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The Senate Committee on State Affairs heard invited and public testimony regarding interim charges related to the public pension system in Texas, and the implementation of SB 2190, HB 3158 and HB 3976.

Examine and assess public pension systems in Texas. Specifically, review and assess (1) the different types of retirement plans; (2) the actuarial assumptions used by retirement systems to value their liabilities and the consequences of amending those assumptions; (3) retirement systems’ investment practices and performance; and (4) the adequacy of financial disclosures including asset returns and fees. Make recommendations to ensure public pension system retirees’ benefits are preserved and protected.

This report is intended to give you an overview and highlight of the discussions on the various topics the committee took up. This report is not a verbatim transcript of the hearing; it 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.

Keith Brainard, Texas Pension Review Board (PRB)

  • State employees participate in some form of a defined benefit plan
  • Research shows that the design of the plan is aligned to certain outcomes
  • 401K has proven to be unreliable
  • PRB is creating a set of retirement design principles
  • 7% return is acceptable
  • Fixed rate contribution at 10% cap structure lacks mechanism to react to changes
    • Partly responsible for underfunding state pension plans
    • Contribution cap is another factor
    • Also need accurate actuary projections
  • Zaffirini- do you have specific recommendations?
    • Not at this time, will provide that information
  • Zaffirini- what role should the legislature play in setting actuary assumptions?
    • Do not believe that the legislature should have a role in creating assumptions
  • Zaffirini- discussed constitutional contribution limitations
  • Schwertner- mentioned contribution limitations, many states that do not have limitations are worse off, how would you explain that?
    • Most states that address pensions do so in a context of ensuring they are adequately funded
  • Schwertner- how do the projected investment returns compare to the actuary returns?
    • Depends on the timeframe being considered
  • Schwertner- the cap was put in place to limit the amount of state money put into the system, and there is a need to fully fund the plan?
    • A large factor is how much the plan costs
    • Texas is substantially under the average of state spending on pensions
  • Schwertner- do other states have better benefits?
    • Varies, in some areas Texas does better and in other areas Texas does less well
  • Nelson- what is the state doing to ensure localities will not be in the same position again?
    • Systematically going through from the least funded municipalities to help course correct
    • Staff is available for technical assistance
  • Reviews are conducted, and potential recommendations are created
    • Will provide a report to the legislature regarding pension shortfalls
  • Hughes- based on what you’ve seen, where would you put the cap or what should the state contribution be?
    • Defer to other representatives for an answer
  • Schwertner- are our pension plans like social security in that it is unsustainable?
    • Does not believe that public pension plans are inherently unsustainable
    • Public pension plans are designed to pre-fund needs
  • Schwertner- do you think that employees should be able to control their own money?
    • Pooling Assets and liabilities is a more effective way to fund public priorities

 

Anumeha Kumar, PRB

  • Provided written testimony
  • PRB has created legislative recommendations
    • Will provide the recommendations to the legislature in a few months
  • Creating a pension dashboard
  • Have 99 current defined plans
  • Discussed types of plans and number of plans throughout the state as in written testimony

 

