Friday, February 22, 2019

Is sustainability sustainable?

By Blake Pontius, Contributor

Given investors’ surging interest in combining financial return objectives with environmental, social, and governance (ESG) factors—a concept known as “blended value”—some may be tempted to dismiss this as a transient trend.1 But our journey to incorporate ESG factors into our fundamental analysis has reaffirmed our belief that the emphasis on blended value will reshape the asset management industry and the sectors that comprise the global economy for decades to come.

Long-Term Trends Underpin ESG Focus

Shifting demographics and other long-term trends are underpinning the growing importance of ESG factors.

Demand comes from a broad investor base, including institutions and individuals—in particular women and millennials, who are controlling more wealth and have a higher interest in sustainability than other groups. Geographically, interest is expanding beyond traditional boundaries such as Europe into Asia. Japan’s $1.5 trillion Government Pension Investment Fund, for instance, is placing more emphasis on sustainable investing.

During the financial crisis in 2008, the top risk factors identified by corporate executives were mostly economic, including asset-price collapse, a slowing Chinese economy, and the oil and gas price spike, according to the World Economic Forum’s Global Risks Report. In 2018, four out of the five top risk factors are environmental or societal: extreme weather events, natural disasters, failure of climate-change mitigation, and water crises.

In short, we’re seeing ESG risks become higher priorities for corporate executives. This is influencing how investors view the risks and opportunities facing companies.

Click image to enlarge.

Overcoming Hurdles to ESG Integration

While there is still some hesitation among investors about the value proposition of ESG integration and some perception that it may conflict with their fiduciary duty, a growing body of research debunks the idea that there is a tradeoff between financial performance and sustainability. For example, a meta-study from Deutsche Bank and the University of Hamburg showed that 90% of 2,200 individual ESG studies show a neutral or positive link between good ESG practices and corporate financial performance, with a large majority of positive findings across regions. In all, this study showed that 38% of studies in developed markets showed a positive link between ESG and financial performance.

Click image to enlarge.

Another headwind to further ESG integration is concern about the quality of data on companies’ sustainability practices. More investors are relying on third-party sustainability ratings frameworks that are based largely on corporate disclosures. But because these ratings are largely disclosure-driven, with less emphasis on corporate behavior and forward-looking strategy, average ESG scores tend to skew strongly toward larger companies with an inherently backward-looking bias. In addition to being market-cap biased, ESG ratings tend to skew more favorably toward regions where corporate sustainability reporting is more common, such as Europe.

Opportunities for Active Management

ESG ratings can be helpful, but they only tell part of the story. It’s important to use them more as a starting point for developing one’s own view of a company’s sustainability profile.

This is a major part of our value proposition as an active manager, and we deliver on this by doing intensive bottom-up analysis. Our active approach involves sending our analysts around the world to meet companies and talk with their stakeholders.

There are small-cap companies that aren’t reporting or producing sustainability reports, but are actually doing great things to create compelling investment opportunities when viewed through the lens of blended value.

In addition, some enhanced techniques using big data and artificial intelligence can sort through the higher-frequency data points and help offset the fundamental limitations of traditional ESG rating systems. We see potential applications in both quantitative and fundamental research.

Integrating ESG in an authentic manner that is aligned with one’s philosophy and process is difficult. It can’t be achieved through a simple overlay or siloed approach.

1The term “blended value” was developed by impact-investing thought leader and author Jed Emerson.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of William Blair Investment Management or TEXPERS.

Blake Pontius
About the Author:
Blake Pontius is director of sustainable investing and a global portfolio specialist at William Blair Investment Management. In this role, he coordinates the firm’s integration of environmental, social and governance factors in its investment processes and provides analytical support to portfolio managers on the global equity team. He is also responsible for communicating investment strategy and portfolio positioning to clients, consultants, and prospects.

Taking interest rate risk out of factor investing

By Michael Hunstad, Contributor

Interest rate changes and the shape of the yield curve provide a lot of information about market conditions that drive capital allocation decisions throughout the economy and thus influences stock market returns. Interest rates affect stock valuations through two main channels —discount rates that impact the present value of future cash flows and borrowing costs that directly relate to consumer spending. Both influence the performance of equity markets and risk factors to varying degrees.

