House Committee on Pensions, Investments & Financial Services Holds Aug. 16 Meeting

This report, compiled by TEXPERS legislative consultants and staff in attendance, is intended to give you an overview and highlight the discussions on the various topics taken up. It is not a verbatim transcript of the discussions but based on what was audible or understandable to the observer and the desire to get details out as quickly as possible with few errors or omissions.

Opening Remarks

  • This hearing is a culmination of a lot of work from the last session and preparing for the next session

Invited Testimony on HB3898

Amy Cardona, Executive Director, Pension Review Board

  • HB 3898 is an important bill that codifies 2020 recommendations to improve the financial health of Texas retirement systems
  • FSRP is a plan developed by the retirement system and municipality when the system becomes distressed; 40-year actualization is pushed down to 10 years
  • All Texas retirement systems are required to have FPR to achieve full funding, a requirement passed in 2019
  • FSRP and FRP were not linked
  • Changes in the bill made to funding soundness restoration plan requirement and funding policy requirement
  • Implementation will take place over several years, through 2025, when plans are due
  • Stricter triggering mechanism; reduced funding threshold from 40 to 30
  • Reduction is important because PRB established funding guidelines with 30-year amortization at end of limit
  • Tied funding requirements (FSRP and FRP); required to be updated in tandem and develop and adopt their policies together with 2 years to get to goal
  • Stricter revised requirement when first FSRP doesn’t work; incentivizes a robust FSRP the first time around and thinking longer term; 25-year amortization
  • FSRP changes involve rulemaking, which are taking place now
    • New requirement for when FSRP is triggered, they must notify members
    • Improve communication between systems and their members
    • 5 systems had FSRPs in place before Sept 2021, grandfathering those plans in
    • Standards to show progress under FSRP moving toward their goal
    • New law spells out what compliance looks like (such as documentation)
    • Timeline of rulemaking: Public comment period now through the end of August, expect adoption in October
    • HB3898- performance evaluation requirement passed in 2019 to evaluate investment practices on period (IPPs) basis depending on the asset size of the system
    • The initial round was due in 2020 to PRB; in the fall of 2020 published recommendations
    • Bill added disclosures with a formal review and comment process
    • IPPE requirement- have a draft of revised guidelines, anticipate board will adopt in Oct
    • Funding policy made in 2019, completing in 2020, leg made changes in 2021; hope systems will update on as-needed basis  
    • Want FSRP users to update policies in collaboration with sponsors

Panel 1 on HB3898

Art Alfaro, The Texas Association of Public Employee Retirement Systems (TEXPERS)

  • TEXPERS there as a resource to the committee
  • Chairman Anchia -  Any thoughts on how the rulemaking process is going for HB3898?
    • Very inclusive, always looking for comments but haven’t heard any from members 

Dan Buckley, Deputy City Manager, City of Galveston

  • Have 3 types of pension programs; improving and maintaining them is part of their long-term goal
  • In 2021, TX leg recognized board decisions occur without sponsor input; HB3898 requires governing board to jointly develop and outline funding policy to ensure sufficient funding
  • PRB is not fully implemented yet for joint development, limited to FRSP provisions; requires 30-day notice to adopt and develop a sufficient funding plan but is not being implemented with fidelity
  • Need updated guidance and rulemaking to ensure proper policy implementation as intended with the law; lack of authority for PRB to resolve issues when districts as non-compliant
  • Stephenson - can’t fix anything without the revenue to match expenditures and growth; the money is the problem
  • Parker - timelines need to be shorter, alarms tripped sooner, sponsoring entities need a mechanism to act, is that correct?
    • Yes, need the means to resolve issues with teeth; Civil money penalties could force action

Ann Bishop, Texas Public Employees Association

  • Appreciates efforts of HB3898, offers strong best practices to work toward goals matching liabilities against revenue
  • Helping to make legacy funding (ERS main fund) actuarially sound
  • Need regulatory teeth and more funding to accompany this legislation; PRB not sufficiently funded

Invited Testimony on Texas Local Fire Fighters Retirement Act (TLFFRA)