Kenneth Herbold, PRB

  • Reviewed presentation
  • Actuary assumptions are designed to estimate costs in the future
  • Costs are determined by actual costs, not the assumptions
  • Assumptions help determine how to pay for future benefits
  • Assumptions include: Economic and demographic assumptions
  • Goals are principle-based
    • Reviewed principles as referenced in written testimony
    • Includes items like: will not be overly biased, intergenerational equity, etc.
  • Hughes- intergenerational equity is to avoid the social security nightmare?
    • Yes, intergenerational equity- benefits are paid for by those receiving the benefits
  • Use building block approach to arrive at actuary assumptions
  • Schwertner- in terms of asset allocation, do you consider structural changes in the markets?
    • Analysis depends on the size and sophistication of the plan, considering the changing market is part of it but actuaries are not investment professionals. It is important to remember that these are long-term projections and to have an investment structure that changes with the market
  • After the actuary recommends an assumption to the board, it is the board’s responsibility to select an assumption
  • Assumptions are compared nationally
  • Short-term fluctuations shouldn’t significantly impact assumptions
  • Assumptions are regularly reviewed to ensure they are aligned with plan goals
  • Birdwell- last interim the TRS reported difficulty meeting objectives while not changing assumptions, when would the advisory board recommend an assumption rate change?
    • Kumar- the two state systems are required to review every 4 years
    • If a plan consistently does not update assumptions systems experience losses for a long period of time
    • The review period is when guidance is initiated
  • Birdwell- are you waiting to be asked for input or do you initiate input?
    • The large state-wide plans have built-in review times
    • Smaller systems are recommended to review the systems
    • Review board is not custodian of those smaller plans only have a review capacity
    • Ensure that their assumptions are realistic
  • Schwertner- regarding pension review, what is the thought regarding the liability of the state when the board issues recommendations to smaller systems?
    • AG is better to consider this issue, and has been clear that municipalities are responsible for their own plans
  • Schwertner- even though the plans are in statute there is no statutory obligation by the state to be responsible for pension shortfalls?
    • Refer to the AGs office and press release

 

Porter Wilson, Employees Retirement System of Texas (ERS)

  • Reviewed written testimony
  • Have 4 systems under prevue
  • Main fund has 140,000 active participants
    • 100,000 retirees in plan
  • Discussed various assumptions involved in planning
    • Board has changed assumption from 8% to 71/2% return rate
    • Most elements of experience studies look backward while return assumption is a forward-looking assumption
  • Briefly reviewed return evaluation and how changes in assumptions affect the 20-30-year projections as well as actuary evaluation conducted in August 2017
  • Schwertner- what is a reset to market value?
    • Most funds recognize gains and losses over a period
    • Recognized all deferred losses at one time in current valuation (roughly $2 billion)
  • Nelson- if a goal is to become actuarily sound, what else can we do besides cash contributions?
    • The only other way to make changes is to make benefit design changes
    • Some of those changes have been made to contain costs
  • Nelson- why did ERS board choose to go with 7.5% instead of 7.25% as recommended by the actuary?
    • Took longer-term projections of actual valuation
    • 20-year was 7.4% and 30-year was 7.6% so settled on 7.5%
    • With the understanding that it would be reviewed in 2 years (August 2019)
  • Schwertner- what type of assets in terms of deferred valuation was reassessed?
    • All of them, they are now the actual value of the system
  • Schwertner- what percent of assets are in alternative assets?
    • 20%
  • Schwertner- one issue is that they are less transparent
    • Working very hard to be as transparent as possible
  • Lucio- how would the international trade issue affect ERS?
    • Without specifics, that is why portfolios are diversified to reduce the impact of changes in fiscal policies
  • The constitution does say “no less that 6 and no more than 10% cap” but also says “must” be funded
  • Noted the stagnant number of Texas employees, which could cause potential issues with deferred liability
  • Stress testing is being evaluated to a higher degree
  • Briefly discussed governance structure as reviewed in Sunset
    • Governance has been bolstered
    • Added several diversified members to investment review teams
  • Schwertner- what is the investment return over the last 10 years?
    • 67% net

 

Brian Guthrie, Teacher Retirement System of Texas (TRS)