A lay of the land

To facilitate our analysis, we first place the shape of the yield curve into one of four regimes based on interest rate changes and the shape of the curve:
  • Bear Flattening: Interest rates rising, yield curve flattening — typically associated with periods of Federal Reserve tightening and market participants anticipating slower economic growth and inflation.
  • Bear Steepening: Interest rates rising, yield curve steepening — typically associated with periods when the Fed is tightening monetary conditions and market participants are anticipating faster economic growth and inflation.
  • Bull Flattening: Interest rates falling, yield curve flattening — typically associated with periods of Fed loosening and market participants anticipating slower economic growth and inflation.
  • Bull Steepening: Interest rates falling, yield curve steepening — typically associated with periods of Fed loosening and market participants anticipating faster economic growth and inflation.

We emphasize that changes in interest rates do not have any causal relationship to pure factor returns. However, we do see interest rate risks creep into factor portfolios in the form of unintentional sector, industry, leverage, regional and country exposures.

Factor insights during changing rate environments

The following chart summarizes the performance of Fama-French factor portfolios by yield curve regime. The portfolios are constructed without controls for unintentional and uncompensated risks.

Click to enlarge image.
Source: From December 1977 to October 2018 Kenneth French’s website, Northern Trust Quantitative Research. Long/Short portfolio returns constructed using top/bottom decile for the respective factors. Yield curve regimes are based on trailing 6 month yields for the 10 Year and 2 Year treasury.  Empirical duration calculation is based a regression on the change in the level of the yield curve across the 1Y, 2Y, 5Y, 7Y and 10Y tenors with controls for the equity market beta.

Size:  Smaller companies tend to outperform during bear flattening and steepening environments when the Fed is typically tightening and economic growth prospects are improving. 
Value:  Value stocks tend to do the best in bear steepening environments when the Fed is typically tightening and the market is pricing in higher economic growth prospects.
Quality:  High quality companies benefit from a falling rate environment when the Fed is typically easing, as they are able to deploy capital at cheaper borrowing rates to profitable investments.
Low Volatility:  Low volatility stocks tend to do well in a falling rate environment, whereas in a rising rate environment when the Fed is tightening, low volatility stocks tend to underperform.
Momentum: High momentum stocks have tended to do well in most interest rate regimes.
Dividend Yield: Higher yielding stocks tend to do well in a falling rate environment, whereas in a rising rate environment when the Fed is tightening, stocks with higher dividend yield underperform.

A note on low volatility: Low volatility strategies are expected to have some interest rate sensitivity because lower volatility companies generally have stable cash flows, so they tend to finance operations through higher levels of debt, especially in sectors such as utilities and consumer staples. However, employing risk controls to manage sector and other exposures can significantly lower interest rate sensitivity. Many commonly used approaches have little or no risk controls and thus expose investors to a much higher degree of interest rate sensitivity than necessary.

Control the unintended biases

The exposure of factor portfolios to interest rate risk may be intentional, but is more likely to be the by-product of a lack of consideration for this risk. Unintended and uncompensated biases come in many forms including interest rate, sector, industry, region, country and idiosyncratic risks. In other words, they contribute to risk but not return, resulting in inefficient portfolio outcomes. We suggest that investors only take compensated risks and avoid the ones that are not.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of Northern Trust Asset Management or TEXPERS.

Michael Hunstad
About the Author:
Michael Hunstad is the head of Quantitative Strategies at Northern Trust Asset Management. Prior to joining Northern, Hunstad was head of research at Breakwater Capital, a proprietary trading firm and hedge fund. Other roles included head of quantitative asset allocation at Allstate Investments, LLC and quantitative analyst with a long-short equity hedge fund. He holds a doctorate in mathematics, an master's degree in economics and an MBA in quantitative finance. 

How companies can survive the 

new industrial revolution

By Dave Dowsett, Contributor

A new industrial revolution fueled by data and artificial intelligence is rapidly changing the global economy and the world we live in. 

The speed of companies coming and going has advanced. Organizations must understand where the competition is coming from - that is fundamental.

