 council members, retired police, and firefighters
    • Invited city staff to participate in meetings
  • Rodriguez asks if the new changes included external consultants
    • Yes, we’ve replaced real estate managers, terminated long term real estate consultant, changed actuarial, changed outside legal counsel
  • Alonzo echoes sentiments of wanting the locals to work out decisions. He also grateful current legislation allows for this and commends their transparency with their issues
  • Stephenson asked what the unfunded liability was
    • Gottschalk: $2.7 billion in assets and $5.7 billion in liability

 
Joelle Mevi, Executive Director and CIO of the Fort Worth Employees’ Retirement System

  • Unitary fund and enabled by statute
  • Difference is there are general employees, police, and fire employees  in this organization
  • 10,00 employees
  • 13 member board of trustees (7 elected, 5 appointed by city, 1 member is CFO for the city)
  • Fund balance of $2 billion
  • December 2014 the actuarial ratio (taken into account new benefit changes from the City of Fort Worth) resulted in a funded ratio of 62%, and am amortization period of 56 years
    • Executive staff met and review results of the evaluation and created a task force to assess the long term sustainability and options to improve the state funds without increasing rates for tax payers. Mevi sits on the task force. They are still collecting data and trying to get the funds in a sustainable status

 
Jim Smith, Trustee of the San Antonio Fire & Police Retirement System

  • $2.6 billion in funds
  • 6,300 firefighters and police served
  • Average pension is $47,000 a year
    • Average of 29 years of service for members; average retiree is 56
  • Actuarially at 89% funding, and 11 year amortization period
  • Lowered rate of return by a quarter of a percent: 7.25%
    • Maybe added 4 years to amortize
  • Conduct asset allocation study every year to lower risk
  • Aren’t in social security
  • Members pay 12.32% and the City double matches that rate; same level funding

 
PANEL 3
 
Brian Gutherie, Executive Director of the Teacher Retirement System

  • Trust fund of $128 billion
  • Provide pension benefits to 1.4 million active and retired teachers (1 million active, 400,000 retired)
  • Average annuity is $2,000 per month
  • Paid $9 billion in benefits in the last fiscal year
  • Assumed rate of return is 8%
  • Pension trust fund earned a return of negative 0.3% for fiscal year 2015 compared to 16.9% for fiscal year 2014.
  • TRS is 80.2% funded in ratio of liabilities to assets
  • Unfunded actuarial liability is $33 billion, with an amortization period of 33 years
  • Will conduct experience study; assessing mortality of members
  • On track to pay off unfunded liabilities by 2048
  • Biggest issues is funding TRS Care and TRS Active Care
    • Health programs were a product of joint select committee, chaired by Senator Huffman and Representative Flynn
  • Funding TRS Care programs is facing deficient of $1.6 billion in the next biennium
    • Facing shortfall last session of $768 million (only enough funding for 2 years given by the legislature)
    • Ending balance, the trust fund is so close to 0 by the end of the year
    • Will know by the end of next year in January if they need additional funding
    • Discussing it with the joint subcommittee, appropriations committee, etc. about problem
  • Active care is an affordability issue
    • Created 13 years ago
    • Designed to be contributed by the state, district, and the rest was paid for by premiums (30%),
    • Now members are contributing to 70% and it’s becoming unaffordable
    • Now some districts are opting out for a local program to lower rates. Concerned that if districts were allowed to leave it would create adverse selection. Will also see if members who opt out can return to the system after 10 years
  • Operationally, things are successful.
  • Office in London opened in November. Looking for direct co-investment opportunities and closed on 3 deals since the opening
  • Hernandez brought up the point that school districts aren’t able to return until 10 years
    • Gutherie: Depending on the size of the district and high cost events could lead them to come back into Active Care. Would need to develop a limitation to prevent adverse events and actuary came up with 10 years
  • Flynn asked for an update on London office
    • Opened in November
    • 4 employees from Austin and 2 contractors
    • Goal of the office is to provide a hub in European sector  and increase opportunity to source co investments and direct investments (lowered fees)
    • Surge of interests from funds of that marketplace
    • Leased real estate transactions and private equity deals
      • Pleased with early reaction
    • Trying to compete for elite dollars to lower risk and produce a better return for members

