“Self-correction” is the norm for Texas state and local pension funds

As the Legislature begins work in January, they may hear siren calls advocating for “local control” of 13 public employee retirement systems enrolled in Texas statutes.  They should ignore such radical proposals, which really mean the complete control of pension funds by city councils. Local control, in the broadest sense of the word, already exists.

The best examples of how local control manifests itself now can clearly be seen in developments this year in Houston and Dallas where concerns compelled House Pensions Committee Chairman Dan Flynn (R-Canton) to hold hearings in those cities. The committee in June and September invited testimony from all pension systems for police, firefighters, and municipal employees.

Of course, the specifics varied for each, but the larger picture was this: all the systems were actively working with their mayors, city councils, city staff, actuaries, unions, and retiree groups to come up with tweaks or overhauls that would ensure the long-term sustainability of all the systems. And, most importantly, the systems were taking responsibility for miscalculations, overly optimistic assumptions, and bad investments. They were all going to their members and asking them to shoulder the burdens in the form of increased contributions or reduced future benefits. 

In Houston, new Mayor Sylvester Turner delivered on his campaign promises to keep defined benefit plans for public employees, even while asking them to adjust their benefits. He and city staff held countless meetings with the Houston Police Officers Pension System, the Houston Municipal Employees Pension System, and the Houston Firefighters’ Relief and Retirement Fund. In September, Mayor Turner provided a public, positive update on fruitful discussions in anticipation of bringing collaborated changes to the Legislature.

In Dallas, the focus has been on the Dallas Police and Fire Pension System, which suffered from overly aggressive investment choices and a panicked run on system assets. Nonetheless, pension fund staff and Trustees have worked hard with city officials to come up with a multi-phased, multi-part plan which strengthens the future prospects of the system.

All the systems may come to the Legislature with details of their plans. When they do, their proposals will have been tweaked and adjusted by so many local different constituent groups as to truly earn the description of coming from the grassroots. All the plans and city sponsors will have communicated their changes to their employees and retirees. All will have sought numerous projections and opinions from their actuaries and investment consultants. All will have tried to gain support from their city councils.

The key to remember is that defined contribution plans are long-term financial instruments. Tweaks and changes can take years to manifest. As long as the leaders of cities and pension funds are working toward common solutions, they can make progress. The proof is there for all to see.

Consider TEXPERS review of 93 systems monitored by the Texas Pension Review Board. The PRB recommends close focus on amortization periods as the best indicators of financial health. Amortization periods are like a home mortgage amortization calculation: they are complex calculations that estimate how long it would take a system to generate all the assets to match its expected benefit outlays. The PRB recommends that pension funds work to attain a 25-year amortization period.

The PRB data shows that, as whole, the 93 Texas pension funds have significantly improved in comparisons of the six years ending August. There are 39 Texas state and local pension funds in the PRB’s recommended range. Only four pension funds are in the least-desired “infinite” amortization range. These numbers reflect six-year trend highs, and demonstrate that pension funds are doing a great job managing difficult market environments, pension benefit promises, and city and employee contributions. The pension funds in Houston and Dallas will make the adjustments needed now so as to attract and retain world-class caliber people to their employment ranks. They have that goal in mind for their citizens. They will succeed.

TEXPERS Special Report: Texas' State and Local Pension Funds Achieve Best Five-year Measure of Financial Health in 2014-15

HOUSTON (September 30, 2015) -- The Texas Association of Public Employee Retirement Systems issued a report today showing that 93 state and local pension funds which submit data to the Texas Pension Review Board combined in 2014-2015 to achieve the best overall improvement in financial health in five years.

[This report was updated in March 2016.]

The TEXPERS assessment is based on information requests it made of the PRB for standardized year-over-year comparisons of pension funds' amortization periods, as presented in PRB Actuarial Valuation Reports for the previous five years.
 
The most substantial improvement in the 2014-15 period occurred in eight pension systems moving out of the infinite amortization period, from 15 to 7. The increase, to 17 from 13, in the number of pension funds at less than infinite and more than 40 years amortization is a function of improvement of at least four systems out of the infinite category. Another four systems from the infinite amortization moved into lower amortization periods.
 
The PRB says that amortization periods are the single “most appropriate” measure of public retirement systems’ health. It defines amortization period as “the length in time, in years, needed to pay for the unfunded actuarial accrued liability (UAAL) and reflects a system’s ability to pay its normal cost plus UAAL.”
 
TEXPERS executive director Max Patterson said: “This report is a stark contrast to those which focus on unfunded liabilities in order to produce alarming headlines. Pension fund experts will tell you that amortization trends matter more than accountants’ moment-in-time snapshots of unfunded liabilities when assessing pension fund health.
 
“The trend toward lower amortization periods across all Texas pensions, in conjunction with the TEXPERS Asset Allocation report showing excellent pension fund investment performance in the 20- and 30-year periods, should provide lawmakers with the confidence to maintain the status quo," Patterson said.
 
