in Houston, Texas

Pension reformers warn of looming breaking point, cite governments' 'actuarial bullshit'

Thursday, Dec 08, 2011, 06:03AM CST
By Mark Lisheron
Texas state Capitol

You might call it the Big Little Bang.

On Nov. 17, the assembly for the smallest state in the Union voted by a landslide to take some pension benefits away from all of its public employees and 21,000 retirees.

Rhode Island assemblymen, one after another, spoke with remorse that evening about what they were about to do. And with good reason. Most of this assembly was seated with the support of the Democratic and union machines that vehemently opposed the pension cuts.

Fifty-seven of the 72 members of the House and 35 of 37 in the Senate voted for a bill that would pull Rhode Island’s public pensions back from the precipice and reduce its unfunded liability by $3 billion.

For pension reformers in Texas and across the country, Rhode Island was just a matter of time and a bellwether. In a report issued late last week, the Laura and John Arnold Foundation of Houston warned of underfunding of the nation’s public pensions by $1.26 trillion and the “catastrophic” municipal bankruptcies, pension debasement and wholesale public service cuts that were sure to follow if something wasn’t done.

Bill King, a Houston lawyer and columnist, helped Houston businessmen found Texans For Public Pension Reform with the intention of making pension reform an issue for the 2013 Legislature.

“I think the state needs to get the hell out of this (pension) business completely,” King told the Austin American-Statesman in August. Although he has pulled back a bit on that statement, King says that unless the state commits itself to paying fully each year for the pension promises it makes he can see a time in the next decade when half of a Texas homeowner’s property taxes would be needed to pay pension contributions.
Bill KingBill King

“We’ve created a system where politicians have made promises with the expectation that they will be paid for by our kids and our grandkids,” King says. “The public is not yet connecting the dots that the money isn’t going to be there for the pensions or their services will be sacrificed to pay for them.”

King admits it has been tougher to get the attention of the people who matter in Austin because public pensions on the whole are better off in Texas.

By paying off less than the total paid out to fund members and any interest owed on what is unpaid - sort of like maintaining a balance on a credit card - governments create unfunded liabilities that can grow exponentially.

Earlier in the year, the Pew Center on the States, a public policy project of the Pew Charitable Trusts, issued a report that said the amount the nation’s public pension funds had gone unfunded from 2008 to 2009 had jumped by 26 percent.

State pension plans alone were responsible for $660 billion of the $1.26 trillion of underfunding, the study said.

While the recommended rule of thumb used by the Government Accountability Office and actuarial experts suggests pensions be at least 80 percent funded in any given year, 31 states failed in 2009 to meet the standard, the study said.

At the very bottom Illinois, West Virginia, Oklahoma, Kentucky and New Hampshire were all below 60 percent.

Rhode Island was just 59 percent funded, but not until August, when one of its cities, Central Falls, declared bankruptcy and cut its pension benefits by nearly half, did both political parties get behind state Treasurer Gina M. Raimondo’s Rhode Island Retirement and Security Act of 2011.

The bill limited cost of living adjustments, expanded the retirement age to 67 and moved public employees into a pension plan funded in part by the employee in a state matching 401(k). Such a hybrid is one of the recommendations made for Texas in the Arnold Foundation study.

Neither Josh McGee, author of the foundation study, nor King is suggesting things are as dire as they were in Rhode Island. Texas is comfortably above the 80 percent funding threshold, as are other populous states like Florida and Pennsylvania. New York, along with Wisconsin, were the only fully funded state pensions in 2009, according to the Pew study.

California, however, is a cautionary example of becoming too comfortable funding your pensions at only 80 percent of their full worth. Faced with hundreds of billions in unfunded state and local pension liabilities -- Pew says the unfunded liability for the state alone in 2009 was more than $93 billion -- Gov. Jerry Brown in late October proposed a cost-sharing 401(k) hybrid, retroactive pension increases and a 67-year-old retirement age similar to Rhode Island’s.