Amy Cardona, Executive Director, Pension Review Board

  • Legislative changes have put structure around decisions to improve pension plan; improved PRB’s oversight ability
  • Slide 15: PRB’s role in overseeing pension plans in state
  • Oversight agency and not regulatory, no enforcement mechanisms because locally funded without state contributions
  • PRB’s Mission: provide technical assistance, collect reports, use data to report statewide trends to lead to productive policy discussions, publish best practices, research and analysis, identify red flags, authorization to make legislative recommendations
  • If no compliance or implementation, work with systems to collaboratively achieve compliance
  • Board adopted policy that lays out their approach; may report issues to key legislative offices; invite systems to board meetings
  • Midland Fire Pension Fund invited to next meeting for update on audit recommended through a review; board concerned about lack of progress on audits; haven’t heard response to invitation yet
    • PRB is a national model for pensions oversight; Texas doing better than other states
    • Overview of TLFFRA Act, statute, how its distinct, financial metrics
    • TLFFRA funds from local firefighter funds
    • Out of 100 identified PRB benefit plans, 42 are TLFFRA
    • Not all retirement systems that serve firefighters have TLFFRA plans
    • Statute originally passed in 1937 as umbrella for all TLFFRA plans, establishing board composition
    • Act sets floor for contributions but otherwise amount set on local level
    • Act rail metrics compared to other pension systems: higher amortization periods
    • Anchia - Of the 42 TLFFRA, are they all mapped here in the report you provided? Yes.
    • Anchia - Have a sizeable group of plans (over half) that are over 40 years. How would you characterize those long-term plans? Legislature set a funding standard and quite a few are over it
    • Parker - Can you provide the committee with individual plans? Yes, and always have up-to-date data on their website too
    • Graphs of trends in unfunded liability (grown) and average funded ratio (declined) are shown in the presentation
    • PRB’s research activities to improve pension plan funding over time
    • Slide 19 lays out PRB’s work to help provide guidelines for improvement and growth
    • Intensive review process started in 2018 for oversight, which has grown and helped identify trends
    • Reviewed 10 systems so far, 1 still in progress; all TLFFRA except for one; looking for assumptions out of line; PBR review due to fact they’re more poorly funded
    • Chronically insufficient contributions and investment returns not meeting assumptions lead to poor funding
    • Systems and their sponsors can be slow to react due to:
      • Separate processes for city and statute for member contributions, subject to a member vote; dual track decision making
      • Some cities are reluctant to increase contributions because they have less control over benefits and unfunded liabilities
      • No agreed-upon structure to enhance benefits
      • TLFFRA systems and their partners in Irving and Longview have established structures together
  • PRB plans to do a governance study in the future; did an asset pooling study in 2018
  • Notes there are issues with getting contributions and other issues arising from the vote structure
  • Anchia - Asks about pooling study related to smaller plans
    • The conclusion is that money could be saved by pooling assets, study stopped short of governance
    • TMRS is also an option of asset pooling; recently Paris Fire voted to be added
  • Anchia - Asks about funds for TMRS
    • City pension obligation bonds in order to pay off unfunded liability; like Longview

Keith Brainard, Governance and Oversight, Texas Pension Review Board

  • People overlook the role governance plays in the success for plans
  • TLFFRA plans funded are typically less funded than other plans
  • Pension funds rely heavily on investment earnings; is the most important assumption
  • TRS has reduced their assumption from 7.25% to 7%
  • For some plans average return exceeded investment return; TLFFRA group falls short and has a significant effect on the funding condition of the plan
  • Anchia - Talk about the importance of that gap?
    • Has added many millions to the unfunded liability of these plans and have a compounding effect
    • Obvious we need to change the investment return assumption
  • Parker - What is the cause of this related to governance? Something systemic is happening
    • Smaller plans have less to work with than others; are consistently falling short
  • Parker - Need different managers, governance being more conservative?
    • Plans consistently underperforming need to lower the assumption
  • Each year a fund does not meet its actuarially determined contribution, increasing their unfunded liability; TLFFRA plans consistently do not meet this
  • Funding level based on contribution rate; TLFFRA are fixed rate plans
  • Recommend state require plan sponsors of TLFFRA pay in full
  • Recommend there not be a public negotiation of contribution/benefit levels
  • Recommend an AVC requirement be phased in
  • Recommend the city council and the board approve rates
  • Recommend legislature to only allow benefits enhancements if it does not cause an increase in its amortization period; move AP from 30 to 15 years
  • Anchia - Asks about governance structure and state involvement
    • The legislature could move toward pooling assets through a common administrative entity
    • Administratively TLFFRA funds currently have high costs
  • Anchia - Pooling mechanism could be used as an incentive?
    • Is the model Massachusetts used; a number of plans jumped at the opportunity
    • A handful of other plans that were required to pool by law
    • Are a number of plans that maintained local control
    • Wisconsin, Colorado and other states have consolidated plans with great benefits; success in fire and police plans
  • Parker - MA program, plans have the ability to become autonomous after being pooled?
    • Do not think so, will follow-up