TEXPERS has created seven graphics to describe the PRB data at www.TEXPERS.org/Amortization-report. (the updated report is available at www.TEXPERS.org/Amortization-Report-2.)

TEXPERS Amplifies Attorney General Opinion on Pension Funds in Statute

HOUSTON (September 13, 2016) – The Texas Association of Public Employee Retirement Systems today applauded the state Attorney General’s opinion in the matter of who is liable when a local retirement system is unable to meet financial obligations.

The AG’s office, in response to an inquiry by Houston Rep. James Murphy, said “In no instance does the constitution or the Legislature make the state liable for any shortfalls of a municipal retirement system regarding the system’s financial obligations under title 109. The Texas Constitution would in fact prohibit the State from assuming such liability without express authorization.” Title 109 refers to Texas statutes regarding the formation and operation of pension funds, the benefits they may pay, and beneficiaries. Among many other considerations, Title 109 provides different operating authorizations for cities of various sizes. There are 13 pension funds in the largest Texas cities governed by statute.

Max Patterson, executive director of TEXPERS, issued the following statement:

“The AG’s opinion is welcome at this time in the debate over local control, which really means exclusive city council control of a pension system. In fact, the AG’s opinion is not news in the sense that this question has been asked, and answered, in House committee sessions reaching several years back, and essentially confirms the understanding by which all the local pension fund systems already operate. Namely, that their financial matters are the responsibility of the pension fund members and their city. It has never been expected that the state would be called to act as a backstop to local pension fund problems.

“This opinion should further the public’s understanding that the 13 pension funds in statute come to the Legislature for one thing: a checks-and-balances process that ensures every local group agrees on proposals for changes to benefits or funding. The process works well as it is because any change must receive complete approval and support from a city council, its mayor, the pension fund Board of Trustees, retirees association, active members, and unions. Without such consensus, there will not likely be a path forward for legislation in Austin. The Legislature does not take sides in who is right or wrong in pension fund matters. It wants all local concerns to be equally satisfied with change proposals,” Patterson said.

“TEXPERS and its members support the 13 pension funds in statute because the current process prevents the whipsaw effects which can occur when pension fund issues become fast-moving political footballs. Contrary to normal political processes, pension funds function best when stable, long-term thinking dominates,” Patterson concluded.

The Texas Attorney General’s office opinion may be found in its entirety at https://texasattorneygeneral.gov/opinions/opinions/51paxton/op/2016/kp0112.pdf.

Texas' State and Local Pension Funds Reach 6-Year Pinnacle of Financial Health Texas' State and Local Pension Funds Reach 6-Year Pinnacle of Financial Health

HOUSTON (August 24, 2016) – A report from the Texas Association of Public Employee Retirement Systems shows that 93 state and local pension funds combined in 2015-2016 to achieve the best trend performance improvement in financial health in six years, breaking last year's record.
                                              
TEXPERS based its assessment on the Texas Pension Review Board's year-over-year comparisons of pension funds' amortization periods. An amortization period indicates the number of years needed to pay off all present and future projected benefits to employees. It is similar to a home mortgage in terms of years needed to pay off interest and principal owed. The PRB says that amortization periods are the single “most appropriate” measure of public retirement systems' health.
 
The most substantial improvement in the 2015-16 period occurred among three pension systems moving out of the infinite amortization period, from 7 to 4. This follows a dramatic improvement of 8 fewer pensions in this category in the prior year. An infinite amortization period means that there will not ever be enough funds to pay future benefits.
 
In addition, five more pension systems attained the PRB's recommended status of amortization periods of 25 years or less, setting another six-year record of 39 pension funds achieving this feat.
 
TEXPERS executive director Max Patterson said: “These amortization period trends matter more than accountants' moment-in-time snapshots of unfunded liabilities when assessing pension fund health. We maintain that Texas pension fund Trustees and staff can, with time, make necessary adjustments to improve upon various measures of performance. As long as the key ingredient of appropriate funding is provided by their employer, we will continue to see ongoing improvements to amortization periods.
 
“This positive trend for amortization period should be put in perspective. Stock market performance in 2015 was the worst in seven years and left a lot to be desired. As 2016 market performance has recovered well, we think this amortization period improvement trend will continue. Texas lawmakers should, with confidence, maintain the status quo going into the next legislative session,” Patterson said.

Texas pensions continue positive performance

The Texas Pension Review Board recently published its periodic report of data submitted by 93 state and local pension funds. We at the Texas Association of Public Employee Retirement Systems watch these reports closely. Please accept the following summary:

 

1. In the three months between the February and May PRB reports, the total actuarial value of assets of under public employee pension fund management increased about $11 billion, from $232 billion to $243 billion. 
2. The unfunded liabilities of all 93 systems increased $500 million, or just 0.1%, to $60.7 billion from $60.2 billion. This represents a 22 to 1 ratio of increase of assets to liabilities in just a three month period.