Financial services companies especially need to find a way to navigate disruptive technology particularly as artificial intelligence and machine learning creates new ways of doing business and engaging with customers. Doing so, however, remains a challenge for large organizations accustomed to moving slowly and avoiding risk. 

To reduce the risk of missing out on the tech revolution underway, companies should follow these 5 suggestions for survival:

  1. Understand the impact of machine learning - Artificial intelligence and machine learning can remove bias in decision-making and lead to faster and more accurate results – for financial services companies, this is a huge opportunity. Fintech, and the firms that offer machine learning solutions to companies, are rapidly changing how financial services are structured, provisioned, and consumed. 
  2. Expand your ecosystem - Fintech companies are quickly changing how consumers interact with financial services, but they’re also startups that lack a focus on enterprise-wide challenges. Fintech startups find a gap on the value chain and they relentlessly go after it. They aren’t trying to go after enterprise problems. They’re going to go after a specific solution, like payments. Therein lies a natural fit for large organizations to partner with startups and to tap into how they think and solve problems. The competitive advantage will not be determined by the organization alone but by the strength of the partners and ecosystems you choose.
  3. Collaborate - According to an Accenture survey, 75% of executives agree that their competitive advantage won't be determined alone but through collaboration. You have to collaborate now to compete, you can't just go away, think you’ll build a five-year initiative, build some code behind closed doors and then come out and be the best. Collaboration is key.
  4. Embrace failure - When you want to deal with disruption, you’ve got to think big. And that’s generally quite hard for financial companies. Large financial services organizations tend to play it safe and “increment” their way forward. But in fintech, big bets are critical – and they generally fail. You’ve got to be prepared for that failure and have support when you do fail because if you don't, people don't want to do that again.
  5. Change happens from the top - Dealing with disruption requires top down sponsorship. You can't bring in a consultant to innovate for you. You have to do it yourself. You have to find where your gaps are. Leaders should ask people in their organization to identify where the problems lie. You might need help on delivery but you don't need help with consultants identifying your problems.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of Invesco or TEXPERS.

Dave Dowsett
About the Author: 
Dave Dowsett is global head of strategy and innovation for Invesco. In this role, he focuses on augmenting Invesco Technology’s core roadmap with emerging financial technology in the marketplace. His role includes overseeing the identification of business needs through capabilities work, modeling strategic intelligence scenarios, and facilitating the movement of innovation and disruptive technology pipelines across the organization. 

Are you really diversified?

By Mark Shore, Contributor

When I hear the phrase “Are you diversified?” it sometimes reminds me of the Jimi Hendrix album “Are You Experienced?” Perhaps ask yourself the question, are you experiencing real portfolio diversification? Often when investors think about diversifying their portfolio, they think in terms of the well-known 60/40 allocation model of stocks and bonds. I remember back in the late 90s when dotcoms were all the rage, investors would say “yes, I’m diversified, I’m invested in financials, healthcare and technology stocks.”

When the century turned, the economy and stock market also turned as the U.S. economy entered a recession and equities experienced increased positive correlation during the decline.  During this time, some investors began to rethink what diversification really means and how do they reduce their correlation risk and tail risk. During the financial crisis, the same issue reappeared, and many investors were once again thinking about diversification.

As I often tell my DePaul University students, “correlations are not static, but are dynamic based on the duration of time the correlations are measured.” For example, if you look at correlations on a rolling 12-month basis, it may cycle between different levels of correlation versus a single “static” correlation matrix measurement over a given period, as demonstrated in Figure 1.

Figure 1: Correlation matrix Jan 1997 to Dec 2018
Click image to enlarge.

Source: Bloomberg data. Indexes include: S&P 500 Total Return Index, MSCI EAFE Index, Barclays US Aggregate Total Return Value Unhedged, S&P Goldman Sachs Commodity Index, FTSE REIT Index, BarclayHedge CTA Index, BarclayHedge Hedge Fund Index.

A rolling correlation can help to identify market scenarios where the correlations may change and if the correlations tend to be persistent or dynamic over time. Figure 2 demonstrates, on a three-year rolling basis how the correlations of foreign stocks and hedge funds tend to be relatively persistent in maintaining high correlations to the S&P 500 Total Return index over time. While the REIT index and the managed futures index exhibit more cyclic correlation behavior.