The populist governor, stung by the angry reaction, had stood firm on a bill that has yet to be considered by the California Legislature. "I try to protect working people whenever I can but I'm also responsible to the taxpayer and making sure we have a solvent state government," Brown said in a Los Angeles Times story at the time.

McGee says California and Rhode Island got into their fixes in the same way Texas and all the other states went from pension surpluses in boom economy of the 1990s to billions in liabilities today.
Josh McGeeJosh McGee

“You have elected officials making financial commitments to be paid long after they’re gone,” McGee says. “Then, given government’s task to balance the budget, there is an incentive to underfund in the present when there are unpredictable costs in the future.”

Politicians in Texas were encouraged to think that way after nearly a decade of bumper investment crops brought in by pension and retirement fund managers. What should have been a buffer to protect the funds against a downturn became a substantial benefit increase bestowed upon state pensioners by the Legislature in 2001.

“I think it’s human nature when things are going well not to see those surpluses as a cushion for the bad times, but extra money,” Ruth Ryerson, executive director of the Fort Worth Employees Retirement Fund. “You could reduce contributions and increase benefits at the same time.”

Almost immediately after the Legislature’s gift came the first of three severe economic nosedives, the last not yet in full recovery. In 2009, the Teacher Retirement System of Texas, by far the state’s largest pension fund with more than 834,000 members, saw its valuation drop from $110 billion to $69 billion, executive director Brian Guthrie says.
Brian GuthrieBrian Guthrie

The fund swung back up to $90 billion later that year because fund officials didn’t panic. Others did.

“I’ve heard horror stories about getting out of the stock market and missing the best third quarter in stock market history,” Guthrie said. “I came out of it with a greater appreciation for patience and a need for a long-term model.”

The problem is keeping critics from projecting the short term onto the long term with patience and appreciation. Guthrie says the Teacher Retirement System is fit and hale, with assets to allow it to keep making pension payments more than 60 years into the future.

The fund is also unfunded by nearly $23 billion, almost five times the $4.8 billion unfunded liability of the second biggest pension program, the Employees Retirement System of Texas and its more than 142,000 active members, according to state Pension Review Board figures for September of 2011.

The 10 plans with the largest active membership in the state have a combined unfunded liability of $36 billion. Of the 96 pension plans in the Review Board report, 63 or nearly two-thirds have funding ratios below the 80 percent actuarial threshold.

So far there has been no Central Falls in Texas, but King, who is careful not to cry doomsday, is concerned at the lack of urgency among fund managers to get back to full funding.

King says the public is also being misled by a device designed to smooth out fund forecasting that assumes funds will earn at least 8 percent a year, which he calls “complete actuarial bullshit.”

The Arnold Foundation study says the investment return nationally has been just under 4 percent.

“Those plans that assume 8 percent growth are assuming a boom economy forever, and that’s just not realistic,” King says. “There is a danger in this thinking, and you get further and further behind.”

There is some truth to King’s contention, Guthrie says. In the long term, funding at 80 percent isn’t actuarially sound, he said. And recent investment returns have been tepid.

The teacher’s retirement fund’s annual return on investment over the past five years is about 5 percent, 8.3 percent over the last 10 years and 9 percent over the last 25 years.

The 30-year return rate for the Employees Retirement System has been 8.5 percent, executive director Ann Bishop says.

“While the stock market has been rocky in recent years, experience has shown that well diversified investments can provide a stable return over the long run,” she says.

Texas pension funds are further stabilized by the state Constitution, which says the state may contribute no less than 6 percent and no more than 10 percent to pensions funds in any given year, according to Keith Brainard, research director for the National Association of State Retirement Administrators, based in Georgetown, TX.

This past Legislature approved a 6 percent contribution for the 2012 fiscal year and 6.4 percent for 2013.

And while the Legislature went in for a benefits boost a decade ago, it did not nor did it ever include cost-of-living increases what would have tied future taxpayers to an inflating pension balloon, Brainard says.

