Texas state workers fear fallout from changing math on pensions

Jerry Wald retired early after 21 years of state service and left behind the stresses of his supervisor role at the Department of Aging and Disability Services. But a decade after he stopped punching the clock, the 67-year-old has a different sort of anxiety: watching the buying power of his monthly state pension check shrink.

“Every year I’m alive, I’m losing money,” said Wald, who lives in Houston.

Though health care, food and most everything else keeps getting more expensive, the monthly pension checks for thousands of retired state workers haven’t increased since 2001. An amalgam of factors, including chronic legislative underfunding that’s only recently been addressed, has kept the Employees Retirement System of Texas from adjusting its payments for the rising cost of living.

And now a looming vote by the retirement system’s board of trustees has retirees even more worried. On Wednesday, the board will consider lowering its earnings assumption for the $26 billion trust fund and changing its predicted rate of return from 8 percent per year to as little as 7 or 7.25 percent, based upon the recommendations of a financial firm hired to perform a broader study of the system.

The move may sound innocuous, but it could have major implications for the state budget and the retirement system’s beneficiaries.

Labor advocates fear the Legislature would respond to the change by shifting more financial burden onto the system’s beneficiaries, either by forcing current employees to chip in more for their future pensions, cutting benefits or closing off the fund to future retirees.

Lowering the expected rate of return wouldn’t affect how much money flows into the retirement system, but it would dramatically alter its long-term balance sheet. Under current assumptions, the fund is projected to grow large enough to cover its liabilities within 35 years. Under a 7 or 7.25 percent expected rate of return, the fund would never be expected to grow large enough to provide full benefits to retirees into the future.

“We’re very, very concerned about it,” said Seth Hutchinson, vice president of the Texas State Employees Union. “The Legislature in recent years has made a lot of progress in investing money to shore up the pension fund, and state employees have done the same. Lowering the assumed rate of return will just undo that progress and just move the goalposts further back for state retirees.”

The Employees Retirement System handles benefits for about 240,000 active and retired state employees, elected officials, law enforcement and prison officers and judges. On average, the system’s beneficiaries receive $1,600 per month — which now buys what less than $1,200 would have in 2001, a 25 percent drop in purchasing power.

Doug Danzeiser, who directs an office at the Texas Department of Insurance and is one of three appointed trustees of the retirement system’s six-member board, said he has received hundreds of emails from retirees concerned about the upcoming vote.

“It’s a difficult situation,” said Danzeiser, who added that he trusts the analysis of the board’s hired experts.

A host of other states already have lowered their predicted rates of return for state pension funds, a change some financial analysts say is needed, largely because low interest rates have limited earnings for the type of low-risk investments that pension funds generally favor.

“The days of very high returns with an acceptable level of risk are just behind us,” said Tom Aaron, a vice president and senior analyst at Moody’s Investors Service.

Reducing the rate to 7 percent would give Texas a more conservative expectation than most state pension funds, but the move would be in line with states that have most recently switched. California, which runs some of the nation’s largest public pension funds, recently voted to lower the expected return rates of its employee and teacher retirement funds from 7.5 percent to 7 percent.

If Texas were to follow suit, Moody’s might view it as a positive for the state’s credit ratings, Aaron said.

“What it ends up doing is typically forcing the governments to pay more into the fund and sooner – and fit that into their ongoing operations,” he said. “And it also allows the fund to take on less investment risks.”

Proponents of the change point to the fact that over the past 20 years, annual returns for the trust fund have hovered at 6.9 percent, and the 25-year return rate is 7.4 percent.

Seeking to protect the status quo, labor advocates point to the retirement fund’s healthier 8.3 percent annual returns over the previous 30 years.

“I definitely think [returns] should be looked at in the long term — that’s what we’re all about,” said Janice Zitelman, a retired social worker who served as an elected retirement system trustee from 1989 to 2001. “I think they can wait to lower it.”

Folks on both sides of the debate agree a lower rate would eventually prompt action from the Legislature, either by putting more cash into the fund or asking beneficiaries to make a fresh round of sacrifices.

Texas law says state pension funds can’t adjust for cost of living unless the funds are actuarially sound — that is, they have enough money available to cover all liabilities even after increasing retiree payments. As it stands, the Employee Retirement System is expected to reach that threshold in 35 years, which is actually an improvement compared the past two decades.

Texas tended to fully fund the Employees Retirement System throughout the 1990s. But a turn-of-the-century recession triggered a long streak of chronic legislative underfunding that strained the system. In 2015, lawmakers sought to shore up the retirement system by increasing state and employee contributions by roughly 2 percent each.

State Rep. Dan Flynn, R-Canton, who chairs the House Pensions Committee, said he preferred the conservative 7 percent figure, but “I’m comfortable going with whatever [trustees] think is best.”

Not every lawmaker is completely comfortable with the proposed move.

Sen. Kirk Watson, D-Austin and a member of the Senate’s powerful budget-writing committee, said he worries a vote to lower earnings projections — merited or not — would prompt lawmakers to reach for simplistic fixes that could harm retirees.

“I’m not yet convinced that everyone fully understands that those are the repercussions of this,” Watson said. “This is an issue that the Legislature has created, and we need the Legislature to live up to its own constitutional responsibility to state employees.”