  • Provided written testimony
  • Current funding period in just above 30 years
  • Discussed diversification of investments
  • Discussed return assumption of 8% and actuary returns
  • 13th largest fund in the world
  • Discussed board governance of investments
    • Board of trustees review and consider any investment that is over 1% of the fund
    • Staff is required to report monthly
  • Have had 88 audits over last 6 years
  • Reviewed asset allocation studies which determined a gross asset return- led to roughly 7.4% assumed return
    • Also analyzed asset return probability
  • Current assumptions show that to reach actuary soundness would require $67 million per year put into the system
  • Each 1% increase equals $420 each year
    • Contribution would be additional 1.2% per year to reach actuary soundness
  • Board deferred action for 2 weeks for additional discussion
  • Huffman- if the board lowers the rate to 7.5%, actuary soundness would take $599 million annual influx from the state
  • Huffman- with a COLA it would be roughly 2 billion per biennium to reach actuarial soundness?
    • Correct
  • Nelson- need to do a better job of getting that information out, how can we go about that?
    • We meet with members regionally on a periodic basis
    • There is a more fundamental issue of misinformation regarding this issue
  • Huffman- the last cola was in 2013?
    • Brian: that is correct
  • Huffman- has Texas paid that yet?
    • No
  • Schwertner- We did significant work this last session regarding government oversight. I hope that people who rely on these pensions realize we as a state are taking this very seriously.
  • Schwertner- Members need to understand that investment return is the largest issue that has faced TRS.
  • Schwertner- How has TRS done relative to other large pensions?
    • We have done a good job of beating our peers.
  • Schwertner- with that being said, you would think the advisement of Mr. Newton and his company that the forward projections would be heavily scrutinized.
    • Joe Newton- TRS has done well on returns. One thing we need to pay attention to is adjusted returns.
  • Lucio- If the board were to lower the assumed rate of return, how would that affect the period of unfunded liability?
    • Our funding period would go to 86 years (it would take that long to pay off)
    • Brian- prior to the 2013 session, we did a pension benefit design study. The study was helpful and we plan to update it this interim.

 

Amy Bishop, Texas County and District Retirement System (TCDRS)

  • Does not receive funding from the State of Texas
  • Our savings-based benefits are responsibly funded. Described “Cash Balance Plan”.
  • $22,000 is the average benefit for our retirees
  • Have many plans funded over 100%
  • Most plans are funded at about 80%
  • Investment earnings are funding most of the plan
  • Discussed disclosures and transparency
    • Robust website in terms of transparency
  • Investment return assumption has been and will remain at 8%
  • Nelson- discussed fluctuations in portfolio earnings
  • Lucio- it is an economic stabilization fund?
    • The reserve fund is, it is a tool used to keep rates stable

 

David Gavia, Texas Municipal Retirement System (TMRS)

  • TMRS does not support all municipalities
  • uses combination of employee, city and investment funds
  • Each municipality determines the benefit and rate options
  • Board of trustees serve 6-year staggered terms with support by staff and consultants
  • Many cities are 100% funded or higher
  • Administers $28.4 billion in assets
  • System-wide funded ratio is 86.3%
  • In 2017 with 13.76% investment return
  • Fees will increase as more investments in alternative investments
  • Transitioning by the end of 2018 transitioning from bond based to more diversified portfolios
  • Discussed exceeding investment return assumptions
  • HB 3056- HB 3056- Allowed University Park to close its stand-alone firefighter plan to new hires and allowed entry of new hires to TMRS – a bracketed bill to only apply to University Park.
  • Actuary policies
    • Adopted shorter and closed amortization periods
    • Adjusted return rate to lower number from 7% to 6.7%
  • Nelson- why did the board choose 6.7% return rate in 2017?
    • In 2015 capital market assumptions were reviewed and determined that it needed to be lowered in consultation with actuary and consultants
    • Did experience contribution rate increase associated with a lowered assumed return rate lowering

 

Joseph Newton, Gabriel Roeder Smith (GRS)

  • Valuation often determines what the plan sponsor contribution is
  • TRS and ERS work opposite of that
  • Purpose of a valuation is to assess the funding policy
  • Experience studies help determine if there are changes needed,
    • Need time to see trends
    • Expensive to conduct the studies
    • Could do it every year but would not give as valuable information
    • More frequent studies could allow for minor tweaks and changes to be made along the way
  • Actuary considers forward-looking view in creating assumptions
  • Discussed actuary process at GRS
    • Important to understand what peers are doing and why in considering alternative assumptions
  • Careful to pay attention to short-term
  • Huffman- is your recommendation still at 7.25%
    • Yes
  • Huffman would it be unwise to set it at 7.5%
    • Not unwise but would like to see that be reviewed again in two years similar to ERS
  • Difference between ERS and TRS experience studies
    • Mortality and payroll growth are big factors and taken care of in last experiential review

 

Monitor the implementation of House Bill 3976, relating to the administration of and benefits payable under the Texas Public School Retired Employees Group Benefits Act.

