Monday, February 14, 2011

TEXPERS Engaging Legislators Regarding Dubious Nature of Rider 3 to House Bill 1

On behalf of our 420,000+ members, TEXPERS is sending letters to several members of the Texas legislature informing them of our opinion about Rider 3 under the appropriations to the Pension Review Board in House Bill 1 (the General Appropriations Bill). The proposed legislation would recommend the contribution by each public retirement systems of 50 cents for each active member and annuitant, ostensibly to pay for the operations of the PRB.

Our letter to legislators points out that the mandatory fee is essentially a tax and would probably violate both the Texas Constitution and the requirements for tax-qualified plans under Section 401(a) of the IRS Code of 1986.

We note in our letter that Section 67(a)(1), Article XVI of the Texas Constitution says “The assets of a system are held in trust for the benefit of members and may not be diverted.”

We also note that Section 67(f)(2), Article XVI of the Texas Constitution is applicable to the retirement system boards that do not participate in the statewide systems. It requires Boards to “hold the assets of the system or program for the exclusive purposes of providing benefits to participants and their beneficiaries and defraying reasonable expenses of administering the system or program...”

Section 401(a) of the Internal Revenue Code contains a similar prohibition on diversion of assets as a requirement for preferred tax qualification status.

The appropriations Rider 3 would clearly violate those provisions.

Our letter notes that:
Although it is usual for public retirement systems in Texas to use trust assets to pay the costs of investment, actuarial, accounting and legal services, these are all essential to performing pension management according to fiduciary best practices. In the case of a required fee (or tax) to fund PRB operations, a system would be paying for services that usually will not accrue to the system and may be neither requested nor needed. This would be in contrast to a PRB fee for services that were provided at the instigation of the system.
Because the vast majority of public retirement systems are funded locally, such a mandatory fee would also be an unfunded mandate on local governments, which is not currently illegal but certainly is a subject of current political controversy, as well as a proposed constitutional amendment.
We recognize that the state of Texas is looking at every way possible to balance its budget but this is not the way to go and may cost more in the way of legal fees down the road than it would benefit in the short term. – Max Patterson

Monday, February 7, 2011

Whither Thou Texas Pride?

We stumbled today upon a blog and were struck by its inclination to throw Texas under the bus in favor of a British media organization’s words. We wish our fellow Texans would endeavor to learn more about the Texas situation itself and not accept in unquestioning fashion the opinions that look to other places and infer how bad things are here. That’s unproductive to the debate in our great state, where the public employee pension system is in relatively good shape.

Specifically, we stumbled upon the Texas Conservative Review (TCR) blog that cited an Economist editor’s views of “the public pension crisis facing our states and local governments, including Texas.” Without so much as a glance into the situation in Texas, the TCR writer declares that,
“The bird's nest on the ground for public employee unions are increasingly being discovered. In many wealthy countries wages are on average higher in the state sector, pensions better and job security paramount. Regardless of the jobs workers do, their unions have blocked reform at every opportunity.”
It’s disappointing when blogs of various political stripes resort to creating “guilt by association” without looking into the facts in Texas. As a right-to-work state, public employee unions have played only a minor role in city-pension discussions over the years, especially compared to those in other states. And Texas pensions are in pretty good shape compared to other pensions around the world. Look into the facts about Texas pensions before painting with such a broad brush. – Max Patterson

Tuesday, February 1, 2011

Session Must Be In – Media Have Our Number

The beginning of every year seems to have an inordinate number of media stories about legislatures looking at their public employee pensions. This year is no different. It’s a good thing though that more journalists are endeavoring to seek balancing, informed views of what is going on.

For example, Tuesday’s edition of the Fort Worth Star-Telegram carries a story about how the Texas legislature is viewing the funding status of the state’s largest pensions. Yours truly offers a couple of comments on a tax that some are proposing to levy on pensioners as a funding option for the Pension Review Board, the organization responsible for monitoring the state’s pensions. As I said to the reporter, there is a legal issue involved in this – Is the tax a benefit to the pension trust? If it is not, then it is not a legal expense that the state can add. I’m sure we’ll see more on this topic.

And on Saturday the Wall Street Journal published my Letter to the Editor questioning a statement in an editorial on Utah’s current pension changes. The WSJ editorial said the state was paying 10 percent of its employees’ salaries as a retirement benefit and called the contribution “a generous amount by private company standards.”

I question that characterization, especially because it was ostensibly intended to fan the flames of envy politics that are so popular right now.

Here’s the point: Private companies contribute 6.2%of each employee’s salary, by law, as their Social Security retirement benefit. The employee also pays 6.2% of their salary to Social Security. Then the company may pay up to 3-5% of the employee’s salary in matching funds to their 401(k) account. That’s a 9.2-11.2% retirement benefit that’s paid by private sector employers on their employees behalf – a very comparable amount to the ‘generous amount’ being paid in Utah.

Considered in total, an employee in the private sector benefits from 12.4 percent of their salaries paid in Social Security contributions (actually 10.4 percent this year, due to tax law changes for 2011). Then there’s their contribution of, say, 5% of their salary to their 401(k), and then their employer’s matching amount of 5%, ideally. That’s 20.4%of their salary paid in one way or another to their retirement. We just ask folks to make apples-to-apples comparisons when they are discussing these issues.

Of course, private employers can choose not to fund their employees’ 401(k) accounts at any time. We’re seeing now that that does not work in public sector employees accounts. It won’t work well in private sector employees’ retirement portfolios either. That should be a real concern to journalists as it bodes poorly for the future. – Max Patterson