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James Quintero: Texas’ $61 billion pension problem

Texas’ public employees deserve a safe and secure retirement, but many are instead faced with uncertainty as some of the state’s biggest public retirement systems deal with problems brought on by years of habitual overpromising and underfunding.

This issue and those affected by it are increasingly at the forefront of Texas politics as more and deeply troubling information comes to light about these systems. And the latest batch of fiscal data does nothing to dispel those feelings of angst.

New figures from the Pension Review Board, the state agency tasked with overseeing all of Texas’ state and local retirement systems, paint a difficult picture. According to the Pension Review Board’s Actuarial Valuations Report for August, unfunded liabilities — or the difference between how much these systems have on hand and how much it would cost to pay for promised benefits — have soared to a staggering $61.1 billion. A deficit of that size means that Texas governments have promised the moon but are far from being able to deliver it, at least not without first imposing massive tax increases, reducing benefits or some combination of both.

What’s worse is that the situation is deteriorating and fast. The past year alone has seen public pension debt skyrocket by billions.

In February, six months prior to the August report, the Pension Review Board pegged unfunded liabilities at $60.2 billion, a difference of about $1 billion compared to the current total. In July 2015, about a year prior to the agency’s latest report, the Pension Review Board estimated unfunded liabilities to be $57.5 billion — a difference of $3.6 billion in 13 months’ time.

Soaring pension debt is not the only signal flashing red. Most of Texas’ public retirement systems also have subpar funded ratios, which is a key indicator of health.

Many pension aficionados recommend that a system’s funded ratio, which is a measure of a plan’s assets as a share of its liabilities, remain at or above 80 percent to demonstrate that it is sound. But almost three-quarters of Texas’ plans have funded ratios below this red line. As a whole, the average funded ratio among all plans is also below 80 percent.

That things are in such rough shape and are quickly moving in the wrong direction should concern every Texan, but it should also prompt people to ask why. Why are the systems so out of kilter? Why do the problems persist, even when reforms are made? Why does it feel like we’re just kicking the can down the road with each new attempt at reform?

There are, of course, many different answers to these questions, but at the heart of each is a deeply flawed, unworkable system: the defined benefit pension plan. It bears the bulk of the blame for retirement insecurity in Texas.

Defined benefit plans pledge a lifetime of monthly benefits upon retirement based on a person’s earnings history, years of public service, and age — and those promises must be kept no matter the health of fund. In other words, people are guaranteed a payout no matter how well or how poorly the money is managed, which can result in a very costly affair.

It’s so costly in fact that most of the private sector has abandoned offering defined benefit plans. Less than 10 percent of all private-sector workers participated exclusively in a defined benefit plan in 2013.

Excessive costs are just one part of the problem. Defined benefit plans are also less predictable than other types of pensions and are easily influenced by outside factors, like actuaries, politicians and market conditions. In concert, these factors make defined benefits less than ideal.

Fortunately, there are better options available. One such option is the defined contribution model, which operates akin to a 401(k). Defined contribution plans allow participants to contribute to individual investment accounts that are fueled by both contributions and investment earnings. This has the advantage of bringing both sustainability and predictability to the system.

Whereas governments have been slow to adopt defined contribution-style plans, the private sector has decidedly embraced it because it’s a better overall retirement setup.

The need for reform is clear. The current systems are financially unsustainable and do not give public employees the safety or security that they should. Fortunately, there are much better ways to give peace of mind to retirees and taxpayers alike. It’s just a matter of finding the political will to make it happen.

Quintero is director of the Center for Local Governance and leads the Think Local Liberty project at the Texas Public Policy Foundation.

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