A Texas House committee recently wrapped up its hearing on design changes to the state’s public pensions. Expert testimony during the two-day hearing agreed that traditional defined benefit pension plans are the most cost-effective way to provide retirement security to public employees throughout the state, including teachers, state employees, and local government employees.
The hearings were held in response to demands by right wing special interest groups that Texas eliminate public pensions for public sector workers and replace them with 401(k)-type defined contribution savings plans.
“What we heard from all the experts was that traditional defined benefit plans are a much better deal for both public workers and taxpayers,” said Derrick Osobase, political director of the Texas State Employees Union. “The facts are on our side. Now we need to organize and mobilize like never before to get more state and university workers involved in the effort to educate lawmakers with the facts. These same lawmakers need to know that there is a well-organized constituency that will fight like hell to protect public pensions.”
One of the experts testifying at the hearing was Christopher Hanson, executive director of the Texas Pension Review Board, which oversees Texas’ public pension plans.
Hanson based much of his testimony on a report recently completed by the Pension Review Board entitled A Review of Defined Benefit, Defined Contribution, and Alternative Retirement Plans.
Committee Chair Rep. Vicki Truitt said that the report is an excellent source of information about pensions and possible alternatives.
One of the points made by Hanson was that converting to a defined contribution plan will not eliminate or reduce pension funds’ unfunded liability; in fact, doing so will increase unfunded liabilities.
An unfunded liability is the difference between a pension fund’s assets and its liabilities estimated over a 31-year period. The unfunded liability for the Texas Teacher Retirement System (TRS) is $24 billion; for the state Employee Retirement System (ERS), it’s $5 billion. These are the state’s two biggest pension plans.
Prior to 2002, both funds had no unfunded liability, but legislators’ decision to reduce state pension contributions and two big stock market downturns created the unfunded liability.
Opponents of public pensions, such as Houston millionaire Bill King and the Texas Public Policy Foundation, seized on the unfunded liability to argue that Texas state and local governments could no longer afford to fund public pensions and must replace them with defined contribution plans.
Hanson, in his testimony, said that doing so would increase the unfunded liability and increase taxpayer risk. He pointed to the experience of Michigan, which closed its defined benefit plan to new hires in 1997.
At the time the pension plan was closed, Michigan’s funding ratio was 109 percent. In other words, it had 9 percent more assets than it needed to pay off its 31-year liability.
In 2011, the fund’s funded ratio had dropped to 72.6 percent, and the state’s contribution to the pension plan nearly doubled from $229.5 million in 1997 to $442.9 million in 2011. This deficit will continue to grow for some time.
Seth Hutchinson, Texas State Employees Union organizing coordinator, pointed out that reports by both TRS and ERS show that switching to defined contributions will either require more state retirement contributions or reduce benefits or, possibly, both.
“Reduced benefits will endanger the retirement security of both current and future retirees,” Hutchinson said.
Hutchinson said that the ERS and TRS defined benefit pension provide a modest benefit, on average $1,551 a month for state employees and about $1,900 a month for teachers, who for the most part do not receive Social Security. Neither of the plans has provided a cost-of-living increase since 2001.
The state could address ERS’ unfunded liability by a slightly increasing the state’s contribution. “Currently, the state contribution to the ERS retirement plan is less than one-half of 1 percent of the state budget,” Hutchinson said. “Increasing the state’s contribution by $259 million would eliminate the unfunded liability. The increased funding would increase the budget share of ERS pension contributions to just 0.065 percent.
“Converting to defined contribution plan,” Hutchinson said. “Will not reduce or eliminate the unfunded liability, could cost taxpayers more money, and could result in reduced benefits. That’s a bad deal for retirees, employees, and taxpayers.”