The TEXPERS Blog

Houston Pension Debate Continues; Other Texas Cities Look On

2012-02-14T14:52:00.002-06:00

Debate is good and we’re glad to see that Houston’s leaders continue their constructive engagements on the subject of public employee pensions, their funding, and their role in a well-governed city. But we need to remind our readers that what happens in Houston should stay in Houston.

Here’s what’s going on and why we’re concerned that some in Houston are trying to spread their misery:

The latest volleys started with an op-ed by Bill King, appearing in the Houston Chronicle on Feb. 4, explaining his formation of the group Texans for Public Pension Reform, as well as his reason for resigning, recently, from that group’s Board of Directors. King, a Houston attorney and former mayor of Kemah, has written voluminously on the subject of Houston’s budget problems and its penchant for issuing debt to cover both city operational expenses and pension promises.

We should note that King’s concerns about the city of Houston’s outstanding debt obligations is a real, and serious, issue with which the city is coming to terms. But King’s ongoing campaign about public employee pensions in Houston and other places in the state has been interpreted by many as evidence that he wants to run for another political office, possibly a statewide position. He said his resignation from the Board of the group he helped form reflected his acknowledgement of critics’ intuition.

A few days after King’s op-ed appeared, the editors at the Houston Chronicle weighed in with their own views, in “Fixing the pension mess.” The editors did a great job of confining their comments to the situation in Houston, which was the right thing to do. Houston’s problem is Houston’s problem. It’s not the state’s problem. It’s not a Houston-sized problem in the other Texas cities. It’s not Abilene’s problem, or Corpus Christi’s problem, or El Paso’s problem. Across Texas, in situations where benefits have had to be resized according to revised projections of city finances, that has indeed occurred, in Austin, Dallas, Fort Worth, San Antonio and other cities in recent years.

But unfortunately King has been casting his attacks on pensions with broad brushes, projecting his concern about the Texas Teacher’s Retirement System (TRS) and Houston’s situation onto other Texas statewide pensions and other Texas cities, without really knowing what’s going on outside of Harris County. Note that the group he helped form with the Greater Houston Partnership was not named “Houstonians for Public Pension Reform.”

Let’s go back to King’s op-ed, where he uses the claim that the Texas Teacher Retirement system is underfunded to then say that that is what is happening in “local governments,” with Houston being his prime, and only, example:

Some of the plans are also becoming an intolerable burden on local governments. In Houston, the contributions required to fund its three pensions plans grew from $100 million in 2000 to $220 million in 2010. The actuary reports on Houston's plans project that the contribution will need to be $500 million in 2020. At that time, that will represent about half of the city's property tax collections.

There are many ways to address this problem. Private industry did so 20 to 30 years ago, mostly by freezing their existing defined-benefit plans and converting future pension benefits to defined-contribution plans. There are other ways to address the problem, but continuing on the current path is not an option. It will result in a financial disaster for everyone.

Many people are starting to pick up on King’s broad stroke attacks and his one-size-fits-all assertion that defined contribution plans are the answer (because they are not).

Former Texas firefighter Laura Matau provided King and Chronicle readers with her own op-ed, on February 9, offering the view that defined benefit plans have worked, and will continue to work, for public employees across Texas.

Public defined-benefit plans have been a Texas institution for 70 years. More than 2 million working, active and retired Texans participate in these plans, with combined net assets of about $170 billion. Defined-benefit plans provide retirement security for public employees who devote their lives to educating our children, protecting our homes, keeping our neighborhoods and streets safe and providing other critical services that enrich the quality of all our lives.

Matau concludes by reminding Houstonians that strong retirement plans attract high caliber people to public service and the states and cities should keep the promises they’ve made to the people they hired.

Then, yesterday, in a newsletter note to AFL-CIO members in Texas, Houston Independent School District Superintendent Gayle Fallon came to the defense of the Teacher Retirement System and other systems by providing statistics on TRS’ historically high rates of return and its similarities to the Social Security contribution rates. Teachers do not pay into Social Security so they don’t receive any SS benefits in retirement. And Fallon offered her own theory on why there is this effort by King and others to convert defined benefit plans to defined contribution plans, like 401(k)s:

“There is over $170 billion sitting in public pension funds in Texas. Unfortunately those funds have the attention of greedy investors and hedge fund operators who salivate at the thought of converting public pensions into 401(k)s and collecting huge administrative fees.”

All of this back and forth aside, our point here is simple. Texans should not be confused by what is occurring in Houston. Yes, Houston has a problem. Texas, and all its local pension systems, do not.

King’s understanding of how local pensions operate and perform is still growing, as evidenced by the following statement in his op-ed:

That does not mean that we should do away with pension plans altogether. You may have seen an article that appeared in the Austin American-Statesman where I seemed to take that position. The Statesman quoted me as saying, "Texas needs to get the hell out of this (pension) business completely." However, the quote was taken out of context. At the time the reporter and I were talking about the state laws that mandate pension plans for many cities in Texas. I was making the point that I thought the state should stop dictating pension plans for local governments.

In fact, Texas does not “dictate” how pension plans operate for local governments. Someone should tell that to Mr. King.

All cities have choices about how they run their systems. Most let the Texas Municipal Retirement System invest their money and run their benefit programs for their employees, but the benefit levels and contributions are decided by the cities themselves. Those Texas cities that run their own investments and benefits administration – TEXPERS members -- have sought to codify their plans in Texas law to protect the continuity of their plans from potentially abrupt changes in city administration’s after elections. But codification in statute is entirely an effort to preserve their individual plans through a 3^rd party. That is not the state’s ‘dictating’ plans onto cities, as Mr. King seems to think.

It’s our hope Mr. King’s comprehension of these issues continues and that Texans, as strong independent thinkers, will take in these and other facts about a public employee pension system that has a proven track record of working well for public employees and taxpayers. --- Max Patterson

Republican Joint Economic Committee Uses Worst-Ever Market Period to Cry the "Sky is Falling!"

2012-02-06T14:40:00.007-06:00

We read with great interest a December 8 report, "States of Bankruptcy: The Coming State Pensions Crisis" that was issued by the Republican Joint Economic Committee. We noticed several things about the author and the data used, and we hope that people will keep some things in perspective when they read the alarmist, “Sky is Falling” styled report.

Our primary reason for viewing this report as “Chicken Little” like, is the primary date of the data that was provided by the committee by Andrew Biggs, of the American Enterprise Institute. Namely, he used data for the year 2009 to calculate unfunded pension liabilities as a percent of state gross domestic product (see the page 5 chart).

As you recall, 2009 was a particularly bleak year for the American and worldwide economies, and the GDP figures used by Biggs reflect the lows of the recession and stock markets’ collapse that started in 2008. The markets, state economies and pension fund performance records have recovered significantly since this snapshot was taken. It would have benefited the credibility of the report if it had reflected a more representative year in terms of 'normal' economic and market activity. Choosing the bottom of a market cycle to cry the “Sky is Falling” is a bit disingenuous. What’s the data look like in 2010 or 2011, after market recoveries and opportunities for pensions’ to rely on their strong-hand style of investment portfolio management.

Even with the report's use of the worst possible GDP figures, all Texans should note that Texas pensions performed very well on a comparative basis to other states. On the chart, Texas was among the states with the lowest levels of unfunded liability debts compared to GDP. This is testament to the effectiveness of Texas' combined state and local systems for providing defined benefits to their public sector employees and our solid economy. This is resilience, and also a signal that our systems are performing well, even during trying economic times.

It should be noted that, at the local levels in Texas, those few systems which have experienced trouble have done so as a result of their government sponsors' decisions not to adequately fund their pensions. As a result, they quickly get behind their actuarial curves and must take drastic efforts to get caught up with their liabilities. Obviously, this is a poor management practice. Fortunately, at the local levels, very transparent processes exist to correct such shortfalls. In the past two years, pension systems in Austin, Dallas, and Houston have used these processes to realign their benefit promises and taxpayer commitments. These processes work wherever they’re tried. Contrary to the Joint Economic Committees’ assertion, there is no pension system or political movement in Texas that has as its intention asking for "bailouts" from any source, either now or in the distant future.

We will continue to watch the reports that emanate from the Republican Joint Economic Committee. – Max Patterson

Cities Need to Combine Money-Saving with Money-Making

2012-01-24T09:48:00.000-06:00

The city of Houston has been working with its three pension systems for some time now to look for ways to keep the city’s budget in good shape. We don’t want to get too bogged down in the details or history of that city’s situation, but we do want to take a brief moment to point out a couple of recent interesting articles in that city’s major newspaper. There’s a lesson here for other Texas cities.

First, there was the January 9^th news article in the Houston Chronicle which offered the results of a 16-member task force’s work on brainstorming ideas for saving or raising hundreds of millions of dollars for the city of Houston’s government. Among their proposals is ending public employee pensions or changing them dramatically to ineffective and costly defined contribution plans. Here’s how the Chronicle story covered the task force’s “thinking”:

For example, dozens of items offer ways to reduce future pension benefits, including ending pensions altogether and borrowing money to cover the current $5 billion in future pension bills for which the city has not set aside money. The list also includes changing from traditional guaranteed pensions to 401(k)-type savings plans, reducing survivor benefits, requiring employees to contribute more and raising the retirement age.

