House Pensions, Investments & Financial Services met on March 10 to hold an organizational hearing to discuss a variety of benefit plans in the state. A video of the hearing can be found here.
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.
Porter Wilson, Executive Director of the Texas Employees Retirement System
- Administers 4 pension plans, state employees, district attorney’s, custodial officers, and law enforcement is the largest plan with 142,000 members
- Another plan contains game wardens, prison guards etc., who get some of their funding from the previous plan, 35,000 members; have 2 plans for judges
- All 3 of the prefunded plans are on a path to run out of money
- ERS will run out in 40 years, the supplemental fund in 20 years, and the JRS 2 as well
- Once fund is depleted, pay-as-you-go will be implemented
- Short on payroll by 6.63% despite contributions
- Phase-in approach is acceptable course of action
- 5% is sufficient to cover the benefit divided between the employee (7%), the state (7%), and the agency (0.5%)
- $14.7 billion exists in the unfunded liability
- The longer it takes to pay off, the more expensive the unfunded liability is
- ERS runs a pension plan, but also runs a benefit program, the largest being related to health insurance
- 1 in 53 Texans are on the health insurance program
- 2019 funding levels should carry over into the next biennium
- Provide Dental, Life, Vision, 401K, long and short-term disability, etc.
- Anchia – My father benefitted from my mother’s pension, so I am a firm believer in acting on this
- Murphy – I would like you to discuss the flat line unemployment and rocketing line of retirees?
- We basically have 140,000 active state employees, unchanged from 1993
- Our retirement community has doubled, so we need more funding due to the unfunded liability
- Murphy – We were able to provide money to TRS last session, I encourage members to study up on this issue
- Anchia – What is the cost of inaction?
- Investment returns are covering about 60% of the benefits, without this, it is 4 times the cost, a little over $2 billion in retirement funds annually
- Every year it is unaddressed, the unfunded liability grows almost $2 billion
- Anchia – If we do nothing, the liability is still there
- Stephenson – You have 140,000 employees but 280,000 retirees?
- We have 117,000 retirees
- Anchia – Inaction will be very expensive
- We are happy to provide our expertise in the future
Brian Guthrie, Executive Director of the Teacher Retirement System
- Very similar position to ERS last session
- Provide retirement and healthcare benefits to 1.7 million members, 1.2 million active employees
- Active Care program provides employee benefits for 500,000 people
- Vast majority of districts in active care, but only half of the population
- Our retirees are entitled to an annuity based on a multiplier
- Raised retirement age minimum to 62; use the rule of 80 to determine when eligible
- Anchia – Could you give us an example of the rule of 80?
- I have 28 years of service and I am 51, so I have a total of 79 years; I would have one more year until I am eligible for benefits
- Anchia – We could increase the number of the calculation to change behavior?
- Correct; are incentives, disincentives, etc.
- Legislature provided a stair-step system to increase contributions from 6.8% to 7.5%
- Base appropriations bill includes rate contribution increases
- We will fully pay off unfunded liability in 27 years, previously 89 years; lowered our return assumptions to 7.25%
- The system is actuarily sound and the legislature fully funds our program
- Anchia – Could you walk through the pie chart?
- Investments make up the primary source of income, roughly 62%
- Other contributions come from the state and members
- Anchia – What were the results of the recent analysis?
- We do not have the results yet, but we expect our funding period will go down
- Anchia – Is there a way to recommend a COLA but remain below the 31-year period?
- There are two ways, you can pay it up front or finance the system through the pension fund
- Anchia – What goes behind the 31-year period statute?
- It was considered to be a determinant of a healthy pension years ago
- A more appropriate number is now 25 years according to some actuaries
- Munoz – You said it could cost $275 million to pay out the 3% COLA?
- It would cost $2.8 billion up front, or we can finance it through the pension fund
- Munoz – Would it go up every year?
- The $2.8 billion would compound in value each year by investment, it is cheaper
- Munoz – Last session, additional investment staff was authorized to assist?
- We wanted to bring more investment in-house as opposed to hiring external managers, resulting in 43 additional staff, $190 million saved in fees, but we would like to hire more staff because it saves money
- Munoz – Who can utilize this extra funding?
- We can, it stays in the trust fund for the original purpose intended
- Munoz – How much do you pay in management fees per year?
- Over a $1 billion
- Anchia – Most management funds are around 2% for reference
- We can do it cheaper and manage $177 billion
- Anchia – A sunset will be coming to the floor
- We support the recommendations, many do not require a statutory change
- Anchia – Is there a barrier to return to teaching assistance with a penalty upon retirement?
- Yes, but there is a process; most return several months after they retire
- If you exceed past the half level, you lose your entire annuity, I think there are better ways to penalize, perhaps a dollar-per-dollar reduction or a 3 strikes approach
- Appeals process does not give me any leeway to address this
- Stephenson – If they go back to work, are they just paying a payroll tax essentially?
