Resistance v. reform: what’s the real threat to teacher, other public sector pensions?

Public sector pension reform is hardly a new policy topic, however, it is gaining new attention in Texas as recently filed bills seek to alter existing state pension systems that are approaching insolvency and therefore unsustainability. While advocacy groups vilify proposed legislation and warn teachers along with other government employees how retirement benefits may be in jeopardy with retirement security threatened, a better discussion is if pension plan participants understand the looming consequences of not supporting reform efforts?

In today’s world, public and private sector employees have good reason to fear for the safety and security of their retirement futures. But the dirty secret is that while not all dangers are avoidable, proactive management of retirement options at least offers a fighting chance to mitigate the challenges our aging population will face.

And the dangers hardly started with the filing of Texas legislative bills. These pension funds have been at risk for years. They were at risk in the past; they continue at risk here in the present and, without reform, will become even more threatened in the future.

While easy to tag reform advocates as lacking empathy or compassion, real insensitivity comes when impacted parties are inundated with self-servingly alarmist or incomplete information instead of being educated to the realities at hand.  Alarm is indeed due, but too much is at stake to forego understanding the context and widespread economic implications of this critical issue.

Texas legislature looks at retirement system reform

Legislation filed by Sen. Paul Bettencourt, R-Houston, addresses the daunting task of public sector pension reform.

SB 1750 calls for a cost-effectiveness and feasibility study on “implementing a hybrid retirement plan for newly hired state employees and teachers” while SB 1751 actually calls for establishment of an Alternate Retirement Plan (ARP) which is a defined contribution or hybrid plan (combination of defined contribution and defined benefits).

Although SB 1751 pertains to members of both the Teachers Retirement System (TRS) and Employees Retirement System (ERS), only “newly hired employees” will participate in the ARP.  A person resuming employment (in a TRS- or other covered position) and already a retirement system member is not considered a new employee for purposes of required participation and therefore remains eligible to participate in the defined benefit plan.

An employee who participates in the ARP may not participate in the defined benefit plan. The ARP plan travels with an employee if positions are changed, but still included under the retirement plan’s coverage. After five years, participants are vested.

A person terminates ARP participation without losing vested benefits by death, retirement or termination of all positions in retirement system. ARP benefits become available under terms of annuity upon the previously mentioned status changes or the member’s age and years of service in a plan-covered position equaling 80.

SB 1752 authorizes home-rule municipalities currently providing employee benefits under a defined benefit plan to create an ARP as largely detailed in SB 1751. Unlike SB 1751, however, authorization to establish this hybrid plan requires voters to approve the measure.

Reform proponents say existing retirement programs must be modernized. With these systems either currently at or approaching unsustainable levels, both program participants and taxpayers face significant fiscal threats. Action must be taken – and preferably sooner rather than later.

Opponents say don’t be fooled that an ARP only affects new employees and lower new employee numbers will put all plan participants at risk. TRTA Executive Director Tim Lee told Spectrum News how because teachers don’t pay into Social Security, “this bill will pretty much rob them of their safe and secure retirement.”

But how truly secure is even Social Security? Between their hard-earned dollars subsidizing current program participants and with the fund projected for exhaustion by 2035, many people – especially those younger – doubt their Social Security contributions will provide them with any real future benefit.

And of course pension administrators want all contributions – especially those of younger people.  The Ponzi-scheme natures of both defined benefit plans and Social Security are self-evident. Couple that understanding with historical context and choice and new employees might find other retirement options far more appealing.

The predictable path to unsustainability

Over the last 40 years, private sector employers largely phased out defined benefit plans as uncertain financial markets hampered pension fund asset return rates while fewer participants supported more beneficiary payouts. With the unsustainability of private defined benefit plans increasingly obvious, businesses transitioned employees to defined contribution plans that enabled employees to take more responsibility in directing their specific retirement strategies.

Many private sector entities recognized how explosive pension liability risked jeopardizing a company’s entire fiscal health (including its long-term operations and capacity to hire workers). This realization created urgency and that led to action.

