Thursday, December 14, 2017

News Briefs

Fund promotes managing director to 

chief investment officer role

TEXPERS Staff Report

Come spring, Casey Wolf will step into the chief investment officer position at the Texas County and District Retirement System.

Casey Wolf
Wolf will take over the role from current CIO Paul Williams, who recently announced his planned retirement, ending a 22-year career with the fund.

Wolf will come to the job with experience. He currently is the fund’s managing director. In the role, he manages the system’s hedge fund and opportunistic credit portfolios and works on existing and potential investments. Wolf worked for Williams during the last six years. The fund announced Wolf’s promotion in a Dec. 7 news release.

He says Williams’ leadership and thoughtful insights are instrumental to the success of the fund, which had grown from $7 billion in 1999 when Williams became the fund’s CIO to more than $29 billion today.

“I look forward to continuing his legacy and vision for TCDRS and for the opportunity to work with our trustees, managers, advisors, and staff in managing TCDRS’ investments in a thoughtful and prudent manner,” he says the news release.

Paul Williams
During his career, Williams transitioned the TCDRS from an all bonds portfolio to a diversified portfolio that funds 80 cents of every benefit dollar paid to the system’s retirees. The investment practices he started also enabled the fund to meet its long-term investment goals and regularly surpass industry-established benchmarks, according to the system’s news release.

Williams says his time working with the fund’s trustees, executive staff and investment staff, has been a privilege.

“One of the great things about working at TCDRS is seeing people retire with the security their retirement plan provides,” he says. “I look forward to joining them.”

Williams has had an impressive track record despite the volatility of the markets during the last 20 years, says Robert Eckels, the fund’s board chairman.

“The board appreciates Paul’s leadership and foresight,” he says. “Fortunately we’ve been able to fill the position with a strong, experienced leader like Casey Wolf.”

Texas County and District Retirement System is a multi-billion dollar trust with more than 735 participating counties and districts. The fund has more than 282,000 members.

In other Texas pension news:

Trustee re-elected to board seat by acclamation

Ray Wood is keeping his place as trustee of the Wichita Falls Firemen’s Relief and Retirement Fund.

Wood, a lieutenant with the Wichita Falls Fire Department, was re-elected without opposition. His next three-year term beings Jan. 1.

Wood has served as a trustee since 2012 and was chairman of the board last year. His current term ends Dec. 31.

Fund selects lobbyists to defend public pensions

Trustees with the El Paso Firemen and Policemen’s Pension Fund approved a legislative consultant contract with Lisa Hughes and Pat Haggerty during its Oct. 18 board meeting.

The contract is for a two-year term. The lobbyists have been under contract with the fund for four years.

Lobbyists use political contacts, persuasion and public relations skills to represent the interests of organizations. Because defined benefit plans have been under attack at the state and national level, Tyler Grossman, the El Paso fund’s executive director, says having legislative consults is important.


Tell us what’s happening at your fund. To submit an item for the TEXPERS News Briefs, email TEXPERS Communication Manager Allen Jones at allen@texpers.org
Photo: Amarillos Convtention & Visitor Council
Downtown Amarillo cattle drive.

Firefighter pension conference selects 

Amarillo to host 2019 event

TEXPERS Staff Report

Amarillo is hosting the Texas Local Fire Fighter’s Act (TLFFRA) Pension Conference in 2019.

The announcement was made during the Amarillo Firemen’s Relief and Retirement Fund’s Oct. 18 meeting. Amarillo will host the conference for the first time since 1991.

The lapse in time between the conferences was due to prior boards not having the facilities capable of housing the attendees central to the city’s convention center, says Tony Robinson, chairman of the Amarillo Firemen’s fund.

“The city as a whole has worked together to develop amenities in the downtown area we would like to show off,” he says. “We have an Embassy suites which will handle the attendees and possible conference space. If more room is needed our convention center is across the street.”

The TLFFRA member funds voted to select the conference site. In addition to the conference, the Amarillo fund will host an outing to show off the area attractions along with some local fare.

“We hope all the members will make the trip to experience the diversity of climate, topography, and friendliness that is common in the panhandle,” Robinson says. “It's a running joke that I always say - Most of south Texas thinks we're part of Oklahoma.”

Hollie Hawkins, sale manager with the Amarillo Convention and Visitor Council, says she is currently working with the TLFFRA board to secure a date for the conference. The educational conference is usually held around the beginning of October.

The 2017 conference was held in The Woodlands, Texas. Next year’s conference is to be held in Temple. More details can be found at www.tlffra.org.