In our view this is not much in the way of a fruitful brainstorm idea unless the city wants to completely diminish the attractiveness of its already low-paying public sector jobs and greatly increase the city’s budget for ongoing training and recruitment activities. Defined benefit pensions keep people on the job. In human resource circles, it’s widely accepted that it costs a business more than $20,000 each time an employee leaves. Take a look at this site for just one calculation of the total costs involved. Ending defined benefit pensions is a good way to reap the unintended consequences of a greatly increased human resources budget.

But it’s also apparent that the task force focused exclusively on saving money by cutting or raising money in the form of increased taxes. We have not read the report, but the summary provided by the newspaper indicated that was the case. There is another way.

A second article, appearing in the Chronicle last Thursday by two Board trustees at the Houston Firefighter’s Relief and Retirement Fund (HFRRF) provided the alternative prescription: setting the conditions for economic growth. Here’s a snippet:

Houston needs increased private sector economic growth to generate enough revenue to pay for needed city services while also paying off outstanding city pension obligations. The vast majority of the city's general fund revenue comes from the ability of renters, homeowners, businesses and entrepreneurs to pay property taxes, sales taxes and other existing city fees.

To generate more funds for the city, Houston needs more private sector paychecks and profits. We need more private sector jobs for more Houstonians. To put more people back to work, we have to take greater advantage of our community colleges to help more Houstonians secure the new skills they need for the jobs available now and in the future.

The lesson here is that Houston, and every Texas city, needs to take a balanced approach to examining their budget and operations, while also doing what they can to encourage private sector growth. President John F. Kennedy noted how a rising tides raises all ships, and a burgeoning economy can increase revenues to municipal, state and federal entities. It seems to us that the City of Houston should pay some attention to the HFRRF op-ed on economic growth. Pension board trustees, by the nature of their focus on gaining investment returns, are good advisors.

In these two stories, we can see a lesson of value to all planners in all of Texas’ great cities – remember that your job is to develop policies that encourage economic growth as well as managing your city’s budget. Ending defined benefit pension plans may jeopardize your good intentions. – Max Patterson

A Billion Here, A Billion There...Who's Counting?

2012-01-17T14:36:00.002-06:00

It’s never good to make a mistake but owning up to them is important and we need to do that here.

In our case, our original press release and report about inaccuracies in the Laura and John Arnold Foundation report contained a mistake about the size of the estimated national pension shortfall for public employees, according to GASB. The correct amount is $700 billion, not $700 million as we originally stated in our press release and in one place in our original report.

We should note that $700 billion was mentioned correctly in a second place in our original report. And that $700 billion is indeed more than four times less than the $3 trillion estimate provided by the LJAF, which we also stated in our press release. In our view, the $3 trillion figure is the bigger mistake that still needs correction.

Interestingly, the million-billion-trillion fiasco reminds of the statement attributed to the late Senator Everett McKinley Dirksen, who was reported to have said, “A billion here, a billion there, and pretty soon you’re talking real money.” The problem with that, as we’ve learned from the Dirksen Congressional Center, is that Senator Dirksen may not have ever said that in so many words.

Regardless, we still think a million, a billion, and a trillion is real money and shouldn’t be taken lightly by anyone involved in public policy debates. – Max Patterson

TEXPERS releases Special Report

2012-01-13T14:37:00.006-06:00

Earlier this week, we here at TEXPERS released a special report that examined the truth behind some of the numbers and assertions that the Laura and John Arnold Foundation made in their paper titled “Creating a New Public Pension System.”

The paper that we released serves to correct the LJAF paper’s grossly overstated assertion about unfunded pension system liabilities in the United States by citing the most commonly used actuarial method recommended by the General Accounting Standards Board (GASB). The figure given by the LJAF paper is more than four times the actual amount of $700 billion using the GASB method.

This special report that we have released will be the start of a new series of material that TEXPERS will publish that will serve to combat the misinformation and slanted truths that certain interest groups and individuals will have you believe.

In conjunction with the special report, we have also released a new section on our website that deals specifically with the DB vs DC debate. On this new page, you can look through numerous studies that TEXPERS, as well as other like minded organizations have published in support of Defined Benefit plans. You can reach this page by visting here

You can also read the full TEXPERS special report at: http://www.texpers.org/documents/Debunking-the-Arnold-Foundation-Report.pdf

Private Sector Defined Benefit Plans in the News

2011-10-12T09:28:00.000-05:00

Given the rhetoric of the anti-defined benefit crowd, it may be shocking to some that defined benefit plans still exist in the private sector.

We’re here to tell you “They do.”

Today’s Wall Street Journal carries a brief story about the impacts of declining global markets on public and private sector defined benefit pension systems. The story, “Tin-Hat Time for Pension Funds,” says this:

Stocks are getting pummeled as the prospect of a global slowdown increases. The S&P 500 is now down more than 10% year-to-date. Meanwhile, already superlow [sic] bond yields are getting even lower, thanks to the Federal Reserve's latest extraordinary easing action. The 30-year U.S. Treasury bond at one point on Thursday yielded less than 2.8%.

That is the kind of one-two punch that will worsen pension deficits while also making the contributions required to fill holes even bigger…How this dire situation plays out will differ somewhat for private and public pension funds. Private-company funds will more quickly feel the market's pain. That is in part because the way they calculate pension deficits is more closely tied to moves in interest rates than is the case for public pension funds.

The story goes on to mention a Credit Suisse analyst’s note about the funded status of pension plans at Goodyear Tire & rubber, AK Steel, Supervalu, Lockheed Martin, and Northrop Grumman. This is yet more proof, for those who don’t normally keep up with pension issues, that defined benefit plans do still exist in the private sector, and much more commonly than known. (We proved this in Texas earlier this year in an op-ed published by the Houston Chronicle. Take a look too at our blog on the issue.)

A few more points need to be drawn out about the WSJ piece:

If defined benefit plans were so totally ineffective in attracting and retaining employees, then would private sector companies still have them?

If defined benefit plans were so detrimental to private sector company finances, then wouldn’t we hear more about contention at shareholder meetings over retirement plans?

To answer those rhetorical questions, we don’t see private sector companies entirely dropping their DB plans. We don’t see shareholder meetings zeroing in on defined benefit plans in media coverage of financial industry matters.

Our point here is simply that the contentions that defined benefit plans don’t exist in the private sector anymore – and the corollary that public sector employers need to ditch theirs too in favor of defined contribution/401(k) plans – are false. – Max Patterson

Texas Public Employees Association Notifies Members of Attempts to End Defined Benefit Plans

2011-10-06T12:27:00.001-05:00

We took note of a recent communication from The Texas Public Employees Association, the oldest and largest state employee group, to their members about a story in the Austin-American Statesmen. As a non-partisan, non-union association, TPEA is the leading advocate for ALL state employees and retirees before the Texas Legislature and their communication serves to correctly frame a situation now facing all statewide public employee pension plans. Please note their call-out about the policies that two of the largest pension systems adhere to in order to maintain cost feasibility to taxpayers. – Max Patterson

Troubling Proposal To End Traditional Public Employee Retirement Plans Floated

A recent Austin American-Statesman article discusses a group in Houston that wants to amend the Texas Constitution to prevent new public employees from participating in defined benefit retirement plans, such as those under ERS and TRS, even though these state plans are in good fiscal shape.

Although this group appears to be motivated by problems with local retirement plans in Houston, their proposal would have dire consequences for retirees and employees in all public pension plans in Texas.

TPEA believes the efforts by this group and others pose a potentially serious threat to maintaining our retirement plan. All state employees and retirees and their families should be sure to communicate with legislators their support for our current retirement plan. State employees and retirees have worked hard for this benefit and it provides modest but stable benefits that are essential for our retirement security.

While a number of states and some localities nationally have troubled retirement plans, Texas and our state leaders, by contrast, stand as a national model on how to establish and prudently manage sustainable retirement plans.

Two state-run retirement plans, ERS and TRS, include features that keep costs low, prevent abuses found in other states, and promote long-term sustainability. These features include:

· Shared responsibility for contributions between the state and employees.

· No pension “spiking”.

· No contribution holidays.

· No collective bargaining by ERS or TRS participants.

· No automatic cost of living adjustments (COLAs).

· Strong statutory and legislative requirements to ensure accurate actuarial impact analysis of proposed changes.

State leaders have actively managed both ERS and TRS to help ensure long-term sustainability of the plans. Legislative leaders enacted significant changes to TRS in 2005 and to ERS in 2009. These changes prefigured reform plans many other states and other plans are now attempting to put in place.

TPEA researched some of the claims made about defined benefit retirement plans during consideration of HB 2506 during the past legislative session and found that most are not supported by the facts. For instance, claims have been made that the decline in participation in defined benefit plans by private employers has taken place because such plans are inherently too expensive. In fact, changes in federal laws and regulations played the major role in the decline of private sector DB plans. This NIRS study found “the public sector has not been subject to the regulations that so drastically changed funding and accounting rules in the private sector.”

Analyses of defined contribution retirement plans such as 401(k) plans also show that they are a poor choice as a primary retirement savings vehicle because many eligible plan participants fail to contribute sufficiently, invest less than optimally, and frequently withdraw contributions prematurely. An analysis comparing DB and DC plans also found that traditional defined benefit plans are much more cost-effective. “The cost to deliver the same retirement income to a group of employees is 46% lower in the DB plan than in the DC plan.”

