Business community being sold a bill of goods

When the Texas Legislature is in session, there’s all sorts of strange alliances. This year was no different with respect to HB 2608, a bill introduced by Houston Rep. Jim Murphy in response to that city’s decades-long underfunding of its pensions and over spending of its general budget. The bill would transfer control of vast sums of investment money to Wall Street and decrease the stimulus afforded our economy by defined benefit pensions. The law would reach far beyond Houston city limits, to about 100 other pensions across Texas.

As of this writing, we’re not sure of the bill’s ultimate fate. We hope it fails. But the strange thing was seeing HB 2608 gain the support of the Texas Association of Businesses, as it would harm every single one of its members by jeopardizing capital movements in Texas.

Beyond its Houston backers, the only supporters of HB 2608 were Austin- and Washington-based policy foundations which want to transition all defined benefit plans to defined contribution plans for public employees. Make no mistake: this was the ultimate goal of HB 2608.

In other words, like many private sector employees, firefighters, police, and municipal employees would be tasked with becoming their own investment managers in 401(k)-styled retirement plans. They will be herded into a limited number of stock and bond mutual funds that invest only in publicly-traded companies controlled by Wall Street.

That would be a radical change. In recent years, Texas’ state and local pension boards have invested 25% or more of their cities’ and employees’ contributions in alternative assets, e.g., oil and gas exploration, commodities, toll roads, commercial real estate, hospitals and healthcare facilities, and many other businesses in Texas and other states, which operate outside of New York’s control. While we don’t have exact figures, this amount is in the tens of billions of dollars.

While HB 2608 is touted as giving local control of pensions to cities, its most significant effect would be to give New York more Texas money. It would also jeopardize the steady stream of pension benefits paid to retired Texas public employees because of the uneven results of do-it-yourself retirement investments.

That income stream is significant. A 2010 Perryman Group study found that the Texas economy gets a yearly boost of $10 billion from defined benefit plan payments to hundreds of thousands of teachers, police, firefighters, and municipal employees. To provide perspective, $10 billion is five times the total payroll of Texas agriculture; four times the payroll of petroleum refining and related industries; and the total military payroll within Texas (in 2010 figures).

So just ask your average Texas business person whether they would want to jeopardize, to any degree, the economic stimulus created by their local military base. Guess what their answer would be. Why would the Texas Association of Businesses support HB 2608?

Local pensions are a vital part of the Texas economy and our business community benefits greatly from the status quo. It would be a great misfortune to alter a system which has been working well in most parts of the state.

Be Wary of HB 2608 and the call for “Local Control”

TEXPERS Executive Director Max Patterson has produced an op-ed regarding HB 2608. We would appreciate sharing and publishing when possible.

Among the many low-key, but potentially damaging, pieces of legislation now being considered by the Texas legislature is HB 2608, filed by State Representative Jim Murphy of Houston, to address budget problems in the state’s largest city. Members of the Texas Association of Public Employees Retirement systems oppose the Houston bill: it would radically – and detrimentally -- alter the structure of pensions in other cities around the state. 

HB 2608 is simple in intent: it would eliminate the Legislature’s review of retirement benefits changes that cities and their pensions work out for their local police, firefighters and municipal employees. Proponents say the Legislature interferes in city affairs and that HB 2608 gives the people paying local taxes “a clear voice” in how their pension system operates.

But is any of that true?

A good many local pensions, with the help of their city governments, sought decades ago to enshrine city- and employee-contribution rates, retirement age benefit formulas, and cost of living adjustments in state code. Mayors and city councils have fleeting political and budget goals in the long life of a city. Pensions, on the other hand, are built with long-term returns in mind. They calculate hard financial mathematics every day to ensure that their investments will meet future retirement benefits. (In Texas, roughly 60% of pension benefits are created from investment returns.) While local elections and competing budget priorities among council members might resemble a tennis match, the pensions are playing chess.