 
Porter Wilson, Executive Director of Employees Retirement System of Texas

  • Manage 3 main pension funds:
    • Main ERS Fund ( regular employees, elected officials)
    •  LECOS Fund (supplemental fund for law enforcement) – 20% supplement to Main fund
    •  JRS II (Judge and Supremes fund post 1986)
      • JRS I is a pay as you go plan
  • 142,000 active and 100,000 retired members
  • Funds were expected to be depleted in 2064, but was turned around to be fully funded after last session because of HB 9 and HB 1
  • HB 9
    •  increased active member contribution rates from 7% to 9.5% on Sept. 2015
    • Eliminated 90 day delay wait for retirement contributions
    • Future state and member contribution decreases linked
    • Pay raise across the board of 2%
  • HB 1
    • state contributions raised to 9.5%;
    • Agency contribution maintained .05%
    • pay raisers were lower than assumption
  • Unfunded liability will eventually be eliminated
  • Full funding by 2048
  • Funding period of 33 years
  • Normal cost contribution rates for ERS main fund is 12.27%, actuarially sound contribution rate is 19.62%; difference in cost goes towards unfunded liabilities of $8 billion
    • Went from infinite funding period to 33 year funding period
  • LECOS and JRS 2 current statutory rates aren’t sufficient to sustain the systems and will continue to have an infinite funding period
  • If the contribution rate were to drop .5%, the numbers begin to “tread water”
  • $25.2 billion in Total Fund Amount in investments assets
  • Diversifying the investments helps increase the opportunities of being in a high performing asset class at any given year
  • Largely invested in public equities(49%) and fixed incomes (24%); remaining is in alternative assets (private equity, real estate, hedge funds, cash, infrastructure)
  • 30% of investments are Texas based companies with about 200 or more employees
  • Chairman Flynn asked if ERS was investing in foreign investments like the middle east
    • Wilson: Interested in investing in other countries with strong economies, strong governmental organizations and laws, so not investing in the Middle East is limited because of the lack of stability
  • Chairman Flynn asked what kinds of investments we would make there
    • Wilson: we aren’t investing in Iran and have no interest investing in Iran
  • New group benefits program:
    • Virtual visits to the doctor (Telemedicine)
    • Lowered co-pays than in-person benefits. Soft roll out on Jan 1.
  • Another health program is “Real Appeal” for diabetic population (specifically Type II Diabetes) so members can weight with nutrition services and it’s no cost to the member if they are successful in the plan
  • Upcoming new RFPs and Program Contracts
    • Vision care benefits (pay for eyewear, contacts, and vision care)
    • New episode-based bundled payments
    • Pharmacy Benefits Manager
    • HealthSelect Third Party Administrator
  • Consumer-directed health plan (CDHP)
    • High Deductible Health Plan

 
Amy Bishop, Executive Director of the County & District Retirement System

  • 700 employers: counties and governmental districts
  • 270,00 Texans with benefits
  • Best funded retirement systems in the country
  • 50th anniversary next year
  • 9 member board of trustees, appointed by the Governor
  • Grown in $25 billion in assets
  • Operating costs average ¼ percent to 1/3 percent of assets
  • Don’t receive funding from the state
  • 3 things that set them apart: Savings-based benefits, responsibly funded, flexibility and local control
  • Savings-based benefits
    • Savings earn 7% by statute
    • Members save over their careers for retirement
    • At retirement, benefit is based on savings account balance and employer matching
  • Responsibly funded
    • members pay 100% of contributions
    • 1/3 of members contribute more than required to create budge stability and enhancements
    • 2016 average required employer contribution rate is 8.72%
    • Average amortization period is 10.5 years
    • Diverse portfolio to meet long term return goals (8% with acceptable level of risk)
      • Exceeded benchmark
    • Benefits are funded primarily by investments
  • Flexibility and local control
    • Employers have ability to select benefits and adjust them every year
    • Employers may increase or reduce benefits by adjusting the employee deposit rate or employer matching
    • Ability for employees to have local control has set them up for success
  • Hernandez asked if employers are required by statute to put in 100%
    • Bishop: Yes, it’s by statute. Employers can reduce benefits going forward. Employees also can do more than required by adding on to percentage or adding a lump sum