Since state employee salaries are 15 to 20 percent below pay for comparable private sector jobs, the promise of a stable and predictable retirement income is a key motivator in maintaining an affordable and competent workforce for Texas taxpayers. While these issues will continue to be studied and debated, it is essential that decision makers look at the facts here in Texas and not rely on faulty comparisons based on problems in other states.

Radio Interview Contrasts Pension Advocates and Detractor

2011-09-21T11:24:00.000-05:00

KUHF Radio reporter David Pitman spent three hours with me in my office earlier this month discussing pensions for public employees. From that, he created this 2-minute news piece (read here or click the Listen Now button on the page) highlighting the contrasting positions of TEXPERS and a new group that opposes defined benefit plans for public employees. The group is being organized by Houston attorney Bill King, the former mayor of Kemah, and likely an aspiring candidate for future office, somewhere. I don’t want to rehash Mr. Pitman’s story, but instead would like to make a few points.

Interviews are never set up as point-counterpoint occasions, with people of opposing views sitting in a room together debating their positions in front of a reporter who is diligently taking notes. Instead, reporters interview the two sides separately and do their best to provide their listener with appropriate overviews of the contrasting positions. The great thing about blogging is that it does provide opportunities to add to the “moderated” debate in a news piece. As such, I have some editorial comment about positions Mr. King takes in the last two paragraphs of Mr. Pitman’s article/radio piece.

Mr. King asserts that “If you suddenly went defined contribution, we’d still be able to recruit all the police, fire, teachers want today, because all those jobs have waiting lines that go out forever.”

That’s conjecture, but while arguably true today, it certainly has not always been the case.

In robust economic times, the public sector has always ceded great disadvantage to the private sector in terms of attracting potential new hires with salaries they would desire to start a career. It would not take too much digging on our part to demonstrate that in boom economic times most cities have had great difficulties attracting qualified candidates of good moral character to replace retiring officers, firefighters, or staff. That’s why we have the system we do today. It’s made good business sense to the public administrators tasked with finding and retaining good public servants.

Remember that the public is asking young men and women in the primes of their lives to forego the corporate career path and, in the case of firefighters and police especially, to ask for the sacrifice of their bodies in terms of the continuous conditioning and training necessary to perform their jobs. The men and women understand that they will not be receiving salaries commensurate with the potential they lose. By potential we mean the opportunities to attain wealth and perks through ascension in the corporate or entrepreneurial world, as well as the potential of their future lives past 40 as they risk their lives in the performance of duty.

In boom times, cities have often found themselves to be in the unenviable position of needing to compete with private sector opportunities. It seems a long time ago now but the Internet Boom of the 1995-2002 period drew millions of young people into the Gold Rush of that time, so much so that today major industries like the energy and utilities sectors are scrambling to find qualified replacement workers for an entire generation of their older employees who did not have their ranks filled behind them during the Internet Boom.

Thus it’s important for the everyday reader to keep perspective on Mr. King’s observations.

Sure, today there are lines of applicants for many public sector jobs. But that is more a sign of the times than a fundamental shift in the type of work that Americans predominantly seek for their livelihoods. When boom times return – and they will – taxpayers do not want the future that Mr. King would take us to, when low pay and inadequate retirement benefits for public sector work would attract only those not qualified for any other type of employment. Cities like New York and Los Angeles sometimes offer us sad demonstrations of the types of official and police corruption that can occur when salaries and benefits attract and retain only people that might not have obtained other types of employment.

In addition, taxpayers in cities that accept Mr. King’s premise should be concerned about the competition – of other cities. Let’s say that City A in a large metroplex area, like Dallas and Ft. Worth, decides to change their retirement benefit structure so that less benefits, or more risky retirement systems like defined contribution plans, are used. A well-qualified candidate for a public sector position, one who grew up in the area, wants to stay close to home, has the choice of seeking the same position with City A or City B, which has a solidly performing defined benefit retirement system. Where will that person apply? City B, obviously.

As a former politician, Mr. King knows how to parse words very well. In Mr. Pitman’s article, King is paraphrased as saying that he doesn’t have a problem with publicly funded retirement accounts, “but he doesn't believe public employees should be guaranteed a certain amount in retirement, when most private sector workers are not.”

Some in the retirement benefits industry describe that as "pension envy" – of one group of people wanting what the others have. Instead of remedying the situation by acquiring a guaranteed amount themselves in the private sector, they want to take away what others have, to level the playing field. We could quibble over the word “guaranteed” as well as a more fundamental question of Mr. King’s understanding of the role of Social Security, but we won’t, at this time.

In our view, it would be much more productive for Mr. King and others to deploy the same energy (and cash) in seeking so-called guaranteed benefits for private sector employers. At one time, most Americans in the private sector did have defined benefit plans provided by their employer. Certain companies abused the privilege of retaining their employees retirement contributions, using the moneys as low-cost or no-cost sources of capital for their expansion, only to find their industry go the way of the buggy whip and leaving their retirees in the lurch. The U.S. Government stepped in and created ERISA laws so onerous as to make administration of defined benefit plans nearly impossible for corporations. (However, it should be pointed out that many corporations still do offer employees defined benefit plans – see our blog here.)

But the point is that instead of seeking to pressure the revision of ERISA laws (or Social Security, for that matter), Mr. King and others are seeking to force public sector employees into the same poorly functioning defined contribution plans that are increasingly unpopular today. If only there were more productive uses of their time and considerable energy. – Max Patterson

Actuary Study Confirms Cost-effectiveness of DB Plans for Three Texas Systems

2011-08-30T15:29:00.000-05:00

We released a study last week from the actuarial firm Pension Trustee Advisors that confirms, using actual data from three Texas systems, that the costs to taxpayers for defined benefit programs are less those that would be needed for defined contributions to provide the same level of retirement.

The study is interesting and timely because it substantiates a core reason cities have been using defined benefit plans: they deliver reasonable retirement benefits at a reasonable cost to taxpayers.

Municipal employees, firefighters and police who are asked to forego the opportunity for the greater salary and bonus opportunities in the private sector are deserving of a defined benefit in retirement. In the current system, this benefit is one that takes 20 years or more to grow using contributions from the employee and taxpayers over the course of a person’s career.

In addition to steady contributions, the study found that “longevity risk” or “longevity pooling” is a key reason for the savings that taxpayers achieve through the use of defined benefit plans. Longevity pooling is recognition of the actuarial reality that there are fewer older retirees in a system with each passing year. The city (representing taxpayers) can calculate this mortality rate to reduce the amount of total contributions it must make toward defined benefit plans. The city would not be able to make the same calculation – and reduction in contributions – if it uses defined contribution plans. The taxpayers would have to fund all the employees’ retirement account with the expectation that they will live to some pre-determined age that is not actuarially adjusted for the expected rate of expiration.

Here’s how the study discusses the “longevity pooling” dynamic:

Longevity risk describes the uncertainty an individual faces with respect to their exact lifespan. While actuaries can tell us that, on average, for example, our pool of male police officers who retire at age 57 will live to be 82, they can also predict that some will live only a short time, and some will live to be over 100. Figure 2 illustrates the longevity patterns among our 1,000 police officers. With each passing year, fewer retirees are still living. Age 82 corresponds to the year when roughly half of retirees are still alive. In a DB plan, the normal form of benefit is a lifetime annuity, that is, a series of monthly payments that lasts until death. A DB plan with a large number of participants can plan for the fact that some individuals will live longer lives and others will live shorter lives. Thus, a DB plan needs only to ensure that it has enough assets set aside to pay for the average life expectancy of all individuals in the plan, or in the police officer’s case, to age 82. Based on our target benefit level, the DB plan needs to have accumulated $921,807 for each police officer in the plan by the time they turn 57. This amount will ensure that every individual in the plan will receive a regular monthly pension payment that lasts as long as they do. The contribution required to fund this benefit, smoothed over a career, comes to 20.1% of payroll.

So longevity pooling gives taxpayers a break they wouldn’t have if their city uses defined contribution plans.

There’s another noteworthy point we should discuss. At first glance, the statement above, that “The contribution required to fund this benefit, smoothed over a career, comes to 20.1% of payroll” seems high and out of line with what private sector employees earn. The typical private sector employee might rightfully say “I know I don’t get 20% of my salary set aside for retirement. Why should a public sector employee get that much?”

Truly though, most private sector employees do contribute 20% or more – they just don’t know it.

First, consider that a private sector employee’s total “contribution” to Social Security is usually about 12.4% when including their employer’s matching “contributions.” Then consider that many private sector employers match some percentage – anywhere from 3-10% -- of salary that an employee contributes to their own 401(k). Combined contributions into a 401(k) could easily be 6-12% of a private sector employees salary.

So, at the upper limits, a private sector employee and their employer might be contributing as much as 24% of a person’s salary to their retirement, (not counting the set asides for old age medical benefits and even their federal unemployment insurance). At the lower limit, that contribution might be 19%. That’s roughly the same as the 20% contribution of cities for their employees for defined benefit plans that’s cited in the PTA study.

It’s easy now to see the comparability and similarity of amounts. In fact, private sector employees could be viewed as receiving more with their Social Security and defined contribution plans. Oh, have we mentioned lately that, according to the 2010 GAO report, fully 50% of Texas’ public employees don’t contribute to or receive Social Security? (Here’s our blog on that.)

Of course many private sector employees don’t feel that 20% or more of their salaries go toward their retirement. They don’t know that their employer is required to make the matching contributions to Social Security/Medicare. And the 3-10% contribution to their 401(k) feels puny by comparison to the 20% figure that’s bandied about for public sector employees. And their defined contributions plans have proven to be very inefficient over the last 10 years in terms of delivering a consistent return.

