UPDATED 5/7/21 - The Texas House Appropriations Committee on May 7 voted favorably on Senate Bill 321, which would close the traditional defined benefit retirement plan on Sept. 1, 2022, to new employees eligible for the Texas Employees Retirement System. State workers hired after that date, according to the text of the bill, would be enrolled in a cash balance retirement account instead of a more traditional and secure defined benefit pension plan.
The House received the proposed legislation on April 29 after passing out of the Senate the day prior. The House referred it to the Appropriations committee on May 3.
Sen. Joan Huffman, R-Houston, is the author of the legislation. According to a Texas Tribune article, Huffman says the proposed overhaul of the state retirement plan from a traditional defined benefit plan to a cash balance plan is necessary to ease the financial burden on the state and create a sustainable retirement plan for state employees. Huffman believes her bill will stabilize the Employees Retirement System, which she says has an unfunded state liability that will grow $1.1 billion per biennium.
Under Huffman's plan, new employees would participate in a new cash balance scheme that guarantees 4% interest annually. Some state employees could earn additional interest through gain sharing, according to Huffman. The Senator claims an annual amortization payment of $510 million annual will help pay down the fund's unfunded liability.
The US Department of Labor describes a cash balance retirement plan as a defined benefit in name but more characteristic of a defined contribution plan in nature. While both traditional defined benefit plans and cash balance plans must pay an employee's benefit in a series of payments for life, traditional defined benefit plans will specify the benefit as a monthly payment for life beginning at retirement. In contrast, cash balance plans will define the benefit as a balance in an employee's account.
The bill's passage out of the Senate and, now, out of the House Appropriations committee, is troubling news for state employees. Most Americans have been unable to save enough for retirement through alternate retirement plans such as 401(k)s, according to Art Alfaro, executive director of the Texas Association of Public Employee Retirement Systems.
Studies show that cash-balance, or defined contribution plans, are not successful in ensuring public employees have a secure retirement, he says.
"That's because those investing in a defined contribution plan on their own often are not investing enough and do not know how to invest their hard-earned money properly," Alfaro adds.
TEXPERS, a nonprofit membership organization that provides state-mandated and advanced governance and investment training, opposes SB 321 because the traditional defined benefit plan delivers retirement income with little effort on the part of public employees while providing retirement security. Members of the association are trustees, administrators, professional service providers, employee groups, and associations engaged or interested in managing public employee retirement systems. TEXPERS' member systems and employee group members represent 2.3 million active and retired public employees with assets totaling nearly $89 billion.
TEXPERS isn't alone in its opposition. According to another Texas Tribune article, leadership from some state worker's unions have spoken out against the bill, arguing that changing the retirement benefits would increase staff turnover, negatively affecting already-undermanned state agencies.
"Moving the state's Employee Retirement System from a secure and proven retirement savings plan to a less secure cash balance plan is a slippery slope in that local government lawmakers could see the switch as an opening to change their retirement plans for municipal, police, and firefighters," Alfaro says.
Before voting on SB 321 in the Texas Senate, Sen. Juan Hinojosa, D-McAllen, mentioned that many city pensions are not actuarially sound and have a $14.7 billion pension debt. It is a statement that Huffman confirmed and said the debt is continuing to grow.
"At a time when most Americans are struggling to save for retirement, if the state moves public employees to a cash balance scheme, it will only ensure our hardworking public servants are added to throngs of people who are struggling to pay for basic necessities after years of dedication to their jobs," Alfaro says.
According to a report released in February by the National Institute on Retirement Security, Americans of all political party affiliations are worried about their financial security in retirement. More than three-fourths of Americans agree that all workers, not just those working for state and local government, should have a pension, according to the results of a national survey conducted by NIRS.
The nonprofit is a research and educational think-tank whose researchers contribute to informed policymaking regarding the value of retirement security to employees, employers, and the economy. NIRS also has found that states that have switched from a defined benefit plan to a 401(k)-like scheme have not been successful.
In some cases, states have had to revert to traditional defined benefits. Case studies published by NIRS show that states that switched new employees from defined benefit pensions to defined contribution plans experienced increased taxpayer costs and did not improve funding.
"Unlike a defined contribution plan, a traditional defined benefit plan provides a predictable revenue stream to public employees when they enter retirement," Alfaro says. "Defined benefit plans have also proven helpful in recruiting for government jobs that are often hard to fill. The pros of a defined benefit plan don't stop there. The plans have a substantial impact on the US and state economies."
Retiree spending of pension benefits in 2018, according to the most recent measure of the impact of defined benefit pension expenditures conducted by NIRS, generated $1.3 trillion in total economic output. "Pension spending also added nearly $192 billion to government coffers at the federal, state and local levels," according to the NIRS report.
"In Texas, defined benefit pensions for public employees are just as much as an economic state pillar as are the agriculture, oil and gas, and manufacturing industries," Alfaro says. "The state and its cities function through the daily work and decades-long job dedication of more than two million public sector employees such as firefighters, municipal employees, teachers, and state, county and special district employees. Even after these citizens retire, they contribute to the state's well-being by spending their earned retirement benefits."
In 2018, the retirees from Texas' 99 state and local pension funds received $16.9 billion in earned benefits, according to NIRS' research. They then spent some portion of that on their homes, at restaurants, with doctors, in stores and on financial investment opportunities. Retirees' expenditures supported some $31 billion in total economic output and produced $4 billion in federal, state and local tax revenues. Those interested in learning more about the economic boost gained from public-sector retiree spending can access TEXPERS' pensions primer for state legislators, available on the association's website.
"The true indication of how ineffective the 401(k)-like plans are is that whenever lawmakers attempt to overhaul traditional pension plans into defined contribution plans, they have never proposed doing so with their defined-benefit pensions," Alfaro says. "They never will because they want to have a secure source of income when they retire from public service. If it is good for them, it is good for all public workers who spend decades working for their communities."
The state's 87th legislative session got underway on Jan. 4. TEXPERS, along with the association's Legislative Committee and legislative consultant, is monitoring the session, especially for any actions regarding public employee pensions. TEXPERS staff will regularly update this blog page with the latest happenings that may be of interest to trustees and administrators of public employee retirement systems. Follow TEXPERS on Facebook, Twitter, and LinkedIn for the latest news about the public pension industry in Texas.