More than 100 retirees in the Iowa Public Employees’ Retirement System received a scare on Halloween day when they discovered that their pension checks hadn’t electronically deposited into their bank accounts. The pensioners’ money, it turns out, had been diverted into different bank accounts set up by computer hackers.

The incident is a warning for public employee pension systems across the United States, including here in Texas, that retirement systems can be prime targets for cybercriminals.

The Iowa PERS breach involved “hundreds of thousands of dollars” in benefit payments for 103 retirees, says Martin Moen, deputy chief information officer for the fund. The cybercriminals used stolen Social Security numbers and birth dates of pensioners to register accounts on the member access portal of the Iowa PERS online system. The hackers then changed direct deposit information and redirected the benefit payments.

Only accounts that did not have previously established usernames and passwords for retirees’ online access were involved, Moen says. The breach occurred Oct. 18. However, fund officials didn’t learn of the incident until Oct. 31 when several of the fund’s retirees began calling to ask why their pensions had not deposited into their accounts.

“When we realized we had an issue with our member portal we shut off access to it immediately,” Moen says. “We brought the portal down, and took links to the portal off of our main website. It remained down for two days then while we worked the incident.”

The retirement fund also contacted law enforcement.

“We started with the Iowa Department of Public Safety, Department of Criminal Investigation,” Moen says. “They directed us to the FBI.”

The FBI is investigating the incident. As of Dec. 6, there was no confirmation of any arrests.

However, the FBI has been able to identify where some of the funds ended up. Moen says the cybercriminals established several accounts with a banking institution that makes it easy to create accounts online. Moen says the bank has been cooperating with the investigation.

The Iowa PERS has roughly 115,000 retirees. Fund members are employed by the state, cities, and counties or work in education and other governmental industries. Only 15 percent of the fund’s members are active and retired state employees. All 103 victims of the fund’s cyber-hack are former state employees. Because of that, Moen believes cybercriminals somehow got their hands on Social Security numbers from a source other than the pension system and then matched up the identifications with information publically available on a state database.

“There’s a state database freely available to the public with employee names, salary info and that indicates if a person is retired,” Moen says. “You can even download 660,000 records as a CSV (electronic data) file.”

Because none of the identity theft victims had registered for online account access with the fund, the computer hackers used the stolen Social Security numbers and birthdates to gain access to the fund’s member portal. Once registered, the hackers changed banking information of the retirees. The hackers registered five to 10 online accounts a day for about a month, Moen says.

To help prevent this from happening again, the Iowa PERS is establishing a multi-step authentication method of confirming a retiree’s identity for its online member portal. When a retiree logs into their member portal and changes banking or contact information, the fund emails the account holder and sends a notice via traditional postal services to verify that the retiree is the one who actually requested the change. Retirees also can no longer use Social Security numbers to register for account access. The fund also is contracting with ThreatMetrix, a California-based company that uses software technology to profile online transactions and activities to determine whether they initiate from legitimate customers or impostors.

Moen says it is important for public employee funds to have cyberthreat measures in place. He has a piece of advice for Texas funds.

“If your fund has an online member portal, make sure all members register as soon as possible,” Moen says. “If all of our members had been registered, none would have been affected by this attack.”

Professor Glenn Dietrich teaches cybersecurity at the University of Texas at Austin. The university is home to the nation’s top cybersecurity program, which spans three colleges: the College of Business, the College of Engineering and the College of Sciences. The curriculum includes 20 classes. Dietrich also founded the Center for Infrastructure Assurance and Security.

He says Texas pension administrators can expect to see more cybersecurity threats. Hackers are continually searching for companies with weak security to steal sensitive information, usually for profit.

He has some basic tips for Texas public pension administrators looking to ensure their funds’ networks are protected:

  •       Protect networks with a firewall, a software program that monitors incoming and outgoing network traffic and decides whether to allow or block specific traffic based on a defined set of security rules.
  •       Install antivirus software. The software is designed to detect and destroy malicious computer programs that modify other computer programs and inserts their own code. The software will seek out standard viruses already known, Dietrich says, not new ones. The larger antivirus software companies such as Norton usually offer updates. 
  •       Install anti-malware software. Although anti-malware software also helps protect against viruses, he recommends buying anti-malware separately from anti-virus software. Microsoft offers a free program on its website. Malware can help detect keyloggers, which are software that can secretly be installed on a computer to track personal and sensitive information such as Social Security numbers, passwords and corporate data as it is typed on a keyboard.
  •       Establish unique login and passwords for all systems. Dietrich suggests using passphrases instead of passwords. If possible, use passphrases in conjunction with custom IDs for logging into computer networks.
  •       Encrypt files. Encryption tools are used to scramble data such as email addresses, passwords and other personal and sensitive information. Microsoft also offers a download on its site.