In fact, in our view, that perception among many private sector employees, of inefficient defined contribution plans and a lack of knowledge about the 12.4% of salary that’s contributed to Social Security, is probably the root cause of “pension envy.” It is one of the drivers of today’s public policy debates that some are using to push defined contribution plans onto city employees.

Public sector employees have a well defined benefit based on very transparent contributions by them and their employers. Private sector employees don’t have clear defined personal accounts in Social Security. They do know that Social Security benefits are subject to the discretion of the U.S. Government for their payout. There has been much discussion in recent years over cuts to Social Security. Over the last few years, low inflation rates have created circumstances where cost of living adjustments aren’t being granted to Social Security recipients. Retirees have no recourse or control of their Social Security accounts. While many people would like to opt-out of the Social Security system, they can’t.

There’s a lot more information about the study that we will convey in future blogs, but in the meantime please review this very important contribution to the pension debate. – Max Patterson

Deloitte Study: Employers Skeptical about Retirement Security for Private Sector Employees

2011-07-28T11:46:00.004-05:00

Previous entries to this blog have cited studies by Deloitte, an international consultancy, on retirement security and 401(k) plans. In recent months they’ve published the results of their 2010 studies and there is a lot to be learned. We’ll dedicate several new blog entries to their findings and offer our thoughts on their relevance to Texas public employees’ retirement security.

The Deloitte “Annual 401(k) Survey of Retirement Readiness” builds on several years of study for Deloitte’s research group. The details of their summary finding are telling:

Only 15% of surveyed employers believe most employees are or will be prepared for retirement, leaving an astounding 85% that believe some or very few will be prepared for retirement (Exhibit 7.7).

A mere 25% of surveyed plan sponsors offer managed accounts (Exhibit 7.8).
For those that do not offer this service, potential fiduciary responsibility was listed as the top reason (60%) for not offering managed accounts (Exhibit 7.10).

Where to begin?

Top line, this seems to confirm our poll results, where the holders of 401(k) retirement plans aren’t convinced about their ability to retire on time, or as they’d previously planned. In this case, employers don’t seem convinced that their employees will be prepared for retirement. We would have liked to have seen a break-out on this question, where we learned the views of those 25% with “managed accounts” (which we assume to be defined benefit plans). Did those employers feel their employees would be prepared? We will work to find out.

Interestingly, managed accounts are seen by companies to be prohibitive because of their liabilities for ‘fiduciary responsibility.’ This is another topic we will have to take up in the future. – Max Patterson

Houston Chronicle Publishes TEXPERS’ Research: 80% of Texas Fortune 500 Offer Defined Benefit Plans

2011-07-25T13:31:00.000-05:00

In late June, right before the Fourth of July weekend, the Houston Chronicle published our op-ed on defined benefit plans in the private sector. Here’s what we said:

We confined our research to the 35 publicly traded companies on the Fortune 500 list in Houston and Dallas. Some of the notables include ConocoPhillips, Texas Instruments, Southwest Airlines, Continental Airlines and CenterPoint Energy. Out of those 35 companies, 28 still have traditional defined-benefit plans for their employees in one way or another as stated in their most recent 10-K filings. In effect, 80 percent of Fortune 500 companies located in Texas' two biggest cities retain defined-benefit-style plans.

It’s an interesting finding and worthy of note because all too many people think defined benefit plans don’t exist in the private sector. Not true. They do exist, but their administrative and fiduciary costs are prohibitive for most companies to implement for all their employees. A Deloitte study of corporate employers confirms as much, and we’ll be talking more about that in future blogs.

After reviewing the data, our non-confirmed hunch is that defined benefit plans in the private sector exist mostly for upper echelon employees, not the rank and file. Again, we have no evidence of this – it’s just a hunch. But because administrative costs are so high, it makes sense for corporations to limit the expense to key employees and officers who are part of an increasingly exclusive club, no doubt. We will continue our research and learn more about these plans in the private sector. – Max Patterson

Texas Public Policy Foundation Misconstrues Poll Results; Proposes Skewed Alternative

2011-06-09T13:35:00.000-05:00

Our last blog discussed our release of an informative poll about Texans’ views on public employee pensions – and their own 401(k)s. After the news was released we saw only one organization attempt to negate or dismiss our poll findings.
Jordan Brownwood with the Texas Public Policy Foundation wrote a dismissive article, “Inconclusive TEXPERS poll confirms…nothing,” that was long on implied pejorative and short on facts.

For instance, Brownwood said “Without guaranteed pension benefits, TEXPERS would be forced to cede significant power to private investors and the individuals they currently represent.” It’s really difficult to deconstruct that sentence and respond to it appropriately because it displays a very fundamental ignorance of what TEXPERS is and who we represent. Our website is www.TEXPERS.org, for Mr. Brownwood’s future reference.

Nonetheless, if we’re interpreting his statement correctly, Mr. Brownwood should know that none of our members (the pension systems themselves) have members (policemen, firefighters, and municipal workers) who are currently asking for 401(k)s. If they were asking for it – because of the poor performance of their plan administrator or the possibility that the benefits wouldn’t be there when they retire – then we would respond to our members’ requests for private investments. That’s just not the case. Plans are performing well and most cities and their pension systems have good plans for fulfilling their actuarial obligations. If there’s another interpretation to Mr. Brownwood’s assertion, we’d be happy to address it.

And then Mr. Brownwood wants his readers to rethink our wording of questions. He says:

The first question in the poll asks respondents if public employees should give up their current defined benefit pensions for a 401(k) plan.

That’s not what we asked and that’s not what we said in the press release.

The exact question was “Public employees who receive defined benefit pensions should be forced to change to 401(k) type plans like most employees in the private sector.” Our question was about the assertion of legislative force by elected officials to change the current pension option for public employees. Like we said in the release, 43% of the public disagreed with that statement while only 28% agreed. Another 11% weren’t sure. It’s clear that forcing public employees into 401(k)s is not an action that would be well-received by the general public – even those who themselves own and use 401(k)s!

Then, in the same paragraph as his statement above, Mr. Brownwood says that:

Since a majority of Texans agreed that public employees have the right to continue with their contractually-obligated pensions (which few are suggesting), TEXPERS makes the assumption that Texans are opposed to pension reform. How different do you think the responses would have been if worded something like: “Using a portion of your personal income, would you be willing to promise every public employee in Texas a retirement package worth over $1 million?” I doubt very many respondents would have agreed, yet it is one way (albeit a very different way) of asking the question.

His question’s setup, “Using a portion of your personal income,” is the way that he wants you to think about the taxes required to pay for employee benefits. In my view that’s a pretty aggressive attempt on his part to skew poll results to fit a “what’s yours is yours-what’s mine is mine” political point of view. Skewing results by inserting political viewpoints is not something we tried to do with our poll.

And in the second part of his sample question, Mr. Brownwood engaged in hyperbole and scare tactics. There is no proposal by TEXPERS or any of its members to promise every public employee in Texas retirement packages over $1 million. That’s ludicrous. Again, Mr. Brownwood shows his inclination to skew questions with non-facts that align to his political views.

The reality is that after 15-20 years of service, with their and their employers’ matching funds, most public employees retire with $200-300,000 in their accounts and receive on average $2-3,000 per month, if that. And since most don’t pay into Social Security over their working lives as public employees, that’s all they receive in their “Golden Years.” Not so ‘golden’ if you ask me.

We enjoy vigorous discussion of these types of issues, but we would also like everyone to play on a fair and level playing field. Mr. Brownwood does not appear to want that. – Max Patterson

TEXPERS Poll Questions Underlying Assumptions in Public Discourse

2011-06-03T14:36:00.000-05:00

Last week TEXPERS released the results of a public opinion poll we commissioned in March seeking Texans’ views on public employee pensions.
The results were very informative to discussions of public attitudes toward the men and women who provide services to the general public as firemen, police and municipal employees, like sanitation workers, librarians, etc. In fact, we know of no other poll that seeks to understand this dynamic in Texas. We will be writing about the poll results a great deal in the future as we think they provide a lot of insights into people’s attitudes toward their own retirements as well as their attitudes toward the retirement plans for public employees.

But for this blog post, the headline is really the most important point: “TEXPERS Poll Confirms Texans’ Positive View of Public Employee Retirement Plans.” Our hunch that most Texans’ view the current systems as working in the public interest was validated by this poll of 503 Texans, across the state, both retired and working. And these Texans weren’t just anybody. They were registered voters with 401(k) plans themselves.

So why did we select this group of Texans to the exclusion of all other viewpoints?

A number of reasons really, but the core reason is our sense that there seems to be a general assumption by many – especially some newly elected politicians – that 401(k)s are the end-all, be-all retirement vehicle for all people. Don’t you get that sense as well? Don’t you feel that most people just unquestioningly accept that 401(k)s are the only best option available to them? And then they just assume that 401(k)s should be the only option public employees should have?

Our view is that we need to question those assumptions. Before we change a system that is working well for public interests, we need to consider what the alternative would be. And our poll, by interviewing only 401(k) holders, sought to find out whether the people most familiar with 401(k)s think that those plans are all that they are cracked up to be. If 401(k)s were really doing their jobs as well as their proponents suggest, wouldn’t all respondents or at least large majorities support that perceived popularity?

