Texas Employee Retirement System

Texas Pension Official Calls For Better Funding, Offers Options to Lawmakers

The executive director of Texas’ Employee Retirement System testified in front of the state Senate Finance Committee.

Executive Director Ann Bishop used the opportunity to call for measures to improve the system’s funding, and warn that credit downgrades could be coming sooner than later if lawmakers stand pat.

Bishop offered lawmakers some options for improving the funding of the system, including a higher contribution from the state.

From Your Houston News:

Bishop said that the problem is not imminent, but every year the Legislature does not fund ERS to actuarial soundness, that is, the ability to meet its obligations over the next 31 years, the annual debt for that fund increases by half a billion dollars.

“If this is not addressed one way or another, the debt is going to keep growing,” she said. “The bond houses do consider this a debt.”

Her agency is asking for an increase in the state contribution rate to employee retirement from the current 7.5 percent to nearly 12 percent. This would allow the agency to begin paying down the debt accrued in the retirement fund.

Bishop offered some other ways to reach actuarial soundness aside from only increasing state funding. One way is to grandfather fewer people when making benefits and contribution changes.

Another is to increase employee contribution rates, for example by increasing the state contribution half a percent to an eight percent and increasing the member contribution rate from 6.6 percent to eight percent, the fund would just meet actuarial soundness criteria over 29 years.

Legally, the state’s pension contribution rate is capped at 10 percent; Bishop’s proposal of almost 12 percent would exceed that cap.

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

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].