Tuesday, October 11, 2016

“Self-correction” is the norm for Texas state and local pension funds

As the Legislature begins work in January, they may hear siren calls advocating for “local control” of 13 public employee retirement systems enrolled in Texas statutes.  They should ignore such radical proposals, which really mean the complete control of pension funds by city councils. Local control, in the broadest sense of the word, already exists.
The best examples of how local control manifests itself now can clearly be seen in developments this year in Houston and Dallas where concerns compelled House Pensions Committee Chairman Dan Flynn (R-Canton) to hold hearings in those cities. The committee in June and September invited testimony from all pension systems for police, firefighters, and municipal employees.
Of course, the specifics varied for each, but the larger picture was this: all the systems were actively working with their mayors, city councils, city staff, actuaries, unions, and retiree groups to come up with tweaks or overhauls that would ensure the long-term sustainability of all the systems. And, most importantly, the systems were taking responsibility for miscalculations, overly optimistic assumptions, and bad investments. They were all going to their members and asking them to shoulder the burdens in the form of increased contributions or reduced future benefits. 
In Houston, new Mayor Sylvester Turner delivered on his campaign promises to keep defined benefit plans for public employees, even while asking them to adjust their benefits. He and city staff held countless meetings with the Houston Police Officers Pension System, the Houston Municipal Employees Pension System, and the Houston Firefighters’ Relief and Retirement Fund. In September, Mayor Turner provided a public, positive update on fruitful discussions in anticipation of bringing collaborated changes to the Legislature.
In Dallas, the focus has been on the Dallas Police and Fire Pension System, which suffered from overly aggressive investment choices and a panicked run on system assets. Nonetheless, pension fund staff and Trustees have worked hard with city officials to come up with a multi-phased, multi-part plan which strengthens the future prospects of the system.
All the systems may come to the Legislature with details of their plans. When they do, their proposals will have been tweaked and adjusted by so many local different constituent groups as to truly earn the description of coming from the grassroots. All the plans and city sponsors will have communicated their changes to their employees and retirees. All will have sought numerous projections and opinions from their actuaries and investment consultants. All will have tried to gain support from their city councils.
The key to remember is that defined contribution plans are long-term financial instruments. Tweaks and changes can take years to manifest. As long as the leaders of cities and pension funds are working toward common solutions, they can make progress. The proof is there for all to see.
Consider TEXPERS review of 93 systems monitored by the Texas Pension Review Board. The PRB recommends close focus on amortization periods as the best indicators of financial health. Amortization periods are like a home mortgage amortization calculation: they are complex calculations that estimate how long it would take a system to generate all the assets to match its expected benefit outlays. The PRB recommends that pension funds work to attain a 25-year amortization period.

The PRB data shows that, as whole, the 93 Texas pension funds have significantly improved in comparisons of the six years ending August. There are 39 Texas state and local pension funds in the PRB’s recommended range. Only four pension funds are in the least-desired “infinite” amortization range. These numbers reflect six-year trend highs, and demonstrate that pension funds are doing a great job managing difficult market environments, pension benefit promises, and city and employee contributions. The pension funds in Houston and Dallas will make the adjustments needed now so as to attract and retain world-class caliber people to their employment ranks. They have that goal in mind for their citizens. They will succeed.