Figure 2: Rolling correlation
Click image to enlarge.

 Source: Bloomberg data

Figure 3 displays on a shorter time frame, a more pronounced movement of correlations, especially with the REIT index moving between -0.33 and 0.95 and the managed futures index altering between -0.71 and 0.84.

Figure 3: One-Year Rolling Correlation to S&P 500 Total Return Index
Click image to enlarge.

Source: Bloomberg data

No one has a crystal ball to determine when the next stock market correction will occur or when the next economic recession will happen. But if you prepare your portfolio in advance for greater non-correlation you are more likely to persevere the market challenges.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all CoQuest Advisors LLC or TEXPERS.

Mark Shore
About the Author:
Mark Shore is director of educational research at Coquest Advisors LLC in Dallas. He has more than 30 years of experience in alternative investments, publishes research, consults on alternative investments and conducts educational workshops. Shore is also an adjunct professor at DePaul University's Kellstadt Graduate School of Business in Chicago where he teaches a managed futures / global macro course. He is a board member of the Arditti Center for Risk Management at DePaul University. Shore is a frequent speaker at alternative investment events. He is a contributing writer for several global organizations including the Eurex Exchange, Cboe, Swiss Derivatives Review, ReachX, MicroCap Review, and Seeking Alpha.
Prior to Coquest Advisors, he founded Shore Capital Research, a research/ consulting firm for alternative investments.

The U.S. yield curve inverted. Time to worry?

By Erin Bigley & Scott Krauthamer, Contributors

What drove down U.S. stocks in late December? The answer may be the U.S. bond market and what the shape of the yield curve is—or isn’t—telling us about the state of the economy.

For most of 2018, the U.S. yield curve has been flattening. This happens when the gap between short- and longer-dated yields narrows, historically a sign that economic growth may be slowing.

On Dec. 25, a section of the curve briefly inverted, with the yield on the five-year U.S Treasury note falling slightly below that on the two-year note. That helped spark a 3.2% decline in the S&P 500.

The more closely watched gap between the two- and 10-year notes was hovering at just 12 basis points, its narrowest gap since 2007. An inversion of that section of the curve, with 10-year yields falling below two-year yields, has preceded every recession since the mid-1970s. So it’s understandable why flattening yield curves cause investors to pay attention.

Current circumstances have only heightened investor concerns. The U.S. is in one of its longest macroeconomic expansions in post-war history, and investors are growing increasingly wary that it may end soon. U.S. growth has probably peaked this year and is expected to slow in 2019.

Meanwhile, increasing labor costs are pushing up inflation, triggering concerns that additional interest-rate hikes from the Federal Reserve could soon put an end to the current economic cycle.

Does Yield-Curve Inversion Guarantee a Recession?

Here’s something to keep in mind, though. While the U.S. has never had a recession that wasn’t preceded by an inverted yield curve, not every curve inversion has been followed by a recession.

As the following display shows, during the five mild inversions of the yield curve between 1986 and 2001, the U.S. stock market returned an average of 15% in the three years following the flip, starting the month the inversion occurred. Those inversions were not followed by recession. And when the curve inverted in July 2006, it took two years for the equity market to correct.

Click image to enlarge.

There’s reason to think the yield-curve signal may be distorted this time around. Typically, a flattening curve indicates that monetary policy is too tight. In other words, short-term rates have risen too high for the economy to handle without going into recession.

But adjusted for inflation, the “real” short-term interest rate today is still below 0%. While it’s reasonable to expect rates to peak at much lower levels this cycle than in the past, it doesn’t seem likely that 0% is too much for the economy to handle.

Remember, an inverted yield curve doesn’t cause a recession. It reflects conditions that can trigger one. And if they don’t see those conditions in other places, it’s not unreasonable for policymakers and investors to treat the yield-curve signal with some degree of skepticism.

If Monetary Policy Isn’t to Blame, What Is?

So, if the yield curve isn’t signaling too-tight money, why is it flattening?

We think it’s partly because quantitative easing has distorted the long end of the curve. The Fed’s balance sheet may be shrinking, but it’s still many times its size in past cycles. And the effect of QE programs in other countries has probably boosted demand for U.S. Treasuries, which helps to keep a lid on yields.