Brian Guthrie, TRS

  • Challenge going into the last session was that the fund was not sustainable
  • With the changes made the last session $600 million shortfall over the biennium
  • Discussed changes made in 85th legislative session
  • Conducted 90 sessions around the state to help go through changes and new implementations
  • 36,000 participants left after January 1, 2018
    • Less than expected
    • Dependent premiums did go up- a large factor in people leaving
    • Some additional funding put in to address that, but not enough to prevent people from leaving
  • Lucio- what has your agency learned about why so many people left, and can they rejoin at a later date?
    • Big factor was an increase in cost led to people leaving, with many people changing plans within TRS Care, many people found other products
    • They cannot come back at this point without associated cost through open enrollment period
    • There was a time allotted (60 days) for people to come back into the system who left
  • Huffman- did you see some people come back?
    • We did, do not have specific numbers at present
  • Schwertner- can you speak to confusion about plans that were marketed as alternative TRS plans?
    • Cannot speak directly to that, there was misleading information being provided to people
  • Huffman- where you aware TRTS would be offering any supplemental plans to teachers that may have appeared to be in association with TRS Care?
    • Did not know that it was going to happen and was likely very confusing, but a representative from them would be better able to answer questions
  • Nelson- 20,000 new members into the system each year?
    • That is correct
  • Noted cost to customer service due to health care changes
    • Over 100,000 calls per month
  • Lucio- heard from retirees that it is difficult to getting somebody on the phone who can assist, what is the average wait time?
    • About 15-minute average wait time
    • Some peak hours have up to 45 minutes
    • There was a technical error automatically ending phone calls
  • Lucio- need to do everything we can to address those concerns
    • Completely agree, were not expecting such a high volume of need, but are marking infrastructure changes as well as hiring additional resource to help manage this. Which will require additional funding from the legislature
  • Written testimony shows changes made to the plan
  • Discussed additional funding appropriated during the special session for generic prescriptions for members

 

Katrina Daniel, TRS

  • Discussed generic prescription list added after special session
  • Discussed specifics of out of pocket and deductible payments in TRS standard care plans
  • Birdwell- did we do anything for those with disabled adult dependents?
    • The premium was lowered

 

Monitor the implementation of House Bill 3976, relating to the administration of and benefits payable under the Texas Public School Retired Employees Group Benefits Act.

Tim Lee, Texas Retired Teachers Association (TRTA)

  • Proud that something happened with TRS Care during the session and special session to continue the plan
  • Imperative to keep TRS alive- offers the best deal possible for teachers
  • Criticism of TRS Care
    • Cost: 14 years without a change in premium, led to a large change at once, deductibles and copays are very high
    • Choice: limiting/eliminating plan supplemental choices caused people to look for alternative options
    • Communication: telephone system and an overwhelming number of calls, more robust call center is needed as well as funding provided from the state to do so, transitioning issues with people transferring out of TRS Care- needs to be reviewed
  • Lucio – recommends witness reduce his thoughts and recommendations to writing and get it to the committee, have similar concern regarding support staff and paraprofessionals but what kind of feedback have you received regarding the transition to new TRS care products
    • Knowing if they are getting value for dependent coverage, a problem with how to leave is how to pay for it

 

Monitor the implementation of House Bill 3158, relating to the retirement systems for and the provision of other benefits to police and firefighters in certain municipalities.

Elizabeth Reich, City of Dallas

  • Update on history and changes of pension, tough comprises solved significant portion of issues
  • Empowers new board to make fiscally smart, responsible decisions
  • Do not have any changes to suggest at this time
  • Brief updates on implementation
  • New members on board took up challenging task and working tirelessly to implement legislation
  • City will contribute 72% of all contributions to the pension, contributions are guaranteed
  • Having an agreement seems to have stabilized attrition and credit rating agencies see the legislation as credit positive – now rated as “stable” by several agencies
  • Member of staff attends every pension board meeting

 