Companies that continue offering defined benefit plans now often face the challenges foreseen decades ago. The Pension Rights Center tracks these issues and reports today’s retirement system changes often include “plan terminations, plan freezes for new and/or current employees, and changes to the formula by which pension benefits are calculated.”

Union pension plans are also experiencing the consequences of outdated, unsustainable retirement systems. The New York Teamsters Road Carriers Local 707 Pension Fund is the first Teamster fund to officially run out of money with more expected to follow.

Equally concerning is characterizing the Central States Pension Fund as “another looming financial disaster that could leave 407,000 retirees without pensions across the Midwest and South.” The site quotes Central States Pension Fund’s General Counsel as noting that despite private sector difficulties, “the real ‘pension tsunami’ will come when the massive ‘municipal and state plans go down next.’”

Lessons not learned

Public sector pension plans face similar problems as their private sector counterparts. Unelected bureaucrats who established these predictably troubled systems are decades behind in accepting financial reality and in promoting practical action steps for the fund participants whose interests they theoretically serve.

And based on actions seen in other parts of the country, pension administrators aren’t finding fiscal-minded taxpayers amenable to spending new dollars on outdated, failing systems.

The San Diego Union Tribune offers this perspective:

Pension debt is not a new story — in fact, most of the country’s public pensions are significantly underfunded (state and local pensions across the U.S. have an estimated $5 trillion less than needed to cover promised benefits). But this time the largest pension plan in the nation, the California Public Employees’ Retirement System (CalPERS), has thrown public employees overboard. And that has government workers and retirees across the country asking, could this happen to me? The answer is yes! If your city runs out of money and your pension plan is not fully funded, you will lose. The only question is how much.

Penned by Chuck Reed, a former San Jose mayor and board member of the Retirement Security Initiative, an advocacy organization “focused on protecting and ensuring the fairness and solvency of public sector retirement plans,” the op-ed additionally tags California as “leading the charge” of fiscally deficient local governments.

“Stockton, San Bernardino and Vallejo were just the beginning — all forced into bankruptcy with massive pension obligations, causing retirees to lose their health care benefits,” he writes. Reed also notes how “Detroit, Michigan; Central Falls, Rhode Island, and Pritchard, Alabama, retirees took hits to their health care and pension benefits.”

Texas has its issues

The Dallas Police and Fire Pension System recently generated headlines when fears over the system’s solvency prompted large numbers of participants to request lump sum withdrawals at a rate pension officials said would “leave them without the liquid reserves required to sustain the $2.1 billion fund.”

A new Taxpayers for a Fair Pension coalition has been established to address the pension fund which, per the city of Dallas, could run out of money within ten years if no changes are enacted. City officials also say they hope to work with state legislators.

Assessing blame appears to be its own agenda item as city administrators and system participants voice opinions on how this situation was reached. Outdated financial models coupled with unrealistic benefit expectations were undoubtedly key components that hopefully will not be lost in the discussion.

Meanwhile, it’s also of interest that the FBI as well as the Texas Rangers are investigating potential criminal wrong doing with regard to the fund’s past administration.

And Houston has its own set of problems. Specifically, three: the Houston Police Officers Pension System (HPOPS), Houston Firefighters’ Relief and Retirement Fund (HFRRF) and Houston Municipal Employees Pension System (HMEPS).

Mayor Sylvester Turner and city officials have developed a plan to solve system shortfalls resulting from years of the city both failing to pay its annual pension contributions as well as over projecting investment rate returns.

To the plan’s credit, the three systems have identified cuts or benefit alterations (police $1.1 billion, fire $800 million, municipal $700 million) that constitute a 33 percent reduction in overall unfunded liabilities.

That said, Charles Blain, Empower Texans Houston Director, cautions these concessions are “nothing taxpayers should count on especially since Turner wouldn’t go into specifics about what the changes are, only saying that they would be in the areas of cost of living adjustments, future benefit accrual rates, or the deferred retirement option program.”

