State employees who already are paying more into a pension with recently diminished benefits could be facing more of the same depending on how lawmakers choose to deal with a chronically underfunded retirement plan.
Despite changes made to the state’s second largest pension fund in the past five years aimed at eroding a sizable unfunded liability, the Employee Retirement System of Texas – the state agency that provides retirement and health benefits to more than half a million state employees, retirees and their families – and the state Comptroller are warning that the liability is snowballing by some half billion dollars a year and quickly will get worse if nothing is done about it.
“Inaction is not an option. The problems facing ERS will continue to grow if we do not pursue additional reforms immediately,” according to a December report by the Comptroller’s office.
At a legislative hearing this month, outgoing Employee Retirement System Executive Director Ann Bishop piqued lawmakers’ interest when she said the plan’s current unfunded balance of $7.5 billion could at some point affect the state’s good credit rating if the Legislature doesn’t devise a plan to pay it off. The 2016 onset of new accounting rules will double that risk, she noted. The state only has 77 cents for every dollar needed to pay future benefits, according to the retirement system. If not addressed during next year’s legislative session, it is projected to grow to nearly $10 billion by 2018.
The agency again has asked the state for additional funding to make the plan actuarially sound – so that contributions and investment returns cover expenses and payouts – which it has not been since 2003. That would require an additional $350 million every two years.
Absent that, Bishop told members of the Senate State Affairs Committee that the solution is some combination of more benefit cuts or increased contributions from both the state and employees. Lawmakers in 2009 and 2013 increased state and employee contributions and cut benefits for newly hired workers.
While that “has done a lot to help close the gap,” Bishop said “it isn’t enough.”
“It will have to be fixed. And it’s just going to get worse before it gets better,” she told the committee, noting the plan will run out of money to pay for promised pension benefits by the 2050s if nothing changes.
That “sounds like a long time from now,” she continued, but “when you’re talking about attracting people into the workforce and you’re telling them they’re going to pay into a fund for 30 years and not have it in their retirement, that’s not much of a benefit.”
She also warned that further diminishing the plan could inspire a lawsuit or – even worse – spark a mass retirement exodus as more than a third of the state’s workforce is either already eligible to retire or will become so in the next five years. In 2013, retirees received an average annuity of $18,946 from the plan.
‘Political will to solve this’
Rebounding state revenues have given employees and retirees hope that legislators might invest enough to shore up the Employee Retirement System pension fund for good without resorting to sizable contribution increases for employees or cutting benefits. Amid a recovering economy and oil and gas boom, the state is expected to end the current biennium with at least $6 billion more than estimated even as the price of oil has fallen.
The problem, said state Sen. Craig Estes, is that the Employee Retirement System will be competing with other agencies for those funds.
“The bad news is every person in state government wants a piece of that,” Estes, a Republican from Wichita Falls who oversees the pension fund as chairman of the Senate State Affairs Committee, said during this month’s hearing.
However, he joined an increasing number of lawmakers in describing shoring up the pension for good as a worthy cause.
“We need to generate some political will to solve this because we’ve got some wonderful employees and they deserve an actuarially sound system,” Estes said. Those employees include some 300 elected officials, including state lawmakers.
How, and whether, legislators will want to go about that will become clear during next year’s legislative session, which starts Jan. 13. Groups that represent state employees want to see it happen without benefit cuts, but are divided about who should foot the bill. Retirees would not immediately be affected, but are keeping a close eye on any changes.
At the request of lawmakers, retirement system staff have devised eight options for consideration that would further cut pension benefits for newer employees. Three of them would make the plan actuarially sound by applying some combination of reduced benefits to a larger number of employees, including decreasing annuity by 5 percent a year for those who retire early, banning unused leave from counting toward retirement eligibility and altering the formula for calculating payouts to make them even lower.
In 2009 and 2013, lawmakers imposed some version of those parameters on state employees who were hired after Sept. 1 of those years, as well as increased the minimum retirement age. In 2013 they also approved increasing employee contributions to 7.5 percent over the next few years.
The state first reported an unfunded liability in 2003, but it has grown exponentially since then amid the economic downturn, insufficient contributions and a dwindling workforce. The number of employees contributing to the plan has declined in recent years, while the number of retirees and beneficiaries has steadily increased over time.
State law requires an actuarially sound pension plan, which under current standards should be funded for at least 31 years. The state’s other big pension plan, the Teacher Retirement System, was shored up in 2013 by raising the minimum retirement age and increasing contributions for both the state and employees, as well as requiring school districts that do not participate in Social Security to pitch in for the first time. Like the employee pension fund, the teacher pension fund was considered to be in good fiscal health but also struggled to diminish its unfunded liability through investment returns alone.
Texas State Employees Union Vice President Seth Hutchinson said employees should not have to foot any of the bill this time around, especially as they have seen only a few modest pay raises in recent years.
“The reason that the pension is underfunded right now is because the state Legislature has not met its obligation to fully fund retirement benefits for state employees,” he said. “So what needs to happen is the state Legislature needs to put the money into the pension fund to shore it up.”
However, the Texas Public Employees Association has proposed preserving the current pension model and making it actuarially sound by increasing contributions from state agencies and all employees by half a percent, as well as the state’s contribution by 2.5 percent to the constitutional maximum of 10 percent.
Association Executive Director Gary Anderson, noting the proposal assumes there would be pay raises, described those contribution increases as “really very minimal.” And he said e-mail surveys the association has conducted show there is support for the proposal among state employees.
“The bottom line is: If the fund and this liability is not addressed it grows by about $1 billion every biennium and, eventually, it will get to a point here where it simply can’t be resolved,” he said. “So our objective is to try to address it as aggressively as we can this session.”
CORRECTION: This story has been updated to correct when legislative hearing was held regarding pension issues.
HOW TO SHORE UP THE EMPLOYEE RETIREMENT SYSTEM PENSION FUND?
EMPLOYEE RETIREMENT SYSTEM:
- State pays $350 million more per biennium for 31 years after legislative appropriations request, or:
- Raise annual membership fee for contributing members from $3 to $454.
- Increase member contributions.
- Reduce employee benefits through plan design changes, which presents eight options.*
Texas Public Employees Association:
- Increase state contribution from 7.5 percent to constitutional maximum of 10 percent.
- Increase employee contribution to 8 percent (Currently at 6.6, set to go to 7.5 in 2017).
- Increase state agency contributions half a percent to 1 percent.
Texas State Employees Union:
- Supports Employee Retirement System’s legislative appropriations request at $350 million per biennium.
*About 55,000 members (or 41 percent) of the active state workforce would be exempt from all but one of the options: Employees who have worked for the state for at least 25 years, are aged 50 or older or whose age plus their years of service equal at least 70 would be grandfathered in. Some 79,000 employees would be affected.