King doesn’t believe pension funds will get back to soundness on their own. As a platform, Texans for Public Pension Reform is calling for legislative help to make the pensions more transparent and to require uniform actuarial practices so the public can see exactly how the funds are performing.

The pension reformers also want to Legislature to make it law to commit taxpayers to no more pension costs than can be paid for in any given year. Unfunded promises, he says, aren’t good business.

The Arnold Foundation is going further, pressing for the state to turn over its pension responsibilities to public employees and retirees in the form of a 401(k), or at least to consider a combination with the current pension format, McGee says.

Guthrie says the Legislature has asked pension officials to study a plan to pay as you go. Transparency and uniform accounting are worthy goals, he says.

The heads of the state’s biggest pension programs, however, do not support chopping up a pension system they think works well for Texas and dumping the investment risks onto individuals.

It remains for the economy to either blunt or sharpen the arguments for reform before the 2013 session. Vicki Truitt, chairman of the House Pensions, Investments and Financial Services Committee, said she hadn’t heard that anyone was proposing a full pension funding plan.

Truitt says she hasn’t sensed intense pressure for wholesale reform of any kind. By the same token, while she thinks a majority of public employees like their pensions the way they are, they aren’t opposed to changes that keep their funds sound.

“My position is to keep an open mind,” Truitt says, “gather comprehensive, factual information, and allow that factual information to drive sound public policy.”
Contact Mark Lisheron at 512-299-2318 or or on Twitter at @marktxwatchdog.

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Thursday, 12/08/2011 - 08:22AM

Thanks for shining a light on this issue. Good job! Unfortunately, the reality is even worse than the Arnold Foundation study shows. Investment performance over the last 30 years included risk-free 15% interest bonds. Now that is 3%. In a desperate scramble to meet impossible investment goals, pension fund managers are taking on more risk, merely setting taxpayers up for a bigger fall. Right now, your state's true current pension debt is at least $140 billion. The average Texas household owes at least $1,300 a year every year for the next 30 years in ADDITIONAL taxes just to pay benefits already promised. Until we force politicians to account honestly for the pension debt they are sticking us with, they never will fix it.

Kenneth D. Franks
Thursday, 12/08/2011 - 08:51AM

Texas pensions such as the Teacher Retirement System in Texas are sound and fully funded. To suggest otherwise is simply bringing in and pushing ideology over facts. or Google, Red Dirt & Sand

Mark Lisheron
Thursday, 12/08/2011 - 10:27AM

Re: Kenneth Franks and ideology over facts.

Wuh? Didn't you read the story or look at the charts? There are almost no fully funded pension funds in Texas. The executive directors of the two biggest funds told me this was a problem in the long term. The long-term soundness of the funds is a matter of disagreement, fully explored in the story.

I am not sure what it is you are putting over facts, but you are ignoring them.

Zeph Capo
Thursday, 12/08/2011 - 11:57AM

The story doesn't mention the time period when Gov. Bush transferred TRS profits to the general budget. Those funds that are made during economic boom should have minimally been used to shelter the fund from a drop. Instead, our pension investment profits were used as a cash register for the state budget. Now teachers have to pay the price for those decisions?

Thursday, 12/08/2011 - 12:28PM

As a watchdog, don't you think that it is your responsibility to point out that John Arnold ran the Enron 401(k) system, making tons of money while those workers lost everything? Do you think that maybe there is some self-interest here....

Ed Fuller
Thursday, 05/03/2012 - 06:35AM

This story denigrates the usually fine reporting at Texas Watchdog. Those supporting pension reform stand to make a huge profit. The pensions are in acceptable shape and would be in great shape if the legislature and governors would stop robbing the funds and pay in what they are supposed to pay. We already have a hard enough time finding quality educators--the removal of the pension would make recruitment even more difficult. But the John Arnolds ofd the world don;t care about that--just their own bottom line.

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