And so it was that many pensions and cities came to set their pension operations in state law, so that only when the city council, the pension, retirees, unions and city staff came to consensus would the Legislature be asked to vote and approve changes to their governing documents. Beyond that, the Legislature plays no role in the local affairs of Texas pensions.

Given that our pensions are among the best performing in the nation, the system has worked well.

So along comes HB 2608, attempting to persuade a majority of legislators that the problems now being experienced in Houston warrant wholesale change to the structure of pensions across Texas.

In our view, Houston’s problems with its pensions didn’t stem from involving the legislature in pension issues. Decades ago, various leaders began short-changing the pensions of the money they needed to remain actuarially viable.

At first the pensions went along, accepting the city’s promises for re-payment. As time went on, and the city kept digging holes, the pensions balked at accepting any more “deals” that served the city’s short term budget goals, but ignored the long-term liabilities of their pensions.

TEXPERS keeps an eye on the investment performance of local pensions. Our yearly research shows most pensions, when given a chance by their cities, do a great job of earning the investment returns needed to keep the promises their city makes to public employees. Only when cities balk at honoring their commitments do pensions get in trouble, such as has happened in Houston.

HB 2608 should be opposed because of what we know of local pensions which have “local control.” Those are the cities whose budgets often fail: nothing is more tempting to mayors and councils than promising unsustainable benefits to large, motivated city employee groups – the ones who vote. While the proponents of HB 2608 suggest that city governments will manage their finances responsibly through “local control,” experience doesn’t support their contention.

Keep the current system of checks and balances which has worked so well across the great state of Texas. Oppose HB 2608.

Texas local public employee pensions grow their 20-year average returns

Texas public employee pensions for firefighters, police and municipal employees increased their 20-year average returns to 8.6% from 8.2%, which is above the average actuarial investment return assumption of 7.8%, according to the annual study of Texas’ local pensions investments.

The “Report on the Asset Allocation and Investment Performance of Texas Public Employee Retirement Systems,” created by the Commonfund Institute for the Texas Association of Public Employee Retirement Systems, was released at TEXPERS’ 26th Annual Conference in Austin in March.

The 52 pensions contributing to the 2014 survey represented approximately $53 billion in total assets for the fiscal year ending September 30, 2014. All the responding systems submitted data for the previous survey, providing integrity in year-over-year comparisons, the report said.

“Texas’ local pensions reduced their international equity exposure from 25% to 20% and increased their fixed income and short-term securities/cash holdings to 22% and 4%, respectively. The investment allocations reflect de-risking efforts,” said Max Patterson, the executive director for TEXPERS, representing 75 Texas retirement systems and their 400,000 active and retired members.

The report also showed that FY2014 dollar-weighted asset allocations were equally balanced at 27% for alternative strategies (real estate, private equity, energy, etc.) and domestic equities.

The closely watched 10- and 15-year average yearly returns were 7.2% and 6.4%, respectively, with most pensions performing well against the benchmark Wilshire Public Funds Universe on a risk-adjusted basis.

“The overwhelming takeaway is that Texas’ local pension systems continue to perform at acceptable levels for meeting or exceeding their actuarial assumption rate over the long-term,” Patterson said.

TEXPERS released its report to 600-plus pension Trustees, administrators, system members and investment professionals attending the “Discover Opportunities, Achieve Excellence” educational conference in Austin.

TEXPERS releases annual study on Asset Allocation and Pension performance

In a press release today, the Texas Association of Public Employee Retirement Systems noted that Texas’ local pensions for police, firefighters and municipal employees increased their rate of return for the 20-year period which matters most in determining pension health.

See the full report here and the press release below, but here are some highlights in terms of pension performance.

Best       20-year average return – 10.14% – Big Spring Firemen’s Relief and Retirement Fund

15-year average return –8.3% -- Houston Municipal Employees Pension System

10-year average return – 9.35% -- Houston Municipal Employees Pension System

5-year average return – 11.10% - VIA Metropolitan Transit Retirement Plan

3-year average return – 15.83% -- Irving Firemen’s Relief and Retirement System

1-year average return – 12.41% - Irving Firemen’s Relief and Retirement System