Reversing the downward spiral of Texas’ state employee pension fund could require significant increases to how much workers and taxpayers kick in as well as a possible reduction to future retirement benefits.
The $23 billion Employees Retirement System of Texas will run out of money to cover promised pension benefits by 2052 if nothing changes, the fund’s actuarial consultants reported recently. The fund’s 321,000 members include state workers (outside of higher education), elected officials and retirees.
Extending the life of the fund beyond that point would call for a one-time $4.5 billion infusion or gradually increasing the shared contribution rate to 20 percent of payroll. The contribution rate is currently 14.6 percent with the state picking up a little more than half.
Another option would be to reduce pension benefits for future hires by 90 percent even while they would be on the hook for the same level of contributions.
Retirees today get on average $18,614 a year from the pension, and their benefits wouldn’t be affected by any of these changes.
The consultants recommended a measured approach that includes some mix of changes to benefits and contributions. They also cautioned against relying upon annual investment returns beyond 8 percent.
No decisions will be made until at least 2015, when the Legislature next convenes.
“It’s not going to be easy, and it’s not going to be quick,” said Ann Bishop, executive director of the Employees Retirement System. “It didn’t happen overnight, and it’s not going to be fixed overnight. It does take some discipline.”
Eleven years ago, the retirement fund had more than enough to cover its long-term obligations. But it now has only 77 percent of what is needed due to two economic recessions, chronic underfunding and a diminishing state workforce.
Shuttering the pension fund and converting to a retirement plan akin to a 401(k) wouldn’t erase the liability, Bishop told the retirement system board members.
“It doesn’t solve this problem. It may solve a future problem, but it doesn’t solve this problem,” Bishop said of adopting a 401(k)-type plan.
The state pension provides a good value to the employees and the taxpayers alike, said state Sen. Robert Duncan, R-Lubbock, who oversees the pension fund as chairman of the Senate State Affairs Committee.
“It’s fixable,” Duncan said.
Employee groups that represent state workers say the Legislature bears responsibility for the fund’s financial troubles because lawmakers failed to recognize that demographic changes were affecting the bottom line.
In 1993, there were five active employees for every retiree; now the ratio is 1.4 to 1. The total payroll is 20 percent less than had been projected in 2001 — a function of retirement incentives, hiring freezes, pay stagnation and layoffs over the past decade. The number of state workers has fallen by 10 percent over that same period.
“We need to recognize that the fund is being supported by a smaller and smaller group of people, and that’s going to have a real impact on the workforce if there are more significant changes. It’s a real balancing act,” said Gary Anderson, executive director of the Texas Public Employees Association.
Workers have been pulling their weight for retirement even as pay for most has remained pretty much flat, and they have agreed to raise their pension contribution from 6.6 percent to 7.5 percent over the next several years, said Seth Hutchinson of the Texas State Employees Union.
“Asking them to sacrifice more and more is a recipe for disaster,” Hutchinson said.
One option under consideration is to create a separate pension fund for employees who work in law enforcement, such as correctional officers and Department of Public Safety troopers. A report on this proposal is expected next summer.
About 30 percent of the pension fund’s members come from the ranks of law enforcement. Given the physical demands of their jobs, those workers are allowed to retire earlier than other state employees. They are also, however, willing to contribute more.
“We want the solvency issues addressed,” said Lance Lowry, president of the union chapter representing correctional officers. “I’ve indicated that my members are willing to pay a little bit more to get the solvency issues taken care of. … Other groups were less willing to look for alternatives.”
Separating the law enforcement employees from the rest could produce both practical as well as political benefits. If the numbers work, it could improve the financial condition of the main pension fund and also make it easier to craft fixes.
“You’re not getting rid of the problems, but you’re putting them in different silos so that you can deal with them separately,” Duncan said.
Legislators also might be more inclined to pony up for the law enforcement fund, said Gary Chandler, president of the Department of Public Safety Officers Association.
“They tend to think of law enforcement differently when it comes to our needs,” Chandler said.
Legislators and other elected officials are also part of the Employees Retirement System and their pension benefits far outweigh what they contribute. But their numbers are too small to have a measurable effect on the fund.
For example, if Texas legislators were in their own pension plan, the annual contribution rate would need to exceed 290 percent of their pay for the legislators to cover the benefits they earned. They contribute 8 percent of their $7,200 annual salary but earn a pension based on the $140,000 annual pay of a state district court judge.