Allen Jones
About the Author:
Allen Jones is the communications manager for the Texas Association of Public Employee Retirement Systems. Email him at allen@texpers.org or call 713-622-8018.

Changing lifespans make funding 

assumptions hard to predict


Mortality rates, that morbid annual measure of deaths, continue to decline in the United States. However, progress hasn’t been steady, according to a recently released research brief by the Center for Retirement Research at Boston College.

The mortality rate is the percentage of people who die each year. It is one of the most critical assumptions in the analysis of the sustainability and the assessment of appropriate contribution rates of public pension funds as well as for the U.S. Social Security system. Many in the general population don’t like to think about when they will die. But measuring the number of deaths in populations and age groups is common talk for trustees and administrators of public employee pension plans and their actuaries who analyze the financial costs of risk and uncertainty. A slowing decline has many wondering what future lifespans could look like and how that will impact the future of their pension funds.

In the U.S., roughly 823 people die per 100,000 population.  Americans can expect to live for a little more than 78 years, according to the U.S. Centers for Disease Control and Prevention. Some studies put the age at 79. Mortality rates of improvement – the increase of life expectancy – fluctuated on average around 1 percent per year between 1900 and 2016, according to U.S. Social Security Administration data. The keyword is “fluctuate.”

“Sometimes mortality rates decline very rapidly, and sometimes they decline slowly,” according to the brief titled, “What’s Happening to U.S. Mortality Rates?”

Released in September and written by Anqi Chen, Alicia H. Munnell, and Geoffrey T. Sanzenbacher, the brief’s authors examined swings in the mortality rate since the year 1900. The authors also took a closer look at the years since 1969, when more detailed data on cause of death became available.

What the report’s authors and pension fund actuaries want to know is will the current trend of improved mortality rates fluctuating around 1 percent per year continue in the future or will substantial improvements occur less rapidly.

History of Mortality

TEXPERS spoke to one of the study’s authors, Sanzenbacher, to get a better understanding of the mortality rate’s past and future.

“There are two big things to understand,” he says. “Over the long run, mortality tended to improve at a constant rate. Right now, we do see a slowdown.”

Sanzenbacher points to the development of life-extending medical drugs as well as technology; access to health care for the elderly, poor and disabled; and improvements in education and overall standard of living as boosting life expectancy. Here’s a brief history of mortality in the U.S.:
  •       Starting in the year 1900, mortality rates have dropped year after year, with the exception of the flu pandemic in 1918. Sanzenbacher and his colleagues attribute the improvements to better water delivery and waste removal infrastructure.
  •       Then, the discovery of antibiotics helped doctors treat infectious diseases. An infection that would normally kill a person was reduced to a few days of bed rest. These progresses also reduced infant mortality rates.
  •       During the second half of the 20th century, Medicare and Medicaid increased access to medical care for the elderly, poor and disabled. 
  •        And as access to education became more evenly spread across age groups, standards of living improved resulting in a continued decline in mortality. 
“It’s very obvious that life expectancy tends to go up,” Sanzenbacher says. “However, when you look at mortality rates, demographics must be considered.”

Age groups, gender and even where a person lives all play a part in judging life expectancy. Mortality rates, for example, have always been higher for men than for women. Although the gap is narrowing, Sanzenbacher says. Also, the rate of change varies significantly over time for both men and women.

“The United States is now in a downward part of the cycle,” Sanzenbacher says. “The rate of improvement has been falling for men and women in recent years.”

Rate Variations

There is also an age variation. Mortality rates improve at younger ages, which are those younger than 30 years old. Mortality improvement among that age group benefits the actuarial status of America’s Social Security program as well as pension funds. However, growth at older ages worsens the actuarial status.

The variances and demographics of mortality rates can be confusing. Another addition to the mix: rates can change state to state, even county to county. That could be reflective of places with less access to higher education and medical care.

“Mortality rates may be lower in areas where obesity is higher than other parts of the country,” Sanzenbacher says.

In fact, according to another report published on the Institute for Health Metrics and Evaluation’s website (www.healthdata.org), "babies born today in 13 U.S. counties have shorter expected lifespans than their parents did when they were born decades ago." In that study, published in May, researchers calculated life expectancy by county from 1980 to 2014. The report’s authors also considered the risk of dying among five age groups plus the extent to which risk factors, socioeconomics, and health care contribute to inequality.