That certainly wasn’t the case in our poll. That’s why it’s interesting and deserves further discussion. We’ll do so frequently in this blog. – Max Patterson

News Coverage of Pew Report Confirms Texas Doesn’t Have Problems

2011-05-10T13:35:00.000-05:00

When the Pew Center on the States released it’s “Widening Gap” report a few weeks back we noted that Texas was nowhere near the worst performers.

Indeed, other critics of the report noted that it used data for investments on June 20, 2009, which was near the bottom of the market. Hank Kim at the National Conference on Public Employee Retirement Systems and Gerald McEntee of the American Federation of State, County and Municipal Employees made the charge on Special Report with Bret Baier on the day of the report. You can see the video clip here.

We also noted a report on 24/7 Wall Street that used the Pew Report to determine the “10 States Where Pensions Are Running Out of Money.” Texas was not among the states listed, primarily because, as the Pew report noted, our state is very good about making its funding contributions, which enables pensions to keep up with their actuarial obligations.

We want to bring attention to these nuances so that casual readers of pension news don’t use headlines to jump to negative conclusions about pensions here in Texas. Plans are doing well here and now is not the time to fix something that isn’t broken. -- Max Patterson.

Pew Center Report Requires Response

2011-04-26T15:35:00.001-05:00

TEXPERS today distributed a press release about the Pew Center on the States report on the condition of state employee pensions at systems around the United States. Our press release simply wanted to define that Pew focuses on state systems, which are large and have been in the news in recent years for their underfunded status.

Of course, the situation is different here in Texas, as our news release describes. And TEXPERS members, who are mostly smaller pension funds at city and county levels aren’t included in the report and for the most part are in good shape. Our news media needs to know this and I invite them to visit with me about the current environment.

In addition, you might role those DVRs tonight to see how Hank Kim, the executive director of the National Conference on Public Employee Retirement Systems, describes the Pew report on Fox News Special Report with Bret Baier. The interview should be interesting. In a press release today, NCPERS notes that:

“Relying on out-of-date data and employing faulty assumptions, the Pew researchers’ analysis is seriously flawed and, as a result, comes to misguided conclusions that dramatically overstate the financial challenges facing state pension plans. Were government policymakers to embrace Pew’s thinking, they would undoubtedly formulate equally misguided approaches to dealing with their public pension systems – approaches that might well do irreparable long-term harm to those pension funds and to the millions of public employees who are relying on those funds for their retirement security.

We’ll post the link to that and other media coverage in coming days. – Max Patterson.

TEXPERS in the News; Retirements in Question

2011-03-29T10:42:00.000-05:00

For the record, we need to make note of a few media stories of interest: one about TEXPERS, one about our members investment performance, and one about the prospects of a looming retirement crisis.

Yesterday, we distributed a press release about our annual conference, which is wrapping up tomorrow. You can read the entire release here on a “Financial Content” website.

Also, Pension & Investments picked up on our release and asked us for the Performance Study mentioned. We provided them with it and I had a brief conversation with the reporter. That story is located here. It describes the average investment performance achieved by our funds in the last few years. It’s a testament to good management at the local levels.

And finally, the story “Retirement May Be Out of Reach” appeared yesterday in Baseline magazine, about a survey from the Employee Benefit Research Institute indicating that “many workers say they aren’t at all confident about their retirement prospects” and “are dipping into their retirement savings to pay for day-to-day needs.” We’re going to be saying a lot more about retirement security based on some other research we are privy to right now. And we also are going to look into the EBRI report to see whether it breaks down the responses from people in 401(k)s and those in defined benefit programs. Stay tuned to this channel. – Max Patterson

401(k)s – Not a Public Policy Panacea

2011-03-09T20:36:00.001-06:00

Our readers know that this blog has asked its readers to examine closely and impartially the evidence about the value of 401(k)s in the face of political claims that these retirement vehicles are the only feasible public policy solution to city and state budget shortfalls. In fact, there is very little real evidence that 401(k)s are all that they are claimed to be, either in terms of delivering retirement security to employees or closing government budget shortfalls.

Legislators would do well to look closely at recent articles in the New York Times and Wall Street Journal that provide evidence 401(k)s are falling short in meeting the retirement needs of generations of Americans previously employed in the private sector. Why would we want to saddle public employees with similar failed policies?

Consider some excerpts from the Feb. 19 WSJ article “Retiring Boomers Find 401(k) Plans Fall Short”:

The 401(k) generation is beginning to retire, and it isn’t a pretty sight….

The median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement, according to data compiled by the Federal Reserve and analyzed by the Center for Retirement Research at Boston College for the Wall Street Journal. Even counting Social Security and any pensions or other savings, most 401(k) participants appear to have insufficient savings….

In general, people facing problems today got too little advice or bad advice. They didn’t realize that a 6% annual contribution, with a 3% company match, might not be enough. Some started saving too late or suspended contributions when they or their spouses lost jobs. Others borrowed against 401(k) accounts for medical emergencies or ran up debts too close to their planned retirement dates.

Initially envisioned as a way for management-level people to put aside extra retirement money, the 401(k) was embraced by big companies in the 1980s as a replacement for costly pension funds. Suddenly, they were able to transfer the burden of funding employees' retirement to the employees themselves. Employees had control over their savings, and were able carry them to new jobs.

The New York Times on March 3 ran a story “Making the Most Out of Less” in their Retirement section. A few excerpts:

Retirement specialists say a cascade of unhappy factors has dimmed retirement prospects

¶Not only do fewer than half of private-sector workers participate in a pension or 401(k) plan, but corporations are moving more workers from traditional pensions to the considerably less generous 401(k). At the same time, public-sector workers, many of whom still have generous defined-benefit pensions, are seeing those plans come under attack in New Jersey, Wisconsin and other states.

¶Even many Americans with 401(k) plans face problems because workers have a median of about $30,000 in their accounts, while the 55-to-64 age group just before retirement has a median of $78,000, not much to live on in addition to Social Security if you retire at 65 and live 20 more years. As a result of the stock market’s slide during the recession, 401(k) plans lost $2.8 trillion in value, tumbling by more than 40 percent — though Wall Street’s recent rise has allowed them to recoup more than half that loss.

Alicia H. Munnell, director of the Center on Retirement Research at Boston College, said 401(k) plans were far from ideal for retirement, not least because they are so complicated and many Americans have little investment expertise. Workers, she said, have to decide whether to join their employer’s plan, how much to contribute, how to invest their contributions, when to rebalance, what to do about company stock, whether to roll over accumulations when changing jobs and how to withdraw the money in retirement.

“Every step along the way, a significant fraction of participants make serious mistakes,” she said.

In many corners, there is such knee-jerk antipathy toward public sector employees that the counsel of many third-party observers, to be very careful about mid-game changes to mostly successful defined benefit programs, are going unheeded. It’s our hope responsible legislative officials will dig in deeper to the dynamics now exhibiting themselves with regard to the performance of 401(k)s. They aren’t delivering the promised benefits to a whole generation of people and shouldn’t be considered the primary fix to budget problems for state and local government employee pensions. – Max Patterson

TEXPERS Engaging Legislators Regarding Dubious Nature of Rider 3 to House Bill 1

2011-02-14T20:30:00.001-06:00

On behalf of our 420,000+ members, TEXPERS is sending letters to several members of the Texas legislature informing them of our opinion about Rider 3 under the appropriations to the Pension Review Board in House Bill 1 (the General Appropriations Bill). The proposed legislation would recommend the contribution by each public retirement systems of 50 cents for each active member and annuitant, ostensibly to pay for the operations of the PRB.

Our letter to legislators points out that the mandatory fee is essentially a tax and would probably violate both the Texas Constitution and the requirements for tax-qualified plans under Section 401(a) of the IRS Code of 1986.

We note in our letter that Section 67(a)(1), Article XVI of the Texas Constitution says “The assets of a system are held in trust for the benefit of members and may not be diverted.”

We also note that Section 67(f)(2), Article XVI of the Texas Constitution is applicable to the retirement system boards that do not participate in the statewide systems. It requires Boards to “hold the assets of the system or program for the exclusive purposes of providing benefits to participants and their beneficiaries and defraying reasonable expenses of administering the system or program...”

Section 401(a) of the Internal Revenue Code contains a similar prohibition on diversion of assets as a requirement for preferred tax qualification status.

The appropriations Rider 3 would clearly violate those provisions.

Our letter notes that:

Although it is usual for public retirement systems in Texas to use trust assets to pay the costs of investment, actuarial, accounting and legal services, these are all essential to performing pension management according to fiduciary best practices. In the case of a required fee (or tax) to fund PRB operations, a system would be paying for services that usually will not accrue to the system and may be neither requested nor needed. This would be in contrast to a PRB fee for services that were provided at the instigation of the system.

Because the vast majority of public retirement systems are funded locally, such a mandatory fee would also be an unfunded mandate on local governments, which is not currently illegal but certainly is a subject of current political controversy, as well as a proposed constitutional amendment.

We recognize that the state of Texas is looking at every way possible to balance its budget but this is not the way to go and may cost more in the way of legal fees down the road than it would benefit in the short term. – Max Patterson

Whither Thou Texas Pride?

2011-02-07T17:43:00.002-06:00

We stumbled today upon a blog and were struck by its inclination to throw Texas under the bus in favor of a British media organization’s words. We wish our fellow Texans would endeavor to learn more about the Texas situation itself and not accept in unquestioning fashion the opinions that look to other places and infer how bad things are here. That’s unproductive to the debate in our great state, where the public employee pension system is in relatively good shape.

