TEXPERS Advises Galveston on Pension Fund Dynamics

TEXPERS' executive director, Max Patterson, urges the city of Galveston to guard itself against the pitfalls of moving to 401(k)-styled defined contribution plans for its public employees, police officers and firefighters. Patterson wrote a July 25 op-ed for The Daily News of Galveston County.  Click here to read Patterson's editorial. If you don't have a subscription to the newspaper's site,  the full article as originally submitted is posted below.  Raise the Foundations of Galveston's Pension Funds By Max Patterson "Stay in school. Finish your degree. Don't get distracted." It's hard to argue against these words of wisdom. Tried and true, they offer solid guideposts to success in life. The cities which contribute to their pension funds for police, firefighters and city workers have similar words of wisdom to guide them: "Fund the full contribution required to maintain a healthy retirement plan. Work with your pension fund board closely. Don't disrupt your pension systems' ability to make long-term investments." We know principles these work well. Most of the 93 pension systems monitored by a state monitoring agency have used these to thrive since the great financial meltdown of 2008-09. They have, in the aggregate, shortened the time it would take to pay off all current and future retirement obligations to their employees.  Not all cities have recovered in equal fashion. Unforeseen problems can arise. In Dallas, outsized investments in real estate couldn't mature as expected. In Houston, adjustments to unsustainable benefits promised in the stock market heydays before 2001 were made. Those cities worked on solutions to those challenges in the last regular legislative session. Galveston's pension funds have faced down a double whammy. In 2008, Hurricane Ike struck, requiring the city to lay off police, firefighters and municipal workers while retaining the obligations to their retirements. Pension fund health can suffer when the contributions for younger employees aren't available as assets for longer-term investing. At the same time, pension fund assets across the United States were suffering hard knocks from the stock market. These blows might have spelled absolute disaster for Galveston's pension funds. It did not. Texas pension funds are durable - they are structured well to weather storms. Galveston's pension funds have shown steady improvements in the last six critical years of adjustment, just like most other Texas pension systems. The Galveston Employees' Retirement Fund now has one of the most cherished positions in the state, below the 15-year mark for amortization period, a measure similar to the estimated payoff for your home mortgage. Galveston's pension systems for firefighters and police also have shown slow but steady progress given the setbacks. Now is not the time for Galveston to become impatient or to defer payments to its pension funds. We know that surefire disaster occurs when a city shortchanges its annual required contribution. The ARC is the number actuaries derive after they number-crunch every single factor to determine the lowest contribution for the city to pay for workers' employment. Having an actuarially sound pension fund attracts good people to serve in tough, thankless jobs. A solid retirement plan with modest but adequate benefits also helps retain a workforce. There is a competitive market for well-trained police, firefighters and municipal employees. Other Texas cities and towns would love to have your city's staff. They promote their retirement plans to your employees. Don't think for a second that Galveston can move away from defined benefit plans and not suffer. That's not the experience of any city or town which disrupted its retirement plans. As Galveston continues its economic juggernaut and moves forward on its remarkable recovery after Hurricane Ike, the city should do what it has historically done. It should look at the likelihood of future storms and raise foundations. Fund your pension systems appropriately. Don't set them on course to go underwater. Patterson is executive director of the Texas Association of Public Employee Retirement Systems and previously served as the appointed city treasurer for three city pension plans in Houston's Finance & Administration Department in 1990-96.