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House Committee on Pensions, Investment, & Financial Services met on March 1st to discuss the Employee Retirement System, Teacher Retirement System, Texas State Securities Board, and the Texas Department of Banking. Full agenda can be found here. An archive of the hearing can be found here.

 

This report is intended to give you an overview and highlight the various topics taken up. It is not a verbatim transcript of the discussions 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.

 

Opening Comments

  • Chair Capriglione and Lambert – Thank the Speaker for their appointments

 

Employees Retirement System

Porter Wilson, Executive Director of ERS

  • Presented an overview of the agency
  • Agency manages 4 pension plans with ERS, 3 are prefunded
  • State employees contribute 9.5% of their salary to the plan; new employees contribute 6%
  • State contributes 9.5% agencies contribute .5%
  • There are about 130K state employees that contribute to pension plan
  • The number of people that are not contributing to plan has grown over the last 5 years
  • 70% of the state’s workforce comes from 5 state agencies
  • Last session all 3 prefunded pension funds were set to run out of money
  • Coming out of last session SB 321 helped ERS fund and is now in good shape
  • The 2 other funds were not addressed and are not where they need to be
  • Starting last September, the state created a cash balance plan
  • With the introduced version of GR Bill, the combined projected savings are $7B
  • All higher education agencies have access to health benefits except for the UT and A&M systems
  • Have not had to ask for an increase to health benefits since 2017

 

Teacher Retirement System

Brian Guthrie, Executive Director of TRS

  • Gave an overview of the TRS
  • Agency manages 3 sperate trust funds
  • Biggest, is teacher retirement trust fund, has 1.5M retirees
  • Provide two healthcare programs, one for retirees, one for active members
  • The fund serves 675K members and are not co-mingled
  • Everything that goes into the pension fund is decided by the board; has 9 trustees
  • 5 must have investment experience; 3 are direct appointments by the board; 2 are from SBOE
  • Remaining 4 are active members of the system
  • The legislature is responsible for designing a plan for the fund
  • Half of the plan’s assets are global equites and it’s the 5th largest plan in the nation
  • The agency uses a long-term return assumption of 7%
  • The fund pays about $13B in benefits a year; October was the first time paying $1B in a month
  • There is no COLA associated with the funds
  • Legislature addressed the COLA some last session with supplemental payments
  • There is a new contingency rider introduced in GR bill that addresses COLA for retirees
  • TRS had negative return of 6%; the prior year it had an increase of 24%
  • If legislature has a plan structure in mind to address benefit enhancement, TRS can model it
  • Given the size of the plan, a 1% increase would cost $1.1B to finance; number is scalable
  • Last COLA provided was in 2013; it was not prefinanced and was done through the fund; the state is still paying for the benefit enhancements and will be for the next 10 years
  • Recommend upfront payments since they are prefinanced and do not have large effect on fund
  • Explained the function of the Employment After Retirement program (EAR)
  • Last session there was legislation passed that created a 3-strike system for EAR; since then, no one has gotten 3 strikes
  • Agency is aware of the issues with the program; e.g., surcharge, it’s a new charge for districts
  • There are 2 health care funds; first is active care, second is TRS care
  • State only has half of healthcare membership in active care
  • Districts can elect to have their own, e.g., Austin, SA, Houston provide their own plans
  • During last session the federal covid relief package provided $250M and the Gov. provided $350M; the money was used to offset premium increases in active care
  • This one-time funding caused premiums to artificially depressed
  • State is now in the position to have to increase premiums by 20-30% to finance the program
  • TRS has a plan that would increase premiums annually by 7-9% over 6 years; this would put premiums back where they need to be
  • SB 1444 last session allowed districts to have the option to opt out of program
  • No longer have 1 statewide premium, it’s now regionally based (regional ratings)
  • Changes in 2017 made by legislature made it so supplemental funding for TRS is not needed
  • Could be 3 more session before TRS care needs more funding
  • Leo-Wilson- I left TRS care and now am in ERS do I have a year to opt in?
    • Yes, there is a window for people that opted out because of the changes made
  • Leo-Wilson- If you didn’t leave for that reason would I be able to opt back in?
    • Yes

 

Texas State Securities Board

Travis Iles, Commissioner of Texas State Securities Board

  • Agencies board is 5 members appointed by Gov. Abbot
  • Agency is responsible for 4 programs and is administered through 3 different divisions
    • Inspections program- basically the states version of SEC also works with Federal agencies
    • Registration program- serves as gatekeeper for licensed securities financial professional community, also tasked with processing securities
    • Enforcement program- is criminal justice agency, deals primarily with promoters with questionable investments
  • 85th legislature passed vulnerable victims bill, e.g., case against St. Louis firm conducting bad faith business
  • 35A license fees are 3rd lowest in the country
  • 35B fees are set by legislature, and contribute to GR funds; in FY 22’ $194M deposited to GR
  • About 2500% return on investment
  • Enforcement complexity has increased, especially with digital assets
  • Bhojani- We talked about the fees being low, should we increase it a bit?
    • That would be a policy question; we are happy to enforce it
  • Bhojani- Have you seen a state with an assets under management fee, rather than a flat fee?
    • For the client its very common to have an asset under management fee; it’s been a focus of ours to provide scrutiny on the fee arrangement
  • Capriglione- What are the actions you’re having to take against crypto?
    • The overwhelming majority are fraudulent fees, e.g., Bit Connect; the other that is on the rise is interest bearing accounts

 

Texas Department of Banking

Charles Cooper, Commissioner Texas Department of Banking

  • Gave overview of the Departments activities
  • Responsible on all the cost or no cost to GR
  • Mission is to ensure Texas has a safe, fair, and competitive financial system
  • Reports to finance commission of Texas; 11-member board appointed by Gov.
  • Regulates state charted banks which have $420B in assets, trust companies
    • Foreign bank office and agencies
    • Money services business
    • Prepaid funeral contract sellers and perpetual care cemeteries
  • Gave a breakdown on the number of federally insured finical institutions that operate in Texas; finances total $2T
    • Texas Department of banking has 21% of it
    • Texas saving and mortgage lending department has 20%, regulates 21 entities
    • Texas state charted credit union has 3%
    • Nationally chartered banks have 7%
    • Out of state newly chartered banks make up remaining 35%
  • The consolidation in banking industry has affected department; had 295 banks now have 213
  • Number is down because banks merge; assets under super vision has continued to increase
  • In the past few years congress seems to be working more with state bank regulators
  • Dual banking system consist of nationally charted bank, or state charter bank
  • If your nationally chartered bank you are regulated by the Comptroller of the Currency
  • If your state charted bank your regulated by state but you must choose a federal regulator
    • If you chose the federal reserve, they become a member bank
    • If you chose FDIC, they become a non-member
  • Most banks in Texas are non-members
  • Departments largest expenditures are the employee compensation and benefits
  • In 2010 Texas had 58 banks considered problem banks; today there are 5 banks
  • Number one concern for the Banking industry is cyber security risk
  • Concerned about economic uncertainty and about possible recession nation wide
  • Interest rates are high, banks are competing for deposits
  • The regulatory burden at the federal level makes it hard for true community banks
  • Have regulatory concerns about money service businesses, e.g., PayPal, MoneyGram; the space is changing, we have statues and regulations in Texas, but it is different in other states
  • Lambert- Is it too early to see numbers post COVID, about how businesses are doing?
    • There is a lot of liquidity in the system maybe too much, bankers in Texas have done a good job helping keep companies afloat