Blain writes:

The city will also be required to make full annual required payments to the pension systems. The constant underpayments in the past is one of many the reasons the debt has skyrocketed to its current level.

While this all sounds promising, Houstonians should be weary that the proposal is calling for $1 billion in new pension obligation bonds – a measure which taxpayers will be on the hook for long after his administration leaves office.

HB 43, this plan seeking to reform Houston’s three local retirement systems, was the subject of an Austin legislative hearing earlier this week.

In conjunction with testifying against the bill, James Quintero, Texas Public Policy Foundation’s director of the Center for Local Governance, issued this statement:

“Houston’s public pension problems are reaching a tipping point and real reforms are needed now,” said Quintero. “Under the status quo, unfunded liabilities in Houston have grown to $10 billion, or more than four times the city’s General Fund budget for FY 2017. That’s an exceptional level of pension debt and it threatens fiscal catastrophe if not dealt with directly. It’s time for Houston to move away from the failed defined benefit model—a system that’s at the heart of the city’s pension problems—and transition new hires into something that’s better for all.”

A TPPF review of the state’s overall financial performance offers the following analysis on public pension funds:

Texas is not immune to the problems that trouble pension systems across the country. Although Texas’ state pensions do not have the same level of unfunded liabilities, the amount of unfunded liabilities and the assumed rate of return are problems that must be addressed. Volatile annual rates of return and fewer contributors paying for more beneficiaries are exhausting these defined-benefit (DB) plans, whereby beneficiaries are promised regular payments substantially higher than their contributions that leave these retirement systems with mounting unfunded liabilities.

The Texas Pension Review Board (PRB), the state agency charged with overseeing Texas’ state and local retirement systems, notes that the eight state pensions in Texas total $48.1 billion in unfunded liabilities given the average annual discount rate of 7.8 percent. This gives an average actuarial funded ratio—a measure of a plan’s current assets as a share of its liabilities—of 81.9 percent, which is only slightly above the 80 percent threshold often considered as actuarially sound. According to the average 15-year rate of 2.3 percent by Williams et al., Texas’ unfunded liabilities of $362.7 billion ranks 3rd highest nationally, funded ratio of 36.9 percent ranks 17th highest, and unfunded liabilities per capita of $13,120 ranks 14th lowest. These large unfunded liabilities are dominated by the two largest state pension systems, Teachers Retirement System (TRS) and Employees Retirement System (ERS), which account for $41 billion of the total unfunded liabilities at their assumed 8 percent annual rate of return, and include 1.7 million members (Texas Comptroller 2016b).

Stated differently, 1.7 million individuals within Texas’ two largest state pension systems are tied to entities accounting for 85 percent of the state’s unfunded pension liabilities. This is reason for concern and make no mistake – maintaining the status quo is the most imprudent option of all.

The path forward

Changes are unavoidably ahead. Baby Boomers are creating a huge wave of retirees that has been long anticipated, but, in too many quarters, also ignored. Longevity adds additional stress to pension funds as well as other government programs that were established based on parameters and actuarial tables that are now outdated.

Per Bettencourt, upcoming deficits will be in double-digit billions. He says the filing of SB 1751 is accomplishing its purpose – it’s sparking a conversation.

No matter which side you’re on, we still have a choice. And it now comes down to choosing on which side of the conversation you want to be – with the folks in denial or the folks determined to take productive action?

That said, regardless your stance, reality won’t be avoided, as neither will the consequences – for any of us. Warning: pension tsunami ahead.

Lou Ann Anderson is an information activist.  A former contributor at Watchdog Arena and Raging Elephants Radio, she writes and speaks on a variety of public policy topics. She additionally addresses the growing issue of probate abuse as the Creator and Online Producer at Estate of Denial®, a web site that “shines light on the dark side of estate management” by providing news, analysis and commentary regarding probate corruption and estate abuse cases.

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