What’s more, falling oil prices have helped to temper inflation and growth expectations over the last two months.

What to Expect in 2019
There are plenty of clouds hovering over the outlook for the U.S. and global economies. These include ongoing trade disputes, rising inflation and tighter financial conditions.
But while we expect the pace of U.S. growth to slow next year, we’re not forecasting a recession. On the contrary, we expect a solid 2% growth rate in 2019. Strong hiring puts upward pressure on wages and costs, but it also leads to more consumption, a key engine of the U.S. economy.

In addition, household savings and balance sheets are at their healthiest levels in two decades.

U.S. corporate earnings will probably decelerate in 2019 as the “sugar rush” associated with corporate tax reform starts to fade. The broad reduction in corporate tax rates in 2018 led to an estimated earnings-per-share growth of about 24%. But even with corporate margins possibly peaking, we’re not ready to write off positive earnings growth in 2019.

Of course, with growth slowing and uncertainty rising, markets will remain volatile. But we think the de-risking we’ve seen this year may create some attractive opportunities for active investors.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams or TEXPERS.

About the Authors
Erin Bigley
Erin Bigley is a senior investment strategist for the Fixed Income team at AB. She is a member of the firm's Responsible Investment Committee as well as the Municipal Impact Investment Policy Group. She joined the firm in 1997 and previously served as a portfolio manager and trader for the global and Canadian bond strategies. Bigley also spent two years based in London as the global head of Fixed Income business development for institutional clients. She is the coauthor of "LDI: Reducing Downside Risk with Global Bonds," published in The Journal of Investing. 

Scott Krauthamer

Scott Krauthamer is managing director of AB's Equity Business Development team at AB. He oversees global product management and strategy efforts for the firm's equity platform. Prior to joining AB, Krauthamer held a variety of investment, executive management and business strategy roles at Legg Mason, U.S. Trust, Bank of America and J.P. Morgan Private Bank. He started his career as an analyst at J.P. Morgan in 1998, and his financial services experience spans investment-management, quantitative analysis, marketing and business development.

Digital Revolution Checklist: 

Questions to Ask Your Manager

By Scott DiMaggio, Gershon M. Distenfeld, Jeff Skoglund, & James Switzer, Contributors

When it comes to creating alpha, fixed-income managers that stay ahead of rapidly evolving technology will have an advantage over those that remain stuck in the analog world. But how do you assess how well your manager is navigating the changing technological landscape?

It’s critical to know how advanced your manager is, because technology has a direct and increasingly important effect on performance. Managers that have the right tools will do a better job of identifying and capturing opportunities, even in illiquid or volatile markets. And they’ll have more time to focus on the strategic and analytical work that humans are better wired for.

That’s why you’ll want to know where your manager falls on the digital continuum. The following checklist of questions will help you gauge whether your manager has the right technological tools and innovative attitude to succeed in the fixed-income world of the future.

In the last five years, how, specifically, has technology changed the way you do business? What changes are you contemplating for the next five years?

Your asset manager should be able to provide specific examples of how they have improved client outcomes using technology they built or bought. They should also have an explicit technology strategy that anticipates new developments in artificial intelligence, machine learning and fixed-income market conditions.

Can you describe your organization’s culture and attitude toward technology?

An organization that truly values technology should have a track record of integrating it into the investment process, as well as a bottom-up approach to innovation in which the people who encounter everyday problems and inefficiencies are empowered to suggest new technological solutions. Senior management should view fixed-income technology as a top priority.

What problems are your most compelling technology tools solving? What problems do you think technology can solve in the future?

Technology should be used to gain an edge in the marketplace, not just to improve the bottom line. That is, the end goal of integrating technology into the investment process should not be a headcount reduction. Make sure your manager is focused on how technology can help them solve the real-world problems that impede the best client outcomes. If they can’t articulate their current problems or solutions, their strategy may be geared more toward helping themselves than you.

What is your organization’s approach to changing liquidity conditions in the marketplace?

When liquidity is fleeting and scarce, seconds can matter. If firms don’t see liquidity conditions as a problem with a potential technological solution, they’re going to be left out in the cold the next time markets seize up.