Kelly Gottschalk, Dallas Police and Fire Pension 

  • Began immediately on communications as soon as the bill was signed, large outreach efforts
  • Policies and procedures in place, software changes to address benefits
  • Started working immediately with the nomination committee
  • Had full board for October 12th meeting which was critical in order to meet certain end of year deadlines
  • Requiring proof for hardship
  • Bill allowed for people to undo DROP and it was a challenge – more than 600 people wanted numbers run and 183 people did the undo
  • Now starting to look at investment portfolio

 

Monitor the implementation of Senate Bill 2190, relating to the public retirement systems of certain municipalities

 

Melissa Dubowski, City of Houston

  • Sharing of census data allowed certain valuation studies to be completed
  • Calculations for HMEPS, HFRRF and HPOPS were reviewed
  • $8.12 billion liability originally but reforms reduced liability by $5.1 billion based on current calculations
  • Major improvement in city’s net position primarily due to pension reform
  • Credit rating agencies have noted these reforms

 

David Keller, Houston Firefighters’ Relief and Retirement Fund (HFRRF)

  • Have fully implemented the changes in the bill with the cooperation of the City of Houston
  • Discussed timeline for implementation
  • Will be conducting an experience study in 2020
  • Had 12% rate of return last year

 

Sherry Mose, Houston Municipal Employees Pension System (HMEPS)

  • Bill let to over $800 million in future benefit reductions
  • Also created a lower tier of benefits
  • Altered the City’s funding requirement to allow for risk sharing component
  • Have completed new valuation in July 2017
  • Working to streamline processes and work through issues that may arise from the new statute

 

Terry Bratton, Houston Police Officers Pension System (HPOPS)

  • By mid-July had administrative fixes for computer system
  • Worked for better communication with members regarding changes due to SB 2190
  • Did have a significant number of officers retire, but the number of officers is back at the average
  • Pension obligation bonds- received $750 million in December- which has been invested

 

Public Testimony

Anne Fickle, Texas Classroom Teachers Association (TCTA)

  • Request to keep in mind that majority of educators do not/will not receive social security and rely solely on TRS
  • TRS Care needs more money put into the system
  • TRS Care needs revised funding structure
  • Health Insurance for active employees has a great need

 

Linda Eberton, Self

  • Described personal experience with TRS and TRS Care
  • Many retirees cannot afford TRS Care but cannot afford to leave

 

John Grey, Texas State Teachers Association (TSTA)

  • Recommends a dedicated funding stream for TRS Care
  • Many differences in quality of benefits between TRS and ERS, should be more closely aligned

 

Nick Salem, Houston Retired Firefighters Association

  • Retirees are confused about the changes brought by SB 2190
  • Changes created uncertainty surrounding benefits
  • Complexity of plan causes more issues than it solves
  • Recommends revising and correcting the plan

 

Beaman Floyd, Texas Association of School Administrators (TASA)

  • Believes the valuation is a good idea regarding TRS

 

Tanisha Woods, Local 39

  • ERS needs funding to get back on track
  • Consideration needed for how changes to benefits will impact attracting and retaining employees
  • Huffman and Birdwell- thanked TDCJ employees for their hard work

 

Max Patterson, Texas Association of Public Employee Retirement Systems (TEXPERS)

  • Commends and recommends looking at what the pension review board does
  • Thanked legislators for taking steps to continue the state pension systems
  • Have provided in written testimony an example of a municipality eliminating employee defined benefit plan

 

Ted Raab, Texas American Federation of Teachers (AFT)

  • Not necessarily conservative to have an aggressive assumption
  • Need accuracy to maintain a stable system
  • Need to continue reviewing active employee care

 

Bill Hamilton, Retired State Employees Association of Texas (RSEA)

  • Commends review board for work on continuing to improve pension systems
  • Need to continue creating best practices as the state moves forward with improving pension systems

 

Monte Exter, Association of Texas Professional Educators (ATPE)

  • Doesn’t help to lower return rate if the state doesn’t make up the necessary contribution rate
  • Need a realistic dialogue about what the state can put into the system
  • Noted state credit rating can be affected by the health of the pension system