Monday, November 13, 2017

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 or call 713-622-8018.

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.

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. 

Houston Firefighters' Relief and Retirement Fund earns 12% in 

2017 fiscal year, passes $4 billion in assets

Staff Report

The Houston Firefighters' Relief and Retirement Fund combined risk-minimization with macro- and microeconomic diversification strategies to achieve a 12 percent return in its 2017 fiscal year which ended June 30.

HFRRF earned $439,444,928 on its beginning net position of $3.729 billion on July 1, 2016. The pension ended FY 2017 with $4.025 billion, the first time in its 80-year history that it has exceeded the $4 billion marker.

"The recovery effort from Hurricane Harvey has been very difficult for our firefighters and all of Houston, so these investment return figures provide a ray of relief and hope for the future,” says David Keller, chairman of the HFRRF Board of Trustees. “Certainly pension fund performance is not the first thing on people's minds right now, but we are proud to report solid returns that first and foremost will provide for firefighters in retirement and their families in case of death or disability in the line of duty."

"The recovery effort from Hurricane Harvey has been very difficult for our firefighters and all of Houston, so these investment return figures provide a ray of relief and hope for the future,” says David Keller, chairman of the HFRRF Board of Trustees. “Certainly pension fund performance is not the first thing on people's minds right now, but we are proud to report solid returns that first and foremost will provide for firefighters in retirement and their families in case of death or disabilityHFRRF Chief Investment Officer Ajit Singh says he and the investment committee brought a number of changes together to achieve the 12 percent return.

“Our ongoing strategy is to bring the latest academic research in investment management into the portfolio. Our investment return reflects improvements we made in risk-adjusted performance,” Singh says. “And we successfully reduced management costs by over 50 percent.”

Studies confirm that asset allocation and diversification across risk factors are primary drivers of the variabilities of returns, he adds. 

"We worked hard in 2017, and will continue that work in 2018, to take the risk factors diversification concept to the next level," Singh says. "Traditional diversification can still cause over-exposure and add risk. By improving diversification across different style risk factors and linking the risk allocation with macroeconomic risk factors, we protect our members’ assets against many different sources of potential downturns.”

Singh noted how, in 2017, the HFRRF’s Global Tactical Asset Allocation process and Market Risk Indicators, or MRI, provided leading signals that worked particularly well during the uncertainty before and after European elections.

Singh credited the HFRRF investment committee, comprised of HFRRF Board members, with becoming involved in understanding and approving a conservative strategy.

"To describe our strategy in one phrase, it is ‘Winning by not losing,’" he says. "Over the long term, if we can avoid the negative compounding effects of lower draw-downs in bad economic times we add substantial value to the portfolio when better times resume. We are not swinging for home runs. There are too many strike-outs.  We instead strive for consistent performance over the long term,” Singh said.  “Our work is not finished. We will continue to bring leading academic research in the portfolio, continue to focus on improving risk-adjusted returns, risk factor investment techniques while reducing the management costs.”

Singh also noted how the fund generated positive alpha of 308 basis points (bps), compared to three years alpha of negative 253 bps. The alpha is a performance measure adjusted for market risk, measured by Beta, which was 0.91 compared to three-year Beta of 1.36. The Information Ratio, another measure of risk-adjusted performance, adjusting for deviation from the benchmark, was 1.72 for the FY 17, compared to three years of negative 0.40.

Through the end of its 2017 fiscal year, HFRRF achieved the unofficial title of having the best-funded ratio (89.4 percent) of all of Texas’ state and local pension funds with more than $1 billion in assets under management, according to Pension Review Board data. Certain actuarial assumptions mandated by the state with implementation of SB 2190 will decrease that ratio in future PRB reports. 

“Being good, responsible stewards of the Fund is our top priority,” says the fund's board chairman, Keller. “We will continue to work diligently for the firefighters who serve the people of Houston in their most difficult moments.”

HFRRF serves 7,275 active and retired members and has approximately $4.02 billion in net assets.  The American Investment Council Named HFRRF number five of the Top 10 Pension Funds by Private Equity the line of duty."