Do you see your tools as stand-alone improvements, or as part of a more holistic strategy?

Stand-alone improvements are commendable, but the real value to an investor lies in tools that can “talk” to one another. Now that artificial intelligence and machine learning are upon us, firms should have either digitized all their data into a machine-readable format or have a plan for doing so. This is the first step toward developing a technology suite that is more than the sum of its parts.

How do you think human-machine interaction will evolve in your organization over the next five years?

Too often, managers see technology as an alternative to human intelligence rather than a way to empower it. Firms should have a clear answer as to how machines will empower their existing employees and what new talent they will be looking to hire in the future as their needs evolve.

Name three of your developers.

A sure sign that technology is fully integrated into the investment process? Your manager consults developers so frequently to solve research and investment problems that they know exactly who they are.

In the end, the discussion you have with your asset manager about technology isn’t just about technology. It’s also about how much the manager thinks about the future, how comfortable they are with the idea of radical change and how determined they are to make the kinds of investments that result in long-term success. These characteristics put leading managers far ahead of the rest.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams or TEXPERS. 

About the Authors:
Scott DiMaggio
Scott DiMaggio, senior vice president, is co-head of Fixed Income, Director of Global Fixed Income and a Partner of the AB. As co-head of Fixed Income, he is responsible for the management and strategic growth of AB’s fixed-income business. As director of Global Fixed Income, DiMaggio oversees all of AB’s Global Fixed Income, Canada Fixed Income and US Multi-Sector Fixed Income strategies, as well as their associated investment strategy, activities and portfolio-management teams. In this capacity, he leads AB’s internal Rates and Currencies and Multi-Sector Fixed Income Research Review Committees, the primary investment policy and decision-making committees for the portfolios the firm manages.

Gershon M. Distenfeld
Gershon M. Distenfeld, senior vice president, is co-head of Fixed Income, Director of Credit and a Partner of the firm. As co-head of Fixed Income, he is responsible for the management and strategic growth of AB’s fixed-income business. As director of Credit, Distenfeld oversees all of AB’s credit-related strategies, including all global and regional investment-grade and high-yield strategies, as well as their associated investment strategy, activities and portfolio-management teams. In this capacity, he leads AB’s internal Credit Research Review Committee, the primary investment policy and decision-making committee for all credit-related portfolios the firm manages. Distenfeld also co-manages AB’s multiple-award-winning High Income Fund.

Jeff Skoglund
Jeff Skoglund is Chief Operating Officer for Fixed Income, responsible for the implementation of business strategy, innovation and technology, product development, talent management and acquisition, financial analysis, and regulatory compliance. He was previously director of credit research at the firm, where he oversaw a team that provided fundamental analysis of global investment-grade, high-yield bond and bank loan credits. Prior to joining AB, Skoglund was a managing director at UBS Investment Bank, where he held numerous management positions, including both global head of credit research and head of US credit desk analysts. Before UBS, he was a senior high-yield analyst at Merrill Lynch and Credit Suisse. Earlier in his career, Skoglund was an equity analyst and investment banker at Lehman Brothers and worked at Morgan Stanley in equity derivatives. 

James Switzer
James Switzer is a senior vice president and the Global Head of Fixed Income Trading, overseeing both taxable and tax-exempt fixed-income trading. He also trades financials and REITs, and has been instrumental in the strategic repositioning of our trading organization and the development of our industry-leading trading tools, ALFA and Abbie. Before joining AB in 2011, Switzer was a managing director at Société Générale, where he managed the Financial Institutions Credit Trading Desk, and at BNP Paribas, where he managed the Investment Grade Trading Desk from 2000 to 2002. He also formerly served as a sector portfolio manager/trader at UBS Principal Finance (from 2002 to 2005) and at Sigma Capital (from 2005 to 2008). Earlier in his career, Switzer worked at Paine Webber and Co.; Kidder, Peabody & Co.; and Alex. Brown & Sons. 

Thursday, February 21, 2019

State House and Senate resolutions would seek repeal of harmful Social Security Act provisions

By Allen Jones, TEXPERS Communications Manager

TEXPERS' Legislative Committee is supporting three state House and Senate resolutions urging Congress to move forward on legislation to repeal Social Security Act provisions that diminish the retirement earnings of public employees.