“Looking at life expectancy on a nation level masks the massive differences that exist at the local level, especially in a country as diverse as the United States,” says Laura Dwyer-Lindgren, lead study author and a researcher at the IHME. “Risk factors like obesity, lack of exercise, high blood pressure, and smoking explain a large portion of the variation in lifespan, but so do socioeconomic factors like race, education and income.”

According to the report, 11.5 percent of U.S. counties had an increased risk of death in adults between 25 and 45. Inequality in the probability of dying also rose for people between 45 and 85 since 1980. Obesity, lack of exercise, smoking, hypertension and diabetes explained 74 percent of the variation in longevity. Socioeconomic factors – a combination of poverty, income, education, unemployment, and race – were independently related to 60 percent of the inequality. Access to and quality of health care explained 27 percent, according to the IHME study.

By the Numbers

Nationwide, the county with the most significant increases in life expectancy from 1980 to 2014 is Aleutian East Borough, Aleutians West Census Area, in Alaska. Life expectancy increased 18.3 percent. Residents in that county live an average of 83.73 years. The average U.S. life expectancy is 79.08 years. The county with the largest decrease is Owsley County in Kentucky. That county experienced a 3 percent decline in life expectancy between 1980 and 2014, according to the study. Residents there are expected to live an average of 70.21 years.

Texas fell roughly in the middle of all U.S. states in term of life expectancy in 2014. Texans are, on average, expected to live 78.5 years. The Texas county with the highest life expectancy in 2014 was Presidio County. People there are expected to live an average of 83.72 years, an 11 percent increase since 1980. Polk County, on the other hand, had the lowest life expectancy in 2014. People there are expected to live 72.75 years, only slightly up from an average age of 72.17 in 1980.

How it's Used

Mortality improvement must be addressed as a part of the mortality assumption either by projection to a future date or by use of generational mortality projection, says Mark Fenlaw, a consulting actuary with the firm Rudd and Wisdom Inc. It is the responsibility of a pension fund’s actuary to select an appropriate mortality assumption.

“The large statewide public employee retirement systems in Texas have enough experience to develop their own mortality tables or to develop adjustments to published mortality tables,” he says. “Most other public plans in Texas do not have enough experience to rely on completely. They generally use published tables and projection scales.”

Tables consist of a series of annual rates of dying at each age from an early age, sometimes birth, to a very advanced age, such as 120 years old. An educational and professional membership organization for actuaries, the Society of Actuaries, published a new set of tables for pension plans in 2014. However, Fenlaw says many public plan actuaries asked questions about the development of the SOA mortality tables and appropriateness for public employee pension plans. As a result, the SOA agreed to develop a new set of mortality tables by studying the experience of only public employees – yet another demographic subset.

“The study will have three sets of tables: teachers, public safety employees and all other public employees,” Fenlaw says. “These are expected in late 2018 or early 2019. All of these will have separate tables for males and for females. Of course, mortality rates vary by age.”

So, what will happen to mortality rates in the future? Improvements will continue to depend on many of the same drivers. However, experts say the effects could play out differently. That’s where actuaries like Fenlaw often come into play.

“It is not uncommon for mortality assumptions to be changed only every four or five years,” he says. “There is not a single correct assumption; so the actuary is responsible for selecting a reasonable assumption for the particular pension plan. There is an actuarial standard of practice (ASOP 35) that actuaries are to follow in selecting the mortality assumption. The ASOP is principles-based, not prescriptive.


Allen Jones
About the Author:
Allen Jones is the communications manager for the Texas Association of Public Employee Retirement Systems. Email him at allen@texpers.org or call 713-622-8018.

Monday, December 4, 2017

TEXPERS asks U.S. legislators to exclude harmful provision from tax reform plan


TEXPERS staff report

The Texas Association of Public Employee Retirement Systems submitted a letter to senators Orrin Hatch and Ron Wyden, asking them to remove a proposed tax code provision that would subject public pensions to the unrelated business income tax, or UBIT.

The letter mirrors a joint letter released by the National Association of State Retirement Administrators, the National Public Pension Coalition and the National Council on Teacher Retirement in asking legislators to support public pensions by making sure the harmful provision is not included in any tax overhaul. In this way, TEXPERS is joining the unified voice in saying the proposal would diminish investment earnings of police officers, firefighters, teachers and other public workers. 