 
David Gavia, Executive Director of the Texas Municipal Retirement System

  • Known as a hybrid plan, cash balance plan or a savings-based plan
  • Each city and council determines benefit levels and controlling city’s costs
  • Receive no state funding; don’t administer health programs
  • 866 cities participate in TMRS
  • Do not cover major cities (Austin, Houston, Dallas, Fort Worth, San Antonio, or Galveston) because they have their own plan
  • High degree of local control to select the benefit design which will affect city funding
    • An employer is never locked into their design; can add, increase, and reduce benefits to manage costs
  • Basic city options:
    • Employee deposit rate
      • 5%, 6% or 7% of gross compensation
      • 5% interest paid on Dec. 31 of each year
      • All employees contribute at same level
    • Employer match
      • 1:1, 1.5:1, or 2:1
      • Match applied toward deposits and interests
    • Vesting requirements
      • 5 or 10 years of service
    • Retirement eligibility
      • Vested and age 60, or 20 to 25 years of service at any age
  • Board continues to look for sustainable suggestions
    • Adopted general mortality tables
    • Changed actuarial cost method from “projected unit credit” to “entry age normal”
  • Changed actuarial percent rate from 7% to 6.75%
  • Funding ratios have continued to improve from 2007
    • Ratio represents funding districts and evaluation studies
    • Conducted evaluation study
    • 24% of cities have funding ratio of 100% or higher
    • 78% of cities with at least 80% or higher
    • 2.1% below 60%
  • Weighted average of amortization period if currently around 21 years
  • Paid out $1.1 billion dollars in benefits
  • 2015 hit benchmarks but didn’t hit assumed rate of return
    • .3% on gross basis
    • .1% on net of fees basis
    • 20 year basis, average rate of return is still 6.98% on gross basis and 6.94% of net basis
  • Completing portfolio from bonds to total return
    • Results have been favorable

 
Public Testimony
 
Paul Brown and Max Patterson of TEXPERS

  • Provides educational component under the review board by the state legislature
  • Provide report on asset allocation for the legislature
  • TEXPERS publishes data provided by 93 state and local state pension funds every 3-4 months
  • Positive trends
    • PRB advised lawmakers that amortization period is the clearest indicator of pension fund health. Shows if the funds are decreasing over the years
      • Evidence pension funds are making considerable progress towards improved amortization periods (below 25 year period which is the recommended range)
      • Lowest numbers seen in 6 years
  • Concern about how other organizations are portraying the health of pensions including misleading headlines
    • Flynn – we don’t always agree with those
  • The amortization periods are positive in Texas

 
Ana Tinsley and James Harrison, The Tinsley Administrative Solutions LLC

  • Invited by Chairman Flynn to present
  • Alternative retirement savings tool
    • provides research on “living benefits” mechanism
  • Can fill in gaps of retirement (example: can be used before pension benefits arrive)
  • Most valuable aspect of mechanism offers living benefits
  • Allows individuals to access benefits when still alive
    • Critical Illness
    • Chronic Illness Rider
    • Terminal illness Rider
  • Chairman Flynn asks Tinsley if she has presented her information to other municipalities that presented today
    • Tinsley: they wanted to wait until after the hearing to see how members responded. There are some benefits currently being utilized by other plans. The public sector isn’t utilizing living benefits, but the private sector is. It could be valuable to them.
  • Rodriguez was confused about how living benefits are connected to the pension plans
    • Tinsley: It’s a supplemental benefit to the pension plans. Would give an alternative income to employees.
  • Rodriguez asks what is the living benefits called
    • Tinsley: it’s called “Equity Indexing” within the life insurance
  • Stephenson also expresses desire to hear more about the benefits outside of the committee hearing

 
Dennis Woolard, Insight Benefit Group

  • Presenting on pension shortfall funding and unfunded pension liability
  • Invited by Representative Stephenson who met Woolard at a conference. Stephenson thinks this system has a good chance of eliminating unfunded liabilities in the future
  • Stephenson said no cost and encouraged members to read information and follow up
  • Chairman Flynn reminds Woolard to visit with other caucuses. Assuming others may be providing similar services so follow up with others so it is not vendor driven issue.  

 
Leroy Haverlah, self

  • Need for pension monthly annuities on par with cost of living increase
  • Wants adjustment of living increase as a priority during the next legislative session
  • Requests juvenile justice and case officers offers to be included in the Law Enforcement and Custodial Officers Supplemental Retirement Fund to allow for 20 year retirement

 
Chairman Flynn closing remarks:
Needs to know the member’s summer schedules to plan committee hearings in Dallas and Houston.
 
Adjourn