Concurrent resolutions may be used to request action from other entities, including Congress, or for memorials, congratulations, or commendations. The three state House and Senate draft resolutions urge Congress to revoke the Government Pension Offset and the Windfall Elimination Provision of the Social Security Act. TEXPERS President Paul Brown is asking the association’s members to support the state resolutions and Congressional legislation seeking the repeals.

Public employees who receive a pension based on work for a federal, state or local government where Social Security taxes are not withheld may find their Social Security benefits reduced because of legislation enacted by Congress in 1977 and 1983. The Government Pension Offset, or GPO, applies to those eligible for Social Security spouse's or widow's or widower's benefits. The Windfall Elimination Provision, or WEP, applies to those eligible for their own Social Security benefit.

There are two state House bills (HCR 19 authored by Rep.Abel Herrero, D-Corpus Christi) and HCR 25 authored by Victoria Neave,D-Mesquite) and a state Senate bill (SCR 5 authored by Sen. Joan Huffman,R-Houston) pushing for the repeals. The three resolutions are identical and call the Social Security provisions "punitive and discriminatory" stipulations that target "hundreds of thousands of teachers, police officers, firefighters, and other public servants."

"The GPO and WEP as applied to public employees are unreasonable and unjust and will cause tens of thousands of government retirees to experience a diminished quality of life or be forced to return to work to make up for the effects of these provisions," read drafts of the resolutions.

As of Feb. 19, only Huffman's resolution had been referred, having been sent to the Senate State Affairs committee on February 7. The House versions had yet to be referred to a committee.

Sen. Sherrod Brown.
If passed by the Texas House and Senate, the resolutions would be submitted to Congressional leadership, urging them to repeal the GPO and WEP offsets. In the U.S. Senate, S.521, filed by Sen. Sherrod Brown, D-Ohio, is currently in the Senate Committee on Finance and calls for the elimination of the offset and windfall provisions from the Social Security Act. Co-sponsors of the bill are Sen. Susan M. Collins, R-Maine, Sen. Tammy Baldwin, D-Wisconsin, and Sen. Lisa Murkowski, R-Alaska. A related bill has yet to be filed.
TEXPERS isn't alone in supporting efforts to repeal the two provisions. 

Texas is among 15 states affected by WEP and GPO offsets. Other states include Alaska, California, Colorado, Connecticut, Georgia, Kentucky, Louisiana, Maine, Missouri, Massachusetts, Ohio, Rohde Island, Nevada and Illinois.

The GPO and WEP measures, according to the National Committee to PreserveSocial Security and Medicare, were once "intended to address a perceived inequity between those who spent a lifetime working and paying into Social Security and government employees who did not pay into the system." In the more than 30 years since Congress enacted the provisions, the measures have "proved to be both unfair and unworkable," according to the National Committee. 

TEXPERS' Legislative Committee met Feb. 13 in Austin to review bills recently filed for the state's 86th legislative session, including the three resolutions, that potentially involve public pensions and retirement. The committee, chaired by Brown, discussed 16 bills that have some focus on public pensions at the local, state and federal level. 

The committee voted to either continue monitoring measures as they make their way through various House and Senate committees or for TEXPERS to take a neutral, supportive or opposing stance on particularly impacting legislation. In some instances, a bill may also be addressed by proposing amendments suggesting language that is beneficial to local pension systems.

“All committees will soon begin taking up bills to be heard,” he says. “The bill filing deadline for legislation this session is March 8. For the exception of emergency items called by the governor, no bill can be heard on the House or Senate floor, without suspending rules, within the first 60 days of any legislative session.”

To see an updated list of bills being tracked by TEXPERS, visit the association’s online bill tracker at There, click the “View key legislation” link.

About the Author:
Allen Jones handles the print and online media needs of the Texas Association of Public Employees Retirement Systems. Before joining TEXPERS in 2017, he worked as a freelance journalist covering the Houston area for a daily newspaper; served as a publications manager for Hibu, an international corporation; and spent nearly 10 years working for Houston Community Newspapers, a group of community publications. He has a bachelor’s degree in journalism and communications.