Read the letter:

  The Honorable Orrin G. Hatch
Chairman, Finance Committee
United States Senate Washington, DC 20510

The Honorable Ron Wyden
Ranking Member, Finance Committee
United States Senate Washington, DC 20510


Dear Chairman Hatch and Ranking Member Wyden:

On behalf of the Texas Association of Public Employee Retirement Systems, I ask you to please exclude a harmful provision in House tax reform legislation from Senate legislation and any final compromise with the House.

The provision is Section 5001 of the House Tax Cuts and Jobs Act (H.R. 1), which could subject certain investments of state and local government retirement systems to the unrelated business income tax (UBIT). Application of UBIT to public pension plans erodes the immunity states and the federal government each enjoy from taxation by the other. In addition to the revenue loss from the tax itself, the provision imposes significant, complex compliance costs that could impact portfolio construction and diversification of public funds.

The provision could force the consideration of alternative and more costly investment structures in order to avoid being negatively impacted by the UBIT and may diminish investment earnings, which are critical to pension funding. Furthermore, Section 5001 is currently scheduled to go into effect for tax years beginning January 1, 2018, which will impact many existing investments that cannot be restructured prior to this effective date.

Investment earnings pay for approximately two-thirds of state and local government pension benefits, which are taxed when distributed to participants across virtually every state, city and town in the nation. Subjecting public plans to UBIT undermines critically important investment returns, sets a dangerous precedent for taxation of state entities, and will ultimately increase costs to taxpayers.

TEXPERS’ member systems understand that a number of changes to the underlying legislation are under consideration as the tax reform process moves forward. Our association urges that you please continue to exclude this provision, as well as any others that could negatively impact the tax treatment of state and local government retirement systems.

If there is any additional information I can provide, please do not hesitate to contact me.

Sincerely,

   Max Patterson
   Executive Director, TEXPERS
   713-622-8018

   max@texpers.org

Monday, November 13, 2017

Interim charges announced for House Committee on Pensions


Staff Report

Rep. Dan Flynn, R-Canton, continues to head the state House of Representative’s Committee on Pensions.

Flynn is among those named to the committee in the recently released Interim Committee Charges document released by House Speaker Joe Straus’ office in October.
Rep. Dan Flynn, R-Canton.

A charge is made up of people delegated to consider, investigate, take action or report on assigned matters. Rep. Roberto Alonzo, D-Dallas, is vice chairman of the committee. Rounding out the seven-member committee are Rep Anchia Rafael, D-Dallas; Rep. Cole Hefner, R-Mount Pleasant; Rep. Dan Huberty, R-Houston, Rep. Dennis Paul, R-Webster; and Rep. Justin Rodriguez, D-San Antonio.

The House Committee on Pensions reviews the state's oversight of pension systems and studying the effectiveness of corrective mechanisms, including the Funding Soundness Restoration Plan and Pension Review Board Funding Guidelines. The committee also is tasked with making recommendations to enhance state oversight and to maintain or achieve soundness among local pension systems, according to a charges document released last month.

The committee will also:

  • Evaluate the governance structures, including investment oversight, of the Employee Retirement System, Teacher Retirement System, Texas Municipal Retirement System, Texas County and District Retirement System, and Texas Emergency Services Retirement System. Identify best practices and make recommendations to strengthen oversight within the systems.
  • Review and evaluate health incentive programs within the group benefit programs at ERS and TRS. Identify best practices among similar programs and barriers to implementation. Make recommendations for achieving further savings through existing and/or new programs.
  • Monitor the agencies and programs under the Committee’s jurisdiction and oversee the implementation of relevant legislation passed by the 85th legislature.



To learn more about the committee, click here.

Before dismantling public pensions, a new report suggests recouping money lost through corporate subsidies


By Allen Jones
TEXPERS Communications Manager

If Texas were to stop granting corporate subsidies, earnings would be enough to pay roughly 66.3 percent of the taxpayer cost required to fund retirement benefits for current public employees belonging to the main state-administered public pensions, according to a new report from Good Jobs First, a national policy resource center.  

Not everyone is in agreement with the report’s findings, however. Some trade associations and corporate development officers fear that ending corporate subsidies will damage Texas’ reputation as a business-friendly state and ruin its economic standing.

According to Good Jobs First, state legislators are working to increase contributions to ensure funding stability of the state’s pension systems. To do that, however, some are advocating for a reduction of benefits or moving workers to less-secure 401(k)-like plans. During Texas’ recent legislative session, Sen. Paul Bettencourt, R-Houston, authored a bill that would have studied the cost-effectiveness of implementing a hybrid retirement plan for newly hired state employees and teachers, partially moving them away from more secure defined benefits. Although Bettencourt’s bill died, Greg LeRoy, executive director of Good Jobs First, says these types of legislative actions taken while giving tax breaks to major corporations are not sound value statements.