Specifically, we stumbled upon the Texas Conservative Review (TCR) blog that cited an Economist editor’s views of “the public pension crisis facing our states and local governments, including Texas.” Without so much as a glance into the situation in Texas, the TCR writer declares that,

“The bird's nest on the ground for public employee unions are increasingly being discovered. In many wealthy countries wages are on average higher in the state sector, pensions better and job security paramount. Regardless of the jobs workers do, their unions have blocked reform at every opportunity.”

It’s disappointing when blogs of various political stripes resort to creating “guilt by association” without looking into the facts in Texas. As a right-to-work state, public employee unions have played only a minor role in city-pension discussions over the years, especially compared to those in other states. And Texas pensions are in pretty good shape compared to other pensions around the world. Look into the facts about Texas pensions before painting with such a broad brush. – Max Patterson

Session Must Be In – Media Have Our Number

2011-02-01T12:20:00.002-06:00

The beginning of every year seems to have an inordinate number of media stories about legislatures looking at their public employee pensions. This year is no different. It’s a good thing though that more journalists are endeavoring to seek balancing, informed views of what is going on.

For example, Tuesday’s edition of the Fort Worth Star-Telegram carries a story about how the Texas legislature is viewing the funding status of the state’s largest pensions. Yours truly offers a couple of comments on a tax that some are proposing to levy on pensioners as a funding option for the Pension Review Board, the organization responsible for monitoring the state’s pensions. As I said to the reporter, there is a legal issue involved in this – Is the tax a benefit to the pension trust? If it is not, then it is not a legal expense that the state can add. I’m sure we’ll see more on this topic.

And on Saturday the Wall Street Journal published my Letter to the Editor questioning a statement in an editorial on Utah’s current pension changes. The WSJ editorial said the state was paying 10 percent of its employees’ salaries as a retirement benefit and called the contribution “a generous amount by private company standards.”

I question that characterization, especially because it was ostensibly intended to fan the flames of envy politics that are so popular right now.

Here’s the point: Private companies contribute 6.2%of each employee’s salary, by law, as their Social Security retirement benefit. The employee also pays 6.2% of their salary to Social Security. Then the company may pay up to 3-5% of the employee’s salary in matching funds to their 401(k) account. That’s a 9.2-11.2% retirement benefit that’s paid by private sector employers on their employees behalf – a very comparable amount to the ‘generous amount’ being paid in Utah.

Considered in total, an employee in the private sector benefits from 12.4 percent of their salaries paid in Social Security contributions (actually 10.4 percent this year, due to tax law changes for 2011). Then there’s their contribution of, say, 5% of their salary to their 401(k), and then their employer’s matching amount of 5%, ideally. That’s 20.4%of their salary paid in one way or another to their retirement. We just ask folks to make apples-to-apples comparisons when they are discussing these issues.

Of course, private employers can choose not to fund their employees’ 401(k) accounts at any time. We’re seeing now that that does not work in public sector employees accounts. It won’t work well in private sector employees’ retirement portfolios either. That should be a real concern to journalists as it bodes poorly for the future. – Max Patterson

On Public Salaries: Situation 1, City of Houston Attorneys

2010-12-17T10:12:00.004-06:00

We hear a lot these days about public sector salaries exceeding their private sector equivalents. A lot of those stories are about federal employees and they are being refuted along the way by other organizations, as you can see in this Washington Post story.

Our concern is the public’s perception about the salaries and benefits of public employees at city and local levels (counties or special districts). We find that comparisons at these levels are difficult to make.

For instance, there are no private sector animal control department positions, so how would you compare those salary scales? We don’t know. And there are a lot of similar type of city positions that would not compare well in an honest apples-to-apples sampling to private sector equivalents.

But what we do know is that there are a few jobs in public employment that do have some comparisons in the private sector. Take for example city attorneys:

The city of Houston, currently the fourth largest city in the United States, provides a spreadsheet on the salaries of its employees here. We used that information to do a little number crunching for the salaries of city attorneys. As you can imagine, there are many levels of city attorneys in the fourth largest city in the United States, all with very specific job descriptions and qualifications criteria, a situation which really defies our capabilities for pure apples-to-apples comparisons with private sector attorneys. The work is different.

But if you consider that the highest paid city attorney position has a salary cap of $221,338 it's pretty easy to guess that this person is making far less than they would in the private sector. There's no doubt that the Houston mayor engages in a pretty exhaustive search for an attorney best qualified to advise and litigate for the fourth largest city in the country. It’s our guess also that the person is very qualified from a legal perspective, has a long record of success in either private or public sector, and is capable of handling very high profile matters in the courts and in the political arena.

So what would a person of that stature earn at say, Vinson & Elkins, or Baker Botts or Giuliani LLC? The Glass Door website, where people can anonymously report their salaries, reports that a first year attorney at Vinson & Elkins receives $160,000 and 8-year “veterans” receive $249-271,000. That’s not too hard to imagine as true. We can only guess that partners earn well in excess of $500,000 per year. Compare that to ranges in the chart below, which shows the pay scale for all the levels of city attorneys in Houston:

So essentially, based on the chart, attorneys who choose public service know that they will earn much less in comparative pay to those who go into the private sector.

If a top notch attorney has the option of spending ten years at a V&E, earning $5 million in salary or the city of Houston, earning $2 million over that time, which organization will attract the best attorney? The public sector employer is asking the person to forego up to $3 million in earning potential. That same dynamic plays out for every single person represented on the chart. What is the proper level of compensation for those persons for their retirement?

We don’t really know the answer to that question, as it is something that the city and V&E would work out with the person. But the contrast in private sector versus public sector employment salary ranges and their effects on a person’s retirement security are fairly obvious – it’s better to be in the private sector!

As a final note, the city attorney for Houston is currently David Feldman, a former partner at V&E and managing partner of his own firm, Feldman, Rogers, Morris and Grover, LLP. It’s easy to assume that Mr. Feldman did not take the City Attorney position to make money, or to earn retirement benefits. He did it out of a sense of duty for service to his city. Which is a calculation that most public employees make as well, despite the sacrifice. – Max Patterson

Private Sector Employers Outpace Public Employers in Retirement Benefits Paid for Decades

2010-12-02T10:32:00.001-06:00

We were digging around the Employee Benefit Research Institute site the other day to see what they offered in comparing public sector and private sector retirement benefits in terms of total compensation.

In case you don’t know them, the Employee Benefit Research Institute is a non-partisan research organization that uses a wide range of research and data to compile reports about retirement benefits in the United States. The EBRI Founders are executives from some of America’s leading companies for executive recruitment and compensation – they aren’t pushing political agendas. Thus we encourage those of you who are serious about understanding the trends and dynamics surrounding pensions in the private and public sector to spend a lot of time on this site.

Anyway, in our search for comparison data, we could not find one particular study that directly answered our question. But in rooting around we saw that the January 2009 study, “Where – and How Much – Do Employers Spend on Compensation?” had data showing how much employers spent on their employees’ total compensation for the past four decades through 2007. The study went one step further and broke out the retirement benefits paid by private and public sector organizations.

We did a little number crunching ourselves by pulling the gross retirement benefit numbers paid for employees by state and local governments and comparing them to the retirement benefits paid by private employers. The key was calculating the rate of increase for each by decade. (Comparing the dollar amounts themselves wouldn’t really meaningfully demonstrate anything due to the differences in size of the private and public sectors.)

So what did we find?

Private sector employers have increased their spending on retirement benefits (excluding Social Security) at a faster rate of growth in three of the last four decades (through 2007).

In only one decade, from 1980-1990 did public sector employers far outpace their payments for retirement benefits over those paid by private sector employers. (The 1980s were a fast growth decade in general, recovering from economic doldrums in the 70s, and it’s likely that private sector employees’ regular pay accelerated more quickly than public sector employees pay did. But that’s speculation and are neither here nor there in relation to this discussion.)

Our number crunching effort can be seen in the chart below. Pay particular attention to the rate of growth figures.

What should we make of these numbers?

Well, they disprove the notion that the retirement benefits paid to state and local government are excessive by comparison to the private sector. They simply aren’t, and they haven’t been.

These numbers indicate the opposite, that state and local government employers need to do more to keep pace with private sector employers for retirement benefits that attract quality employees!

We doubt that cities will want to hear that as they struggle with their budgets during this economic downturn, but these numbers take steam out of the politically fashionable argument du jour that since the private sector is doing it the public sector should be doing it too. – Max Patterson

Ft. Worth Demonstrates Flexibility in Texas System of Local Control of Public Employee Pensions

2010-11-12T10:06:00.000-06:00

On Tuesday, the Fort Worth Star-Telegram carried a story noting how the City of Fort Worth will be adjusting its employees’ pension benefits to meet some projected shortfalls. The city’s actions demonstrate the remarkable flexibility that all Texas cities possess when considering funding and meeting their employees’ pension promises.

Not all cities are finding themselves in the same situation as Fort Worth – in fact most Texas cities are not. But when one city has a problem, it’s localized. Other pension systems around the U.S. aren’t built this way, and the negative headlines in the national media pay testimony to their failures. Despite its problems, Ft. Worth took big steps toward recovery this week. They should be applauded for the way they handled it.