TEXPERS' previous study of 5-year amortization period trends using PRB report data proves that Texas' state and local pension funds are working with plan sponsors and public employees to set contributions and benefits at sustainable levels. The current data comparing total assets to total unfunded liabilities is another way of confirming this dynamic. The 22 to 1 ratio is truly remarkable. 

Pension fund politics: Wholesale re-structuring or modest modifications?

The political ideologues who promote their views through think-tanks and business associations have been busy this year advocating for defined contribution plans, like 401(k)s for public employees. They conjure up problems with the traditional defined benefit retirement plan to gain support for radical changes. The Texas Association of Public Employee Retirement Systems works to oppose these groups.

Take for example the op-ed recently published in San Antonio’s largest newspaper by Gary Gibson, the in-coming chairman of the Texas Association of Businesses. Gibson was taking aim at 12 pension funds which use state laws to protect themselves from the shifting priorities of temporary politicians on city councils. Gibson wrote, “These funds represent 50,000 retirees and have approximately $8.7 billion in unfunded mandates. It would take a check of more than $171,000 from ever active member of those plans to balance things out. This is unrealistic.”

Indeed, the whole scenario he created was unrealistic. The “unfunded mandates” refer to actuarial liabilities which are estimates of current assets measured against expectations for future benefits. Yes, they must be paid, but they aren’t all due at once. In fact, they will likely be paid over the next 30 years, aided by the normal growth of cities’ economies, the public workforce, and good investments.  

We can’t get bogged down in correcting errors of someone who should know better. But what Gibson demonstrates is the typical effort to create false summaries so as to gin up resentment, anger and envy for public employees and their defined benefit pension plans. Just level the playing field, they say, and put police, firefighters, municipal employees and teachers in the same types of retirement plans used by employees in the private sector.

There are so many problems with that view. Defined contribution plans, like 401(k)s were never intended to be retirement plans. They were structured as supplemental plans to traditional defined benefit retirement plans. But businesses don’t like DB plans, and Gibson represents business.

Regardless, TEXPERS questions why people like Gibson want to throw the baby out with the bathwater for public employees? If a pension system is having trouble – and most of them are not – it makes more sense to make adjustments here and there. Once the adjustments post results, maybe a few more will be necessary. Or not.

The key is that public employee pension funds are long-term institutions. Cities and their pension funds don’t go out of business in the same manner that businesses do. The headlong rush to dismantle DB plans in favor of the increasingly unpopular 401(k) plan is baffling to most people, but apparently not to business groups and their members.

TEXPERS is working with San Antonio’s pension fund to create an appropriate response to Mr. Gibson’s editorial. It’s our hope that our member systems won’t let these issues go unchallenged. 

Lessons from Alaska: The switch to defined contribution plans continues the acrimony and financial pain

Change can bring cruel unintended consequences. Such is the case in Alaska right now, as a result of actions taken eight years. Take a look at this recent news story and remember the history of Alaska’s pension fund changes, as provided by the National Institute on Retirement Security. Here’s the quick skinny on the nightmare that has been unleashed as a result converting DB plans to DC plans.

In 2008, the Alaskan state legislature ended the use of defined benefit plans for new state employees and teachers. It retained the program for existing employees, but agreed to pick up the tab for their benefit promises. Usually, a growing base of new employees helps support a shrinking group of retirees with their contributions into the system and the investment returns those contributions create.

Everything was good in 2005, when 9,000 retired teachers and beneficiaries received their payments, and the state collected contributions from 9,700 active teachers. Fast forward to 2013 and the numbers had flipped. Some 11,705 retired teachers and beneficiaries were being supported by contributions from just 6,532 active teachers.

The same thing had happened with state employees. In 2005 nearly 21,000 retired employees were supported by investment assets and contributions from 33,700 active employees. By 2013, there were nearly 30,000 retired employees and beneficiaries with only 21,000 active members.

Both pension funds was roughly 60 percent funded. Not good, but not horrible, and certainly in a position for recovery. The 17,500 employees hired by Alaska who would have helped with that recovery were no longer contributing to the DB plans because they’d been enrolled in defined contribution plans.

Of course, the unfunded liabilities had flipped as well, for both systems, and the state found itself needing a $12.4 billion contribution to meet benefits it had promised to the employees who were still in the defined benefit plan.

The state has since had to:

1) Extend the amortization, or payoff period by 9 years, adding about $2.5 billion to the unfunded liability

2) Notify Alaskan cities and counties that they will be required to pay portions of the outstanding liabilities.

With regards to the latter, the state and its cities will likely now be engaged in years of litigation over the state’s mandated unfunded liability, adding even more costs to the original decision to end defined benefit plans. The state’s failed policy has been pushed to local taxpayers.

We in Texas have been successful at convincing state lawmakers that switching to DC plans is a big fiscal mistake. Nonetheless, there are still many groups trying to force our cities to convert to DC plans for new employees, so it is important to realize that the same unintended consequences can occur at the local level just as it has in Alaska.