Before dismantling secure retirement for teachers, corrections officers and other public employees, Good Jobs First indicates there are state expenditures, such as the costs of corporate subsidies, which should be considered as a source of pension funding. The Lone Star State isn’t alone in facing the threat of public pension dismantlement.

“In statehouses across the country, public employees’ retirements are often used as a bargaining chip when budgets are assembled,” says Bailey Childers, executive director of the National Public Pension Coalition, in a news release regarding Good Jobs First’s new report. “States will often defer, skip, or underfund pension systems while handing out hundreds of millions of dollars in corporate welfare. State lawmakers need to put their priorities in order and stop the giveaways and protect their employees’ retirements.”

A subsidy is a benefit given to a business in the form of a cash payment or a tax reduction, usually to remove some burden. A subsidy may lower tax burdens placed on struggling industries or encourage new developments by providing financial support for the endeavors. 

“Market forces are causing states to grossly overspend on individual company ‘megadeals like Foxconn, Apple and Amazon’s HQ2,” LeRoy says in a news release announcing the center’s new report. “Our national economy would be stronger if those funds were used for retirement security and other investments that benefit all employers, such as education and infrastructure.”

Good Jobs First compared pension costs in Texas and 11 other states with the amount of revenue those states lose each year through economic development subsidies offered to corporations as well as the tax preferences and accounting loopholes used by companies. Among the 12 states, more than $20.4 billion is given away in tax breaks and loopholes. A better deal, according to the nonpartisan Good Jobs First, would be to utilize the annual cost of these subsidies to cover the entirety of most states’ yearly pension system contributions, which provide retirement security for millions of public employees. The study was done in conjunction with the National Public Pension Coalition, a nonprofit group that works to protect the financial security of working families that rely on public pensions.

Texas Subsidies
In Texas, a lack of a state corporate income tax means there are no income tax credits or exclusions, which are often the most significant expense in other states. Despite that, “the total of corporate subsidies, official tax breaks and unofficial tax dodging amount to about $1.2 billion per year,” according to the report’s Texas-specific findings. 

The report, released in October, bases its data on 2015 financial statements from the state’s main public retirement plans: the Texas Employees’ Retirement System, the Teachers Retirement System of Texas, the Law Enforcement and Custodial Officers Fund and the Judicial Retirement Fund, Plan II. The financial reports indicate annual employer normal costs of $871.1 million for ERS, $957 million for TRS, $31 million for LECOF and $17.1 million for the Judicial Fund. The figures, the most recent available, indicate how much is being taken each year to provide benefits for current government employees. 

The totals equal to an annual normal cost of $1.82 billion. The center compared the annual normal cost to the financial losses resulting from economic development subsidies and other special tax provisions, which equals to about $1.2 billion per year.

“Corporate interests in the state continue to benefit from generous corporate subsidies and other tax breaks,” according to the Good Jobs First report. “And in February 2017, Gov. Greg Abbott asked the Legislature to increase funding for the state’s economic development subsidies by $200 million.”

During 2015, two large state-authorized property tax programs kept more than $400 million in property taxes from flowing from private developers to local governments. A state economic development act appraised value limitation agreement allowed businesses to skip out on paying $221.5 million. The Texas Tax Increment Financial Act siphoned $186.7 million in property tax revenue from public accounts to benefits private development in tax increment financing districts. Other subsidy programs include Sales Tax Refunds on Enterprise Projects, which resulted in a loss of $44.2 million in taxes, and film production subsidies, which cost roughly $16 million.

Local economic development corporations spent $139.1 million in direct business incentives and $264 million to retire debt service of projects, all primarily sourced from sales tax revenues. Several industries also benefit from targeted tax breaks. Internet companies do not pay sales taxes on servers and equipment used in data centers, which cost the state $9.2 million in taxes. Special tax rates on new or enhanced recovery oil wells cost the state treasury $41.9 million. Other oil-related tax exemptions lose an additional $36 million. Also, the Texas Research and Development tax credit, available across industries, cut state tax revenue by $3 million. 

Oil and gas producers also benefit from generous tax subsidies. However, according to Good Jobs First, the cost of those subsidies are not regularly reported.

Among retailers, a one-year Temporary Permissive Alternative Rates, cost the state $232 million in lost revenue in 2015. Another rule that allows retailers to keep a portion of the sales tax revenues they collect from customers, known as a vendor discount, cost the state roughly $251 million in tax revenues. 