- Yes, they are supplementing their retirement income
- The cost of healthcare is increasing more than active member payroll; members are paying 70% of the premium costs
- Recently signed contracts with Blue Cross Blue Shield and United that saved $750 million for both plans over the next several years
- Active care funds flow through the school finance system
- Provision in education code that allows districts of innovation to be declared
- Provisions related to active care that say districts cannot offer competing coverage unless they are a district of innovation, resulting in appealing healthier members to switch over, leaving us to cover the more expensive population
- Recommendation to open regional office will be in El Paso, funding included in the bill
Amy Bishop, Executive Director of the Texas County and District Retirement System
- Partner with 800 employers throughout the state, in all counties but 1
- Serve over 320,000 Texans, 70,000 retirees
- One of the best funded retirement systems in the nation
- Managed by a Board of Trustees appointed by Governor
- 23% operating costs relative to assets, no funding from the state
- Payed out $1.6 billion in benefits last year
- Savings-based benefits, save for retirement in their own accounts, earning 7% a year
- 7 different retirement options to choose from
- Employers contribute as well, weighted average of around 12.71%
- Plan design makes planning and forecasting easier; average retirement age is 61
- Investments fund about 77 cents on every dollar in the program; returns outperformed industry benchmarks and totaled 16.6% in 2019 and 9.7% in 2020
- Employers can adjust benefits as needed in times of trouble
- Reserve funds total $1 billion and additional contributions allow for a buffer
David Wescoe, Executive Director of the Texas Municipal Retirement System
- 220,000 members and 900 participating cities; independent board is appointed
- Advisors, auditors, independent custodial bank, investment consultants, etc.
- Employee and city put in matching amounts with 5% per year pay out
- Very conservative outlooks for funding; city funding numbers are impressive
- Each city has an actuarily evaluation that comes up with their funded ratio
- Reduced administrative budget by 5%
- Do not pay incentive benefits, purely a public service entity
Shirley Hays, Interim Executive Director for the Texas Emergency Services Retirement System
- Active members do not pay into system, local governments involved pay into the system
- Requesting $3.88 million in LAR for the upcoming biennium
- Asking for an additional $110,000 from the GRD fund
- The COVID-19 impact has made our members extremely busy
- 9-member board appointed by the Governor, serve in staggered terms, 3+ years of experience required
- Net rate of return for 2020 was 11%
- Unfunded liability is $25 million, but expected contributions will amortize this liability within 30 years; average member contribution per month is $36
- Anchia – You almost doubled your evaluation, what is your asset allocation?
- The investment committee and consultants have been very involved and qualified
- Since 2010, there has been an increase in contributions from $12 to the current $36 amount
- Anchia – What is the plan for the unfunded liability?
- Additional contributions would bring credit into the system, some are very large amounts
- State contributions can be no more than 1/3 of the total contributions
- Anchia – Many funds are moving from 30 to 25 years, are you discussing this?
- We anticipate that it can be amortized in 30 years with the maximum state contribution over 19 years
Anumeha Kumar, Executive Director of the Texas Pension Review Board
- 347 Texas public retirement systems and 100 defined benefit plans; Total membership is close to 3 million people
- 7-member board is appointed by the Governor
- 17 municipal, 42 part-paid local firefighter, and 34 plans offered by special purpose districts, etc.
- PRB has 11 employees
- Prepares impact statements along with LBB
- Adopted best practice funding guidelines, recommends 30-year maximum amortization
- Systems have ten years to get back under the previous 40-year threshold, 19 systems have been subject to the statute
- Agency conducts reviews of systems facing severe under-funding based on an adopted set of factors, designed to be done before it becomes critical
- Minimum education training program requires new trustees of pension plans to undergo annual training free of charge
- Anchia – What is the deal with non-compliance for the FSRP requirements among 3 systems?
- There are times when the volunteer systems have trouble submitting plans, these particular ones have had financial difficulty due to the pandemic
- We have reached out but we don’t have any enforcement authority
- Anchia – We have not given the authority to enforce this, do you have anything Vice-Chair?
- Parker – This is absolutely something to look into, can you share what these systems have submitted?
- Anchia – The inference is that they are hiding something
- Stephenson – 65% of your evaluation is in 2 plans?
- Correct
- Parker – Have you not done any intensive reviews in 2020?
- Correct, the board has been working in compliance with new mandates in a past Senate bill, but we will start reviewing again soon
- Parker – Do you have a plan?
- We will review the systems that are more severely under-funded
- Parker – When will you know who you are going to review?
- In the next month or two
- Parker – It is important that the mission expands over time to those that are not necessarily in critical condition, could you share what worries you and what we should be focused on?
- We have publicly expressed concerns about how a majority of the funds are fixed-rate systems which does not afford the sponsor time to react to negative circumstances
- The interest is compounding at a very fast rate
- Although systems have reduced their return assumptions, other funding should be contributed to cover these costs
- The board has looked into risk-sharing mechanisms
- Anchia – The trustees for the firefighter plans are not coming to the training, what are your thoughts on this?
- This is very important to address and we reach out to them, but we do not have any enforcement mechanisms