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

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

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?

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

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