Also, Texas is among the few states that allow corporations to allocate taxable income by methods other than the traditional payroll, property and sales weighting. It results in lost tax revenue, according to Good Jobs First.  

The report also recognizes that cities like Houston and Dallas are struggling to fund public pensions of local police, firefighters and municipal employees. Although Good Jobs First’s new report only focuses on state subsidies, LeRoy, the center’s executive director, suggests local governments should ask if their giveaways to corporations are the best way to provide services while fulfilling promises of secure retirements to their residents.

Recurring Theme
LeRoy spoke to TEXPERS about the new report and says he isn’t na├»ve enough to think legislators in Texas will read the report and immediately change course and do away with corporate subsidies. However, he hopes lawmakers will begin to understand how tax breaks are working to undermine their budgets and are eroding the standard of living for retirees.

“If you look at the rest of our publications, we’ve published almost more than 100 studies over almost 20 years now, it’s a recurring theme that these economic development tax breaks have really gotten to be too expensive and they are having collateral damage on state and local economies because they are undermining things that really do help grow the economy and really do benefit every family and employers,” LeRoy says. “By totaling up these numbers and juxtaposing them to things that might better help the economy, including better retirement incomes, we are trying to draw attention to better things to do with the money.”

The biggest corporate subsidy beneficiaries used to be manufacturing and industrial corporations, but are now joined by financial service corporations, biotech companies, research labs and large retailers. Good Jobs First keeps a public list of corporations receiving subsidies at the state and federal level on its website. Sporting goods retailer Cabela’s has received subsidies in a few places in Texas as have Walmart and Amazon.
Berkshire Hathaway is the state’s top subsidy earner having received more than $802 million in state and local awards. Rounding out Texas’ top 10 subsidy earners are Texas Instruments ($604.8 million), Exxon Mobil ($533.3 million), NRG Energy ($417.6 million), Samsung ($317 million), Amazon ($269 million), Saudi Arabian Oil Co. ($257.4 million), FedEx ($250 million), E.ON ($192.1 million), Toyota ($188.3 million). 

Nathan Jensen, a professor in the Department of Government at the University of Texas at Austin, has written critically about one of Texas’ more expensive programs, Chapter 313. The program, created by the state legislature in 2001, provides funding to local governments to allocate tax abatements to firms for economic development purposes. Under the program, school districts lose revenue due to tax abatements but are “made whole” by the state for the lost tax revenue, Jensen says. Estimates are that the state will be shelling out $1 billion per year by 2025 to make up for the lost revenue. 

“This comes either at reduced money for other services or increased taxes in other ways to make up for this lost revenue,” Jensen says. 

According to Jensen’s study, 85 to 90 percent of projects would have located in Texas anyway, regardless of the Chapter 313 program, and 80 percent of the program’s dollars are lost revenue for the state’s school finance system. 

“This is touted as one of the most important incentive programs in the state and it has been associated with investments from companies like Samsung and Toyota,” Jensen says. “This program, along with the Texas Enterprise Fund is the flagship programs funded by the state.”

But how does Jensen actually know companies he studied actually would have built or relocated to Texas without the tax abatement program? It’s a prediction. But there are a lot of smoking guns, he says.

“In some cases, companies openly admitted that they had already begun construction before applying for the incentives,” he says. “This includes Caterpillar that has a YouTube video of their groundbreaking with then Gov. Rick Perry, before applying to Chapter 313, numerous wind farms that we have FAA data that their towers were already built before applying, to companies admitting in their application that they were only looking in Texas.”

There is a lot of skepticism regarding corporate incentive programs. Many perceive the programs to be “corporate welfare,” a transfer of wealth from taxpayers to companies that were already going to exist. Another issue opponents of corporate subsidies have is that these are high-cost programs targeted at a small number of companies. 

And, corporate incentives, says LeRoy, almost never determine where a company builds or relocates. The reason, he says, is because IRS data that documents what companies spend money on, state and local taxes combined as a cost factor for the average company in America comes to less than 2 percent. The other 98 percent of cost structure, labor, occupancy, raw materials, logistics, input, energy, IT, CEO bonuses – numbers that vary a lot depending on the nature of the company – but are the numbers that determine where a company goes. 

