The House Committee on Pensions has released its interim report to the 86th Legislature.
The report addresses several issues including the oversight of local pensions, governance of state retirement systems, and health insurance in pensions, as well as monitoring legislation under the committee’s jurisdiction. For more details, analysis, and conclusions from the committee, please see the complete report.
Spotlight on Recommendations
Charge 1. Oversight of Local Pensions
- Additional legislation that could bolster the current Funding Soundness Restoration Plan would require a lower amortization period threshold to trigger FSRP requirements while requiring the FSRP goal to be in line with current PRB guidelines. The FSRPs submitted would require a reduction in the amortization period with a scaled timeline based on the current amortization period. Therefore, plans with an infinite or 100 year amortization periods would have a longer time to achieve their goal than a system currently at 40 or 50 years. This would require plans to act sooner and design their funding plans to be more in line with industry standards and PRB guidelines.
- Additionally, increased funding is necessary to provide the Pension Review Board with additional staff and resources to analyze and research many of these failing systems. Through creating suggestions for faltering systems and general recommendations for success, the PRB provides necessary information to both local systems and the state legislators seeking to make improvements. In order to continue and expand the research and analysis currently available, additional resources would provide the necessary support for increased intensive actuarial reviews, additional studies, and in-depth state-wide analysis of the current problems facing public pensions. Because the issues facing public pensions are growing, in Texas and across the nation, the state cannot afford to stand by if additional changes can be made now to limit the impact of future problems.
Charge 2. Governance and Oversight of State Retirement Systems
- The committee recommends that systems look closely at the assumed rates of return as well as investment allocations to ensure that both are the most realistic that can be expected while not unnecessarily risky. This is the responsibility of the board and trustees are asked to evaluate this critical factor carefully to protect these funds in a changing market.
- Additional oversight of investment practices and performance by independent evaluators to review the systems’ investments could be a valuable tool to ensure that best practices are followed and to protect the funds of employees and retirees throughout the state.
Charge 3. Health Insurance
- While some similarities can be drawn between ERS and TRS healthcare programs, there are crucial distinctions between the two, in regards to funding sources, membership population, and structure. However, beyond the differences in the healthcare benefits itself, differences in cost have been a concern. While many focus on the higher cost of TRS insurance options, it fails to take into account the distinctions in the pensions they receive. Currently, state employees pay 9.5% of their paycheck to ERS while public school employees contribute 7.7%. In retirement, TRS retirees have an average monthly benefit of $2,244, while the average ERS retiree’s benefits are less than $2,000 a month. During the 2016 Joint Interim Committee to study TRS Health Benefit Plans, calculations were done to determine what it would cost to offer a single combined plan to active and retired public school teachers and employees in Texas with similar benefits to the current ERS HealthSelect plan. These calculations determined that creating this plan would cost an additional $10.4 billion for a total cost of $15.3 billion for the 2018-2019 biennium; this number would increase even more for the 2020-2021 biennium with $12.7 billion in additional funding necessary.41 Given the current constraints of the state budget, this is not something that could feasibly be obtained therefore other options need to be considered.
- In order to work through the challenges of making changes to a system impacting school districts across the state with size, geographic, and cost variations, the committee recommends forming a TRS-ActiveCare advisory panel to advise the legislature on future changes that could best assist teachers in districts across the state. Made up of teachers and administrative staff from school districts across the state, these members would be able to represent areas with differences in healthcare costs, rural and urban, large and small districts. These individuals will work in conjunction with the TRS staff and members of the legislature to provide potential solutions.
- Currently, due to the scope of the funding problem as a result of the funding structure of TRSCare, there is no simple solution, short of once again infusing hundreds of millions of dollars into the system. After listening to testimony from witnesses at the committee hearing and meeting with stakeholders, creating a sustainable health care option for retired teachers continues to be a focus of this committee going forward.
Charge 4. Monitor the agencies and programs under the Committee’s jurisdiction and oversee the implementation of relevant legislation passed by the 85th Legislature.
- While the legislation passed into law during the 85th session has made significant strides to improve pension systems in both Houston and Dallas, the work is not yet done. The Dallas Police and Fire Pension System Board still has work to do in order to increase the investment rate of return to meet their assumptions and replace previous poor investments. The Houston systems will continue to be monitored as potential budget constraints are faced to ensure that the three systems continue to be adequately funded. This committee will continue to observe both cities and their pension systems for their continued improvement over time especially as key actuarial valuations and risk sharing valuation studies are conducted. The Pension Review Board will continue to be overseeing these reports as required by legislation to notify the legislature of any failure of compliance.
- Beyond these cities, there continue to be future concerns of local plans across Texas facing increasing worse financial positions with growing unfunded liabilities, increasing amortization periods, out of control DROP, and actual investment returns well below the discount rate. As the economic times change, no longer can systems afford the level of benefits previously offered. Automatic COLAs, low retirement ages, DROP accounts providing high interest rates, and contributions that are insufficient to fund the plan are all serious considerations that need to be addressed in failing systems. Cities and systems need to be willing to work together in a spirit of shared sacrifice to solve their own problems. If it can’t be done at the local level, just as in past cases, the legislature will step in to enforce reform as necessary to protect the future soundness of retirement systems across the state.