Monday, October 12, 2015

Houston Chronicle publishes Patterson op-ed on local control

The Houston Chronicle published an op-ed by Max Patterson on the front page of its Sunday Outlook section, on the topic of local control.

They juxtaposed it with an article by Josh McGee of the Laura and John Arnold Foundation.

At the end of the day, it's a matter of definition of "control." In TEXPERS view, the Legislature's history of involvement with local pension funds demonstrates that it only passes changes to statute when all parties are in agreement. McGee would have the general public believe that the Legislature takes a much more active role than they really do.

Here is Patterson's op-ed in full:

Local control would make Houston pension fund problems grow
By Max Patterson
Houston voters would do well to consider the true meaning of “local control” for its three public employee pension funds. Those advocating the radical change of giving city council absolute power over pension system dynamics seem disconnected from reality.
The Greater Houston Partnership and Laura and John Arnold Foundation, along with the Texas Public Policy Foundation in Austin, have been tag-teaming a tale about how 12 pension funds in seven of Texas’ largest cities interact with the Legislature. They claim, misleadingly, that legislators control the pension systems through state laws. Eliminating those laws, they say, would return final decision making authority over benefit calculations, contribution requirements and governance to the city council members and mayors who are directly elected by taxpayers in a given locale.
This narrative is misleading. No Texas legislative committee has ever required its own changes to Houston’s, or other cities’, pension funds. Having such power and exercising it would fall within the normal definition of “control.” If the Legislature truly controlled the 12 pension systems in statute, it could theoretically take over Houston’s entire budget process to fully fund the pension systems or unilaterally make pension benefit adjustments. That has never happened.
The authority needed to alter statutes already lies squarely with city council. The kicker is that a council and mayor has to work collaboratively and constructively with city staff, the pension fund board, current municipal employees, firefighters, police and their retirees, and actuaries to develop proposals that meet fiscal and fiduciary restraints. That’s a lot of work for a city council; usually they defer such time-consuming, detailed effort to the pension board, the mayor’s office, or the city manager. Only then, if the council votes to approve a proposal others have created, will it get to the full Legislature for review and vote.
The honest observer saw this dynamic in February when Mayor Annise Parker and the firefighters’ pension system, after years of acrimonious exchanges, came to an agreement they wanted the Legislature to consider. City council, feeling left out of the discussions, convened a special meeting in March to discuss the proposal. Two council members left the meeting, preventing a quorum from voting. The move worked. The bill died. Legislators want all local stakeholders to be in consensus about a proposed change before it gets anywhere close to a vote.
This occurs by design. Decades ago the 12 pension systems and their city councils agreed that the Legislature would be a good check-and-balance to the contentious process surrounding pension fund changes. The pension funds were concerned about the budget dysfunction that can occur when temporary politicians seek money for constituents’ pet projects. Similarly, city councils wanted to ensure that pension benefits would not break the budget. By placing them in statute, and minimizing the ability of the mayor or council to stack a pension board, they created a push-pull tussle between themselves, with the Legislature as backstop. In contrast to local pension systems in other states, the conservative, common sense safeguards in the Texas design have worked extremely well. 
It would be far more constructive for Houston’s leaders to consider the counsel Moody’s Investor Services offered in July: “A sustainable plan to manage the costs, while balancing the budgets, and meeting full required contributions will be key credit considerations going forward.” That last piece of advice speaks volumes.
If Houston city council had over the past decades provided the entire amount its pension systems needed to generate appropriate investment returns then we would not even be having this discussion. The systems’ unfunded liabilities would be lower by hundreds of millions or even billions given the compounding effects of the pension funds’ historic rates of return. The Houston Municipal Employees Pension System, which administers the pension funds for retiring librarians, 911 operators, budget and legal analysts, sanitation workers and other municipal employees, had a 9.19% average annual rate of return over the last 20-year period, well above their assumed rate of return and one of the highest of all Texas pension systems. The Houston Police Officers Pension System, with an 8.78% average annual return over 20 years, handily beat their assumed rate of return and also performed among Texas’ best local pensions.
Pension systems are complicated. Willfully twisting terms and skewing common understandings to achieve a short term political victory will create unintended consequences. The stakes are high. Houston’s pension funds distribute tens of millions of dollars each month for the retirement benefits earned by tens of thousands of retirees, most of who live in Harris County and Texas. Such change would disrupt the predictable stimulus provided to our economy.

Max Patterson is the executive director of the Texas Association of Public Employee Retirement Systems.

Thursday, October 1, 2015

Texas’s state and local pension funds achieve performance hallmark

In the Texas pension fund battles, the opponents of defined benefit plans regularly manufacture a “sky-is-falling” tale about the aggregate amount of unfunded liabilities, the difference between assets on hand and future benefits owed. They use the UL because all the other measures of pension fund health for Texas’ state and local pensions are pretty darn good.

Take for example a recent finding by the Texas Association of Public Employee Retirement Systems regarding amortization periods. The Texas Pension Review Board has said that amortization periods are the single “most appropriate” measure of public retirement systems’ health and defines them as “the length in time, in years, needed to pay for the unfunded actuarial accrued liability (UAAL) and reflects a system’s ability to pay its normal cost plus UAAL.”

TEXPERS found that the 93 state and local pension funds which submit data to the PRB combined in 2014-2015 to achieve the best overall improvement in financial health in five years.

The most substantial improvement occurred in eight pension systems moving out of the worst, infinite amortization period. That correlated in an increase, to 17 from 13, in the number of pension funds at less than infinite and more than 40 years amortization. Another four systems from the infinite amortization moved into even lower amortization periods below 40.

TEXPERS assessment was based on information requests it made of the PRB for standardized year-over-year comparisons of pension funds' amortization periods, as presented in PRB Actuarial Valuation Reports for the previous five years. This improvement indicated that pension funds are continuing to find good investments and manage their benefits in an appropriate way to secure the retirements of public sector employees.

TEXPERS executive director Max Patterson said: “Our report stands in stark contrast to those which focus on unfunded liabilities in order to produce alarming headlines. Pension fund experts will tell you that amortization trends matter more than accountants’ moment-in-time snapshots of unfunded liabilities when assessing pension fund health.

“The trend toward lower amortization periods across all Texas pensions, in conjunction with the TEXPERS Asset Allocation report showing excellent pension fund investment performance in the 20- and 30-year periods, should provide lawmakers with the confidence to maintain the status quo," Patterson said.

TEXPERS has created seven graphics to describe the PRB data at Please share the report on your Facebook pages so that more people will understand how well Texas pension funds are performing.