“It is the dirty little secret of economic development,” says LeRoy, who authored the 2015 book, “The Great American Jobs Scam: Corporate Tax Dodging and the Myth of Job Creation.” “It’s what site developers don’t want you to know, it’s what politicians never seem to understand when they are negotiating. Look at the stump speech from the company’s side of the table rather than the PR side of the table. There is no evidence that states curbing incentives or making incentives more transparent or accountable has ever harmed their business climate.”

In fact, LeRoy says there are a growing number of examples of states successfully pulling back corporate incentive programs and doing just fine. And, he says, it is being done by left- and right-leaning legislatures. He points to California, Michigan and Florida as examples where legislators have proven that corporate subsidies have never mattered, to begin with.

Economic Development
Corporate subsidies do matter, says Tony Bennett, president of the Texas Association of Manufacturing. He views subsidies as economic development tools that attract businesses to the state and create jobs.

The trade association worked during the state’s legislative session to ensure tax abatement and the state’s Enterprise Fund produce returns for communities. According to a slideshow presentation, Bennett shared with TEXPERS, corporate subsidies “are critical because of Texas’ high property tax rates.” According to the association, Texas is among five states with the highest property tax rates.

The rewards are evident, Bennett says – communities remain competitive, multiple new jobs are created and immediate tax revenue comes from corporations as well as vendors and suppliers that follow most large corporations. 

“There are immediate sales and franchise taxes produced by companies looking to relocate or build in Texas using corporate subsidies,” he says. “Plus, there is philanthropy many corporations provide to their local communities. In addition to job creation, it is hardly corporate welfare.”

Bennet says there is a multiplier effect when it comes to jobs created by large new corporations that build or relocate in the state. He points to the U.S. Bureau of Economic Analysis data that allows legislators, investors, and economic development planners to assess the potential impact of various development projects.

“Look at petrochemical plants,” Bennet says. “For every job, around 5 jobs are created. That is more people employed, more people spending money, and more people paying taxes. When an automobile manufacturer came to San Antonio, guess who came to town? A seat manufacture, a tire manufacturer. Transportation jobs were also created. None of that would have resulted without tax abatements that allowed Texas to be competitive to attract the automobile company.”

In the manufacturing industry alone, Bennett’s association represents more than 500 companies, including 70 of the state’s largest employers. Manufacturers employ more than 866,000 people with an average compensation of more than $79,000 a year. Plus, Texas is the No. 1 exporting state for manufactured goods in the United States. That, Bennett says, was achieved with the help of tax abatements. 


“Without tax abatements, Texas’ aerospace, chemical and manufacturing sectors would just be on the losing end competitively,” Bennet says. “Competition is real and it is not going away. Companies will build someplace else. I’ve sat in their boardrooms and have heard first-hand how important these subsidies are to attracting them to our state and communities.”

Allen Jones
About the Author:
Allen Jones is the communications manager for the Texas Association of Public Employee Retirement Systems. Email him at allen@texpers.org or call 713-622-8018.

Retirement-for-all advocacy group hosts symposium; discusses issues concerning public pension systems


Staff Report

Texans for a Secure Retirement held its Fourth Annual Symposium Oct. 18 in Austin. The program highlighted issues concerning the state’s public pension systems.

“Right now there’s a lot of flak in the air about defined benefit pension systems,” TSR Board Chair Louis Malfaro said during the event.

The TSR is a nonprofit retirement advocacy group made up of public employees and retirees. Malfaro told TSR members attending the symposium that it is up to them to educate the public, beneficiaries and state policymakers about pension issues and to serve as watchdogs of bad practices that undermine system plans.

That includes beneficiaries that “game the system” by contributing to the negative feelings the public has about pensions and hurting those that worked all their lives for an honest and dignified retirement. Most public pension beneficiaries do not and will not be pulling in million-dollar pensions when they retire. 

The TSR doesn’t just promote public pension plans. The group also advocates for secure retirements for private-sector employees.

During the symposium’s Retirement for All panel, it was emphasized that not enough Texans have access to retirement plans through their work. According to the panel, there are significant retirement security problems in the state. To highlight the issue, the average retirement savings account balance of Texas private sector workers is only $32,028. Also, one in three Texans older than 65 rely on Social Security as their only source of income.

To try and help more people save for retirement, several states are establishing retirement funds for employees who do not have retirement options where they work. These plans are commonly referred to as "Secure Choice.” Laura Rosen with the Center for Public Policy Priorities showed one analysis that estimates a state-administered retirement program would save the state $55 million in Medicaid spending over a 5-year period.

Max Patterson, TEXPERS’ executive director, also serves as president of the TSR board of directors. He attended the symposium and provided opening and closing remarks.

Click here to watch videos from the symposium.