The Texas system enabling local control of public employee pensions should be applauded as well. It works. – Max Patterson

Social Security and Public Employees in Texas: A GAO Report Provides Validation

2010-11-03T13:13:00.001-05:00

Shortly after we hit the “Publish” button on our previous blog we came across a U.S. Government Accountability Office report that offers validation of our statement that “Many public sector employers and employees do not pay into the Social Security system.” We have an update for what “many” means.

The report, “Social Security Administration: Management Oversight Needed to Ensure Accurate Treatment of State and Local Government Employees,” says that 53 percent of public employees in Texas would not have Social Security benefits available to them because they don’t pay into the system during their years of service to municipalities.

The report provides a number of additional background points and factoids that interested public pension observers should know. Here are some introductory excerpts about the federal government’s relationship to Texas’ public employees, present and future:

When the Social Security Act was passed in 1935, state and local government employees were excluded from Social Security. As a result, some state and local government workers who were not covered by a retirement system were left without benefits when they retired. To help these employees, in 1950, Congress added section 218 to the Social Security Act allowing states to enter into voluntary agreements to provide Social Security coverage to certain state and local government employees….Within a year of this amendment, about 30 states had executed section 218 agreements with the Social Security Administration.

Subsequently, additional amendments to the Social Security Act changed Social Security and Medicare coverage for state and local government workers. Starting in 1991, the Social Security Act required all state and local government employees to be covered by Social Security if they were not covered by a qualifying state or local retirement system.

More recently, Social Security has projected future financial shortfalls in its programs. According to Social Security’s Board of Trustees, the program’s annual surpluses of tax income over expenditures are expected to turn to cash flow deficits this year [2010] before turning positive again in 2012. In addition, all of the accumulated Treasury obligations held by the trust funds are expected to be exhausted by 2037. Once exhausted, annual program revenue will be sufficient to pay only about 78 percent of scheduled benefits in 2037 (and gradually declining to 75 percent by 2084), according to the Social Security trustees’ 2010 intermediate assumptions.

Many options have been proposed to help assure the financial stability of Social Security, among them requiring all newly hired public employees to participate in the program. Although this approach could improve Social Security’s finances at least temporarily and would simplify Social Security as it pertains to public employees, we have previously reported that such a change could also result in increased costs for the affected governments and their employees.[emphasis added.]

On page 11 of the report, the GAO provides the following map summary, showing that Texas is among 5 states who has less than 50 percent of its state and local government employees enrolled in Social Security:

A chart on page 46 of the report goes into more detail about Texas:

There are a number of observations that we will make about this report and the relationship of Social Security/Medicare to Texas’ public employees in future blogs. – Max Patterson

Heartland Institute Report Requires Careful Reading and Discerning Consideration

2010-10-27T23:57:00.004-05:00

Readers of the “The State Public Crisis: A 50-state Report Card” developed by Eli Lehrer and Steve Stanek of the Heartland Institute should view its assertions, findings, and recommendations with skepticism, or at least acknowledge the need to do some additional research.

First, neither Lehrer or Stanek are trained economists or actuaries. Both have substantial political or media backgrounds, but neither states any experience that’s directly involved with pensions. That’s a red-flag in my view, right from the start. (Their bios are included at the bottom of this entry.) There are people who dedicate their lives to understanding pensions and their public policy complexities but Lehrer and Stanek are not such people. They are treating this complicated subject from a very political viewpoint.

Second, their report is so general as to be dangerous and misleading. Across the United States, and especially in Texas, there are so many types and varieties of pension systems that the broad-brush, sky-is-falling approach taken by Lehrer and Stanek throughout their report is more misleading than it is informative. The report’s first paragraph is enough to demonstrate the hyperbole: “Taxpayers in almost every U.S. state owe large and possibly unpayable (sic) retirement pensions to the men and women who work for the government. The deep recession of 2008-2009 has moved up the day of reckoning, requiring immediate action by many states to avoid financial catastrophe.” Really? That certainly is not happening in Texas.

Third, more facts are weighing against their prescription to “Move to Defined Contribution Plans.” They make some statements in that section that are false or coming under increasing fire.

For instance, they say “Defined benefit plans put virtually no risk on the workers or retirees, because taxpayers must make up any funding shortfalls.” This is not totally true. Many public sector employers and employees do not pay into the Social Security system, so there is considerable risk to the employees, as they must rely on the performance of their pension system. And any expected shortfalls fall on the back of both the employees and their city or municipal district. Most employees have seen their personal contribution rate gradually increase over the years and many in Texas are at 8 percent or more, which is higher than the 7.62 percent contribution for Social Security.

Here’s another statement that deserves exploration: “the amount available for retirement (in defined contribution plans) depend on how much money was set aside and the success of the investments. The risk is on the workers.” The reason they offer is “the number of U.S. businesses that offer defined benefit plans has dropped to about 38,000 compared with more than 114,000 in 1983, according to the IRS. Yet they remain the standard benefit for government.”

A couple of problems here. Private businesses have moved to defined contribution plans of various sorts because of tax breaks they receive from doing so. This policy change resulted from concerns about some companies’ use of retirement investments to operate their own business. Public entities do not receive any such tax breaks and they weren’t using the retirement funds as part of their general fund. If anything, many public pension problems that exist today result from cities that hold back their contributions to their employees’ plans. In that sense they are operating their city with funds that should be contributed to the pensions. We advise against this practice as it does put extra burden on the plans. But that’s another blog for the future!

But finally, our readers should know that there is increasing concern – among private sector employer themselves – about the ability of defined contribution plans to provide retirement security.

As Stanek and Lehrer note about defined contribution plans, “the risk is on the workers.” Increasingly, private sector employers are seeing that their employees are not up to the task of taking on this risk, whether it’s their voluntary levels of contribution or their ability to see investment results that would lead to retirement security.

A 2009 study of 401(k)s by Deloitte – available to Stanek and Lehrer but not cited, if it was reviewed at all – indicated that only 14 percent of private sector employers feel that ‘most’ employees will be adequately prepared to retire, while 19 percent cite “very few” and 67 percent feel “some” will be prepared. All the numbers show increasing concerns about 401(k)s ability to deliver retirement security. Granted, the $20,000-$30,000 average yearly public sector benefit (depending on the system and years of service in Texas) is not much better in terms of providing retirement security. But let’s stick with Stanek-Lehrer's point that public employees should be moved to an even worse system.
There’s no doubt that private and public sector employers are concerned about the state of their employees’ pensions. The Deloitte study finds that 37 percent of private sector employers are considering conducting a retirement readiness assessment in response to their concerns. And many public pensions in Texas have financial counselors dedicated to helping their system retirees with the financial situations.
These are our top-line observations of the Stanek-Lehrer report card. Based on that, we don’t feel that digging deeper into their details of their report will amount to any more than wasted time. – Max Patterson

Bios for Stanek and Lehrer as Provided in their Report

Eli Lehrer is senior fellow at The Heartland Institute and national director of its Center on Finance, Insurance, and Real Estate. Lehrer played a major role in founding the smartersafer.org coalition, a coalition of taxpayer, environmental, insurance, and free-market groups dedicated to risk-based insurance rates, mitigation, and environmental protection.

Prior to joining Heartland, Lehrer worked as speechwriter to United States Senate Majority Leader Bill Frist (R.-Tenn.). He has previously worked as a manager in the Unisys Corporation’s Homeland Security Practice, senior editor of The American Enterprise magazine, and as a fellow for The Heritage Foundation. He has spoken at Yale and George Washington Universities.

Steve Stanek is a research fellow for The Heartland Institute and managing editor of Budget & Tax News. He has been a freelance writer and editor since 1997, producing marketing materials and business articles for corporate clients, as well as feature articles and news stories for Chicago-area newspapers, magazines, and business publications. Before becoming a freelance writer, Stanek worked nearly 11 years in corporate communications. He also has worked as a newspaper reporter and editor at weekly and daily newspapers in Illinois.

When 401(k) Is Not OK – Why Defined Contribution Plans Aren’t a Good Idea

2010-10-22T14:51:00.001-05:00

It’s increasingly common these days for members of city councils to consider changing police, fire and municipal employee pension plans from Defined Benefits (DB) to Defined Contributions (DC), those similar to private sector 401(k)s.

The council members – usually the newer ones making a name for themselves early in their political career – offer many reasons for proposing this change but key among them is that most taxpayers don’t have defined benefit plans themselves. It’s a ‘level the playing field’ sort of politically-charged approach.

It’s also rash and ill-advised. There’s a significant body of evidence that show DC plans aren’t a good idea for employees, for many reasons. Key among the concerns right now is the fact that 401(k)s aren’t working out very well for private sector employees. If the goal of private and sector employers is to improve retirement security for all workers, 401(k)s aren’t getting the job done.

Take for instance the findings of a recent study on 401(k)s and the real-life evidence from a state that tried such a switch in 1991.

A Deloitte study, the “Annual 401(k) Benchmarking Survey: 2009 Edition,” reported that 19% (up 2 percentage points from the previous year) of private sector plan sponsors believe "very few" of their employees will be financially prepared to retire. As a result, more than 60% of the employers are considering adding features such as re-enrollment to help increase deferral rates while others plan to conduct a retirement readiness assessment. If the 401(k) is the way to go, then why are employers taking such strident measures to make it work?

