Moody’s: Legal Hurdles to Reform, History of Shorting Annual Contributions Contribute to Texas’ Rising Pension Costs

Texas

A new Moody’s report says that Texas and its municipalities will face rising pension costs in coming years. The report also notes that local governments may not be able to ease those costs as legal hurdles prevent significant pension reforms.

On the state level, the costs come in the form of higher contributions – at least one state-level system is requesting the state contribute more money starting in fiscal year 2016-17.

From Moody’s:

The State of Texas (Aaa stable) and some of its local governments face rising pensions costs due to a history of contributions below actuarial requirements, Moody’s Investors Service says in a new report, “Cost Deferrals Drive Rising Pension Challenges for Texas and Some Locals.”

While the state has a broad ability to tackle pension funding challenges, many local government pension plans are subject to state constitutional protection.

“Most Texas local governments face greater legal constraints and procedural hurdles to pension reform, while the state has substantially more legal flexibility to change and adjust benefits to its plans,” said the report’s author and Moody’s Assistant Vice President — Analyst, Thomas Aaron.

Texas participates in four single-employer plans, with the majority of costs associated with the Employee Retirement System (ERS), and the Teachers Retirement System (TRS). In order to address an ongoing funding challenge, the ERS requested a 59% increase in the state’s contribution rate for the fiscal 2016-17 biennium for that system alone, a cost increase of nearly $540 million across all of the state’s funds.

The full report can be read here [subscription required].

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