Many of you may have heard that I and some other concerned Texans formed an organization seeking to reform Texas public pensions. This effort has been characterized by some as a Wisconsin-style, union-bashing, anti-public worker initiative. Nothing could be farther from the truth.
An Open Letter to Texas Public Empoyees & Retirees
by Bill King
Tuesday, February 07, 2012
The truth is that we have significant problems and a looming crisis with most of Texas' public pension plans. Each pension plan is unique. The benefits paid by each plan and their funding status vary widely, so it is dangerous to generalize. However, a large majority of public pension plans in Texas are significantly underfunded at this time.
The Texas Public Pension Review Board has estimated that Texas' pensions, based on the fair market value of their assets, are underfunded by approximately $68 billion. This is a bad deal for future generations of both Texas taxpayers and public employees.
But it is also a bad deal for current retirees. For example, the Texas Teacher Retirement System is now $32 billion underfunded based on the fair market value of the assets. As a result, retirees have received no cost of living adjustments for over a decade.
Some of the plans are also becoming an intolerable burden on local governments. In Houston, the contributions required to fund its three pensions plans grew from $100 million in 2000 to $220 million in 2010. The actuary reports on Houston's plans project that the contribution will need to be $500 million in 2020. At that time, that will represent about half of the City's property tax collections.
There are many ways to address this problem. Private industry did so 20-30 years ago mostly by freezing their existing defined-benefit plans and converting future pension benefits to defined-contribution plans. There are other ways to address the problem but continuing on the current path is not an option. It will result in a financial disaster for everyone.
That does not mean that we should do away with pension plans all together. You may have seen an article that appeared in the Austin American Statesman where I was quoted and seemed to take that position. The Statesman quoted me as saying "Texas needs to get the hell out of this (pension) business completely." However, the quote was taken out of context. At the time the reporter and I were talking about the state laws that mandate pension plans for many cities in Texas. I was making the point that I thought the state should stop dictating pension plans for local governments.
It is, however, my opinion that government at all levels should begin to transition out of defined-benefit plans to defined-contribution plans. This is because defined-benefit plans allow politicians to promise public employees a retirement benefit without going through the painful process of asking taxpayers to pay for those benefits. Instead, the liability for the promised benefits is kicked down the road to our children and our grandchildren. In defined-contribution plans the full contribution must be funded each year.
However, a transition to full blown defined-contribution plans is not the only solution to this problem. There are hybrid plans that can be used accomplish most of what needs to be done.
There is one point, however, on which I have been adamant. I do not support changing any benefits that any public employee has already earned. In Texas, a deal is a deal and we must live up to promises we have made.
But if we do nothing we are setting up a financial crisis at some point that will pit future generations of taxpayers and public employees against each other as the bills come due for the promised benefits and there is no money to pay them. A number of other states are going through this painful process now. In California, the state's liability for underfunded pensions has been estimated at $700 billion.
Fortunately, the situation in Texas is not that dire, yet. But if we continue to ignore this problem it will only get worse. In some cases, like the City of Houston, the crisis will come sooner than many think.
If you are a public employee or a retired public employee, I would encourage you to get a copy of the latest actuarial report for your pension plan and learn about the funding status of your plan. Many are now available on-line. These are extremely complicated to read, especially for those who do not have a financial background. However, the most important number is the Unfunded Accrued Actuarial Liability (UAAL). This is an estimate by the actuaries of the amount that your employer would have to put into the plan to pay for the benefits that have been earned so far.
However, there is one quirk in that calculation. It does not use the actual market value of the assets in your plan. Instead, profits and losses on the investments in our plans are "spread" over five years. As a result, almost every plan has investment losses that have been deferred. Somewhere in the actuarial report the unfunded liability based on the actual value of the assets will be noted. This is the real number.
Another thing you want to look at is the funding history. Most of the reports have a schedule that show how well funded the plan was in past years. What you will find in most plans is that they were fully funded only a decade or so ago. There is a common misconception that these plans are underfunded now because the employers have not put in enough money to fund them over many years. Actually this problem has largely been created in the last ten years.
There are very powerful interests that do not want you know how serious this situation is. There are hosts of pension bureaucrats, fund managers, lawyers and accountants who make a very good living off of your defined benefits plans. For example, TRS's administrative and investment expenses in 2011 were $275 million. That is up from only $55 million in 2008. These interests have a very strong incentive to make you believe that there is no problem with our current pension systems.
As a result, these interests attempt to discredit anyone who warns about the problem. Personally, I have certainly found that to be the case, as various pension-related bureaucrats have accused me of raising this issue and participating in the formation of Texans for Public Pension Reform for political purposes. If anyone can tell me how telling people the bad news about our pension system is politically beneficial, I really wish they would share it with me.
I have an aunt, mother-in-law and former wife, who are all currently receiving benefits from TRS. The last thing in the world I want to do is jeopardize their benefits. So those who are getting fat off your pension plan can cast all the aspersions they want that this is some effort to beat up on public employees, but it does not square with the facts and the numbers do not lie.
To underscore that I am motivated to solve this problem and not to leverage it for some political advantage, I have decided to resign from the board of Texans for Public Pension Reform. However, I intend to continue to raise this issue with taxpayers and public employees. I will be writing periodically on this subject and I am prepared to meet, speak with or debate anyone, anytime, in any forum on the seriousness of the issue.
It would be profoundly irresponsible for our generation to leave this problem for our children and grandchildren. But facing up to and dealing with it, honestly and fairly, would be a great legacy to leave them, whether they will be future public employees or future taxpayers.
If you have any questions or need any help trying to analyze the financial condition of your pension plan, please do not hesitate to contact me at firstname.lastname@example.org.
You can also follow what I will have to say on this issue on Twitter @weking, on my blog (www.BillKingBlog.com) or on Facebook at http://www.facebook.com/home.php#!/pages/Bill-King/315939961750357.
February 5, 2012