Panel 1 on TLFFRA

Chris Hillman, City Manager, City of Irving

  • Have been able to come to come to a solution with our TLFFRA plans
  • In 2018, the plan had an infinity amortization period; resolved the issue but was expensive
    • $180M of taxpayer money
  • City has a AAA bond rating for Moody’s and S&P; all 15 of bonds passed last year
    • S&P put us on watch due to the state of the plan
  • City had a charter cap which was removed by vote
  • Firefighters made additional contributions from 12% to 13%
  • City increased contributions to 55%
  • Firefighters in the plan created and approved a tier 2 plan and made changes to tier 1 plan; issue was significantly reduced benefits
  • City then had to modify contributions again to due to the creation of the new tier 2
  • Put guardrails in that they would increase contributions for any additional benefits
  • Set up a structure of review if need be; at which time city will bring in own actuary
  • Issued $80M POBs
  • Would like to work this upcoming session to provide an amendment that validates ability to work with TLFFRA boards to come up with these type of agreements
  • Anchia - Asks about retention; is about local control?
    • Yes, and this agreement helps with retention and was voted on by the firefighters in the community
    • Believes the TLFFRA plans need some modernizations
  • Anchia - Seems like you had the perfect situation in order to do this; wonders if others would not have the same situation
    • Modernization of the statute may help with those who do not have the right conditions for this
  • Parker - So many communities would not be able to do this expense-wise; agrees need to look broadly on modernization of statute as a whole
    • Notes there was a large amount of unfunded liability

Dan Buckley, Deputy City Manager, City of Galveston

  • Board actions must be approved by participants; undermines the authority of the board
  • Notes recently employees increased benefit cap “without thought” to the unfunded liability
  • Sponsors and governing boards should work together on anything that would change actuarial soundness of the fund
  • Require joint development, review, and concur requirements between plan sponsor and governing board; changes should require a supermajority vote of sponsors
  • Proposals should be vetted by actuarial soundness
  • Plan sponsor must have an equal set at the table
  • Parker earlier asked for a comparative schedule for TLFFRA plans; cautions the board since there is difficulty in comparing plans
  • Structure and governance under TLFFRA were misguided
    • Solution already exists in TMRS
  • 3.5% cap on revenue growth for municipalities may get in the way concerning reducing unfunded liability
  • Stephenson - Why not create a system in ERS where employees can make the unfunded liability go away with separate investment pools; have complex formulas when we do not need them
    • Plans have been underfunded with established and set liability rates; have not been statutorily required based on an actuarial funding plan
  • Anchia - How would you create parity on a board?
    • Supermajority vote for benefit enhancements

Kolby Beckham, Chairman, Longview Firemen's Relief & Retirement Fund Pension Board

  • Heard testimony that unfunded liabilities driven by members only; is not accurate
  • Board’s actuary would have to approve benefit change using measure pension review board set, preferably 25; above that wouldn’t get approval
  • See difficulties in plan changes to the negative where you need membership approval; matter of educating members why it’s necessary
  • Unfunded liabilities started in early 2000s with idea market would recover, which didn’t occur, and liabilities compounded; exacerbated in 2008
  • City representatives need to go back to the city, not just attend board meetings, but to ensure they’re communicating status of the board
  • Factors that affect pension fund status: Benefits are out of alignment, investment returns, or contribution rates
  • Passed a pension obligation bond through city budget and tax increase
  • TMRS doesn’t get rid of unfunded liabilities, especially when don’t have growing tax base
  • Benefits had hit point they were footing bill of active members today and city’s contribution was going to unfunded liability without addressing the interest
  • Without actuarial approval, can’t increase benefits without giving knowledge to the city
  • Lack of collaboration between sponsoring entities and funds
  • Review of pension review board’s ability requires sponsoring agencies to play a role
  • Chair Anchia - Agrees about shared responsibility of city and board