In West Virginia, the Teachers' Retirement System (TRS) closed their DB plan to new members in 1991. All new hires were offered a DC plan. This decision resulted in the loss of new members, making it more difficult to finance their unfunded obligations. Because the DC plan was not reducing employer costs nor providing an adequate level of retirement income, West Virginia Legislature reopened the DB plan for public school teachers. In June 2008, when given the choice to return to the DB plan, 78% of those in the DC plan chose to switch.

As the issues of converting to a DC plan continue to surface, hopefully more public employers will realize that a DC plan may not be the solution. We’re going to touch on this issue in many future blogs, but 401(k)s aren’t okay for public employee retirement security.

Fact vs. Fiction in the Public Employee Pension Debates

2010-09-07T12:13:00.001-05:00

As the representative of public employee pensions around the state, TEXPERS is responsible for monitoring the media and helping them to do their jobs informing the public by providing the most accurate information.

Since the administration and decision making for pensions is really a very complex subject, we can’t make the assumption that everyone has all the right information all the time. So bear with us as we try to clear up a few misperceptions we’re seeing in the media.

Defined Benefit (DB) vs. Defined Contribution (DC) Plans
In our view, traditional DB plans are better for the taxpaying public than defined contribution plans. While some critics claim that DB plans put more burden on the taxpayer, studies have shown the opposite. The 2008 study from the National Institute on Retirement Security demonstrates how DB plans deliver the same level of retirement benefits, at half the cost of DC plans. The study showed that DB plans:

1. Avoid the problem of "over-saving," resulting in a 15% cost savings;
2. Maintain an optimally balanced investment portfolio rather than typically down-shifting over time to a lower risk/return asset allocation, resulting in a 5% cost savings; and
3. Achieve higher returns, resulting in a 26% cost savings, because of professional asset management rather than individual investment decisions.

Performance
Yet another study shows that the public employee pension plans in Texas are doing their job in delivering results on behalf of plan members over the long-term. And 2010 results are positive as well. Both bode well for cities, in that strong investment results maintain or reduce the contributions which cities need to provide to their employees’ pension systems.

(As an aside, strong plan performance has tended, over time, to persuade cities that they could get away with lower than necessary contributions to funds. That ‘underfunding’ makes it very difficult for funds to keep pace with the actual dollar value of the returns needed to fund their employees’ retirements. In other words, good return numbers are one thing, but having the amount of funds available for the benefits due to retirees is another matter. Keep that in mind as you read on, about performance:)

In late 2009 we asked 65 TEXPERS’ members to provide their returns for 1-,3-, 5-, 10- and 15-year periods ending in September 2009. We received 55 completed surveys, 48 of which had the five-year quarterly return history necessary for inclusion in our analysis. The member systems which responded represent $20 billion in assets under management.

What we found was that, for the 15-year period ending September 2009, the respondents’ composite investment return was 8.3 percent, compared to the average actuarial investment return assumption of 8.2 percent. The systems were meeting their obligations to retirees, net of expense, which was a pretty good showing, considering the awful markets in 2001-2002 and again in 2008-2009.

And the news has gotten better, in terms of plan performance. Some of the bigger plans in Texas have showed strong market gains in the intervening months since September. For instance, for the 12-months ended June 30, 2010, here are some noteworthy increases:

• Austin Firefighters Retirement Fund 11.97 percent
• City of Austin Employees Retirement System 15.73 percent
• Dallas Employee Retirement Fund 18.74 percent
• Fort Worth Employees’ Retirement Fund 13.41 percent
• Houston Municipal Employees Pension System 12.2 percent
• Houston Police Officers Pension System 13.67 percent
• Houston Firefighters' Relief and Retirement Fund 17.30 percent

Differences in Compensation and Retirement Benefits
The message line of the day for some politicians and media organizations is that public sector employees are doing better than the private sector employees who pay their salaries. What’s important to note is that government employees earn less than private sector employees throughout their careers. Bonuses don’t exist in the public sector. Raises are usually confined to costs of living adjustments. In tight times COLAs are abandoned.

As you consider the amounts of benefits that public employees receive, consider that at least 25 percent of public sector workers don’t receive any Social Security benefits. Many do not pay into the Social Security system during their years of public employment, so the yearly benefit from their cities is the majority of their retirement pension.

We have come to learn that the average annual pension benefit for retirees in The City of Fort Worth is $30,924. According to the Employee Benefit Research Institute, the lowest income groups are defined as those who earn less than $31,000.

We’ll add more blogs that demonstrate the differences between public and private sector employment so that Texans have a well-informed view of what is going on. - Max Patterson

TEXPERS Outlook Newsletter Notes Recent Pension Legislative and Regulatory Moves

2010-07-28T09:39:00.004-05:00

Our May issue of TEXPERS Outlook newsletter contains several stories of interest to those who follow pension activities.

I think one of the most interesting story is about new guidelines that the Government Finance Officers Association recently adopted on pension governance. The GFOA works to enhance and promote the professional management of governments for the public benefit by identifying and developing financial policies and best practices and promoting their use through education, training, facilitation of member networking, and leadership.

Specifically the GFOA’s report recommends that state and local governments establish rules of governance for their post-retirement benefits systems and define the key elements necessary for trustees and fiduciaries to fulfill their responsibilities. In my opinion I think a lot of our member pension systems already have such guidelines in place. They are available here.

As I hinted at in my previous blog, Texas pensions do a lot of this already. Just look at that 2005 document of the Lubbock Fire Pension Fund that was discussed previously. There’s a lot there and I think that’s typical of most if not all the TEXPERS members. – Max Patterson

Local Control: The Foundation of Texas Public Pension Funds

2010-07-21T10:36:00.003-05:00

We want our readers to have a good foundational understanding of what TEXPERS is and who we represent.

TEXPERS was founded in 1989 as a voluntary nonprofit educational association. Our members are the trustees, administrators and participants of public employee retirement systems in Texas, as well as professional service providers, employee groups and associations engaged in or interested in the management and financial soundness of those systems. TEXPERS consists of 84 retirement systems, 9 employee groups, 180 investment professionals. Our members manage the money for retirement hopes of more than 420,650 active and retired participants.

It’s important that you know and keep in mind that TEXPERS does not manage money! Instead, our members, spread out across this great state, oversee the management of the money and the administration of benefits of the retirees in their cities, counties and other public entities.

TEXPERS provides fiduciary education to plan members for their administration of benefits and selection of investments on behalf of their members. Instead of a centralized organization managing the money of public employees, our state has largely chosen to give local entities control over the investment activities and benefit levels for their retirees.

This makes sense from the perspective of local control, of keeping decisions close to the people they impact most.

For instance, most if not all of the funds have boards that are comprised of several members from the community in which the organization resides. To pick one name, the Lubbock Fire Pension Fund manages the retirement money of firefighters in Lubbock. The firefighters occasionally vote not only on the members of that Board but also changes and modifications to their pension plans. The Board is then responsible for working with their elected city representatives and the Texas state legislature to make sure those changes are allowed.

To see this in action, take a look at this link which will take you to the results of a vote the Lubbock Fire Pension Fund conducted in 2005. In just reading the first page it is neat to see that some 231 of 278 members of the pension fund participated in this vote on issues directly affecting them, including the definitions of service, final average pay that determines the levels of benefits, and the maximum service retirement benefit, and many other stipulations.

At other times the members of local funds will vote on the Board members who determine those issues. And city governments usually appoint a couple of their own people to the Board as well, often the city treasurer or finance director and a member of the city council, or a former member as it may be. This structure creates a certain check and balance system that we will discuss in more detail in future blog entries.

But it’s important to know that the fireman or police officer on the street has the ability to get involved in issues affecting their own retirement money, by voting directly on matters that are presented to them or by voting on who serves on their pension plan’s Board of Trustees.
It’s a model that has proven effective and that creates a lot of theoretical and practical effects on governance. We’ll be discussing those in future entries. – Max Patterson

Introduction to the TEXPERS Blog

2010-07-02T22:13:00.002-05:00

Welcome to the Texas Association of Public Employee Retirement Systems (TEXPERS) blog. I am Max Patterson, the executive director of TEXPERS, and I will be one of several authors contributing to this blog.

In coming weeks and months I will be joined by members of the Board, experts in pensions and investments, and other guest bloggers of various backgrounds to discuss issues of importance regarding the pension systems for public employees of Texas, particularly those employed by police and fire departments as well as municipalities and other districts.

Our joint purpose will be to provide readers with more information about the functioning and performance of Texas public pension systems. Along the way we’ll examine some of the issues that are coming out in the news, both here in Texas and in other states. Our primary focus will be Texas, of course, but so much of the national news seems to focus on problems in other states. We hope to provide a bit of a reality check on those issues, as some of those reports seem to cause confusion and anxiety here among plan members, politicians and the general public.

We don’t want confusion and anxiety when it comes to understanding the good things that are being done at Texas public employee pensions.

Our 80+ member systems work hard to educate their trustees and staff members in their fiduciary responsibilities. They work extremely hard to find the right investment mixes to assure the greatest return with the least risk. They dedicate a tremendous amount of time to the efficient management of their funds and their retirees’ benefits. We owe it to them to clarify issues that are confusing to the media and the general public.

That’s the simple intention for our blog, greater understanding about the Texas public employee pension system. We invite you to come along, learn a little and engage with us in clearing up areas of concern. We’re writing this blog for you, so we hope you’ll engage and question us when things get a little opaque, or comment when we need an extra fact or opinion. This is your blog as much as ours. All Texans win with strong public employee pensions in Texas. Come along and enjoy! --- Max Patterson