April 21, 2021

Finally – Real Pension Reform from the Texas State Senate

Finally – Real Pension Reform from the Texas State Senate

A couple of months ago, I wrote that the Texas Employment Retirement System (“ERS”) was back in financial straits after being bailed out by the Legislature just five years ago (see this post).  ERS went back to the Legislature this session with another massive funding request but with no changes to its basic defined benefit structure.

Click here on image to watch Senate Finance Hearing on SB321 (Time stamp 17:20 - 1:15:00)

In a surprise development this week, the Senate Finance Committee unanimously passed a bill (SB321) that moves new employees to a cash-balance plan.  Cash-balance plans are a hybrid approach with elements of both defined-benefit and defined-contribution plans.  While purists, like your correspondent, prefer pure defined-contribution plans, cash-balance plans are an enormous improvement over a pure defined-benefit plan.

The state currently sponsors statewide plans for all Texas county employees and municipal employees whose cities have elected to participate.  Both are cash-balance plans and have performed reasonably well.  The Texas Municipal Employee Plan System (“TMEPS”) has maintained a funding ratio in the high 80% range for many years.  Of course, the devil is in the details regarding the design of the plan, but from my cursory review, the plan incorporated in SB321 appears sound.

This will not reduce the massive nearly $15 billion debt that has already been run up on ERS.  During the Senate Finance Committee hearing, Sen. Joan Huffman said it will take over $500 million a year for many years to pay down that debt.  But, at the least, this plan means we will stop digging the hole any deeper, which is Rule One in problem solving.  And unlike the Houston pension “reform” in 2017, we are not reneging on benefits which employees have already earned or putting in place a system that is so complicated that no one understands how of if it works.

This plan could also be a blueprint for future pension reform.  For example, a similar plan would be a great solution to the Houston Municipal Employees Retirement System, which is a complete disaster, and could quite easily be implemented by moving those employees into the TMEPS plan.

It was 2008 when I first stumbled across the financial disaster of defined-benefit pension plans and began sounding the alarm.  This is the first real pension reform I have seen in Texas.  Hopefully, the whole Senate, the House, and the governor will see the wisdom of this path.

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