Invited Testimony on LECOS and JRS 2

Porter Wilson, ED of Employee Retirement Systems of Texas

  • ERS funds 3 major pension funds including LECOS and JRS 2
  • ERS funds covered normal costs of plan but didn’t meet 30-year period, $14B in unfunded liability
  • Set to run out of money in 2061 last session but on path to be fully funded by 2054 now
  • SB321 significantly changed trajectory of fund through legacy payments (~$510M each year) and new benefit (cash balance benefit/Group 4)
  • Other components: guaranteed lifetime benefit, enhanced benefit for law enforcement and custodial officers, reduced contribution for certain members, 5-year vesting period, 4% account growth plus gain share, retirement match at 150% for most members or 300% for law enforcement
  • Sept 1st effective date- new law enforcement will be in Group 4; on target to implement on time with help of Comptroller’s Office
  • Anticipate technical changes needing to be addressed next legislative session
  • Funding policy to pay off unfunded liability under 30 years could be done through additional legacy payments; if increase $90M a year, save billions in interest
    • Chair Anchia - Have you done work on identifying if one-time payments will save interest in the out years? What would that look like?
    • Infusion of a one-time payment chips away at interest over long term to pay off unfunded liability; actuaries want to see an ongoing and regular payment
    • This year may not have as high of returns as last year but will provide estimates to the committee
    • Significant work was done on main ERS fund last session, but other things still need to be addressed in LECOS and JRS 2
    • Both funds have depletion rates: LECOS in 2050 and JRS in 2076
    • Normal costs are not being met in these funds so that’s of paramount importance; normal cost 2% but only 1% being covered, so $20M gap annually
      • Chair Anchia - These funds always lived in ERS? Yes, always
      • LECOS is supplemental and JRS 2 is stand-alone benefit
      • Unfunded liability could be paid off in single lump sum, could break it up into 2 payments, or make it a percentage of payroll over 30+ years
      • Chair Anchia - Lump sum payment doesn’t stop from accruing unfunded liability? No, because still not covering normal cost
      • Parker - Projected rate of return? 7%, even for cash-balance plan

Carla James, Director of Legislative Affairs for Retired State Employees Association

  • Retirement needs frequent attention and constant support
  • Worked at Comptroller and LBB, saw chronic pattern of underfunding for ESA from legislature
  • Been 20 years since retirees got cost of living adjustment (COLA)
  • Texas retirees supported by SB321 through legacy payments
  • State employees have lost ground in their retirement support as well
  • Must invest in our future and services to our public servants
  • Salary increases are woefully behind, many state employees without a raise in over a decade
  • Urges legislature to take long-term view, be creative; consider investing $1B in the fund
  • Wants legislature to increase legacy payments by a small amount and one-time payment

Panel 1 on LECOS and JRS 2

Tyler Sheldon, Legislative Director, Texas State Employees Union

  • Strong pension program is the backbone of recruitment for state employees and needs to be protected
  • ERS board lowered return assumption, which increased unfunded liability; thankfully work done to improve this in 2015 but still requires more reform to prevent depletion
  • Employees now in cash-balance program facing unstable market forces for retirement funds
  • COLA not been done since 2022, retiree loss of 32% of buying power; needs to be a priority this session with increased inflation
  • Recommendations:
    • Increase multiplier that calculates pension
    • Supplemental payment or 13th check of $2,500 per retiree
    • Need large supplemental payment to get LECO back on track to help address staffing issues, especially in corrections department; Roll TJJD into LECO

Ann Bishop, Executive Director, Texas Public Employees Association

  • Represents state employees and retirees
  • SB321 changed contribution strategy of fund to legacy payments and percentage of payroll
  • LECOS now in similar situation due to court fees; # of state employees decreased 3.5%, and LECOS employees decreased by 8% in past year
  • Need to stabilize funding strategy, pay normal cost first
  • There’s a crisis and state government will implode if salaries are not increased because not competitive with private sector
  • Inflation is cumulative, having a big impact on current and retired employees
  • The legislature can solve this problem and looks forward to working with them
  • Parker - Understands this is a necessity, especially when state is in a good place financially

Panel 2 on LECOS and JRS 2

Megan LeVoie, Administrative Director, Office of Court Administration

  • More than 1,000 judges are part of JRS 2; appreciates committee looking at actuarial soundness of pension
  • Base pay of district judge not raised since 2013
  • Most district judges have 30 years of experience; they’re crucial to a fair justice system
  • Fully funded and predictable pension needed for recruitment
  • Concerns when base salary last raised, made a tiered retirement system, which is inequitable
  • Chair Anchia - Actuarial impact statement has sticker shock? Yes, needs to be actuarially sound; some judges said penalty would have made them turn down role if they knew before taking job

Richard Jankovsky, President, DPS Officers Association

  • Thanks the committee for commitment of funds
  • Asks committee that next legislature use surplus to cover shortfall in LECOS
  • LECOS benefits for officers and members of 20+ years of experience
  • Members already contribute .5% of monthly salary so asking state fully fund LECOS rather thank taking more from their paychecks
  • COLA necessary to cover basic needs of retirees
  • Rogers - Recommended COLA amount? Wouldn’t know cost but 13th check would help or percentage like what social security is doing 
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