Texas Pensions Pan Steps on Funding Gaps Taken by Others

(Corrects number of union members in final paragraph.)

Texas public pensions said moving away from traditional defined-benefit plans wouldn’t shrink their unfunded liabilities, in contrast to money-saving steps to end lifetime guarantees by states from Rhode Island to Kansas.

The state’s $110.3 billion Teacher Retirement System released a study saying that switching to a 401(k)-style defined-savings plan may cut payments to retirees. The fifth- largest U.S. public pension by assets said Aug. 31 that the change also would widen a $24 billion gap between promised benefits and projected assets to $36 billion.

The teacher plan’s report and a second study issued yesterday by the $22.1 billion Employee Retirement System of Texas contrast with projected savings and unfunded liability cuts for pensions in Rhode Island, Kansas and Louisiana, which made such changes. All three place in the top 10 among states with the highest gaps between assets and future obligations, according to a Bloomberg Rankings study of 2010 data.

“There’s a lot of visibility on this issue nationally, and there’s a push for change in Texas,” said state Representative Vicki Truitt, a Southlake Republican who leads the House Pensions and Investments Committee. The reports set the stage for a debate by Lone Star State legislators next year.

“This is going to be a hot issue” when lawmakers convene in January, Truitt said. Her panel will take up the reports Sept. 12.

Studies Ordered

The Legislature in the second-biggest U.S. state by population ordered the pensions to study alternative ways to meet their obligations. Moving away from the current system, which guarantees retirees set monthly payments for life, would be the biggest change in the two plans, which cover 1.5 million beneficiaries combined.

Rhode Island, seen as one model for taking steps to lower costs, last year mandated a 401(k)-style plan for newly hired workers and suspended cost-of-living increases for current retirees, moves projected to help save about $3 billion a year. Kansas adopted a similar approach, mandating cash-balance plans for workers hired after December 2014, according to the National Conference of State Legislatures.

Louisiana will switch all employees to defined-savings plans, the group said. New York will offer a defined-savings program to nonunion workers who earn at least $75,000.

Retiree benefits “are really a form of deferred compensation that shift the risk from workers to the taxpayers, and as we’ve seen with pension systems across the country, sometimes taxpayers end up with a pretty steep bill,” said Chuck DeVore, a spokesman for the Texas Public Policy Foundation, a research and lobbying group in Austin.

Changes Sought

Defined-savings plans such as 401(k) programs are among changes in public pensions advocated by DeVore’s group. It has suggested the switch for new employees and those not yet vested for retirement benefits.

The report from the teacher fund said such a change would cut payments to retirees while widening its unfunded liabilities. Closing the defined-benefit plan to recently hired workers would reduce contributions, curbing the growth in assets that generate investment returns to help cover commitments, the report said.

The Employee Retirement System’s study said its $5 billion unfunded obligation would climb to $12.8 billion within 10 years if no changes are made. It has 83 percent of the assets needed to cover future benefits, as does the teacher plan. Actuaries generally consider 80 percent funding levels to be healthy, the Pew Center on the States said in a June report.

Unfunded Liabilities

States face a $1.4 trillion gap between promised pension and retiree health-care benefits and projected assets, Pew said. Studies using different methods and assumptions for investment returns have projected gaps of more than twice that amount.

The retiree health-care fund faces a $1.2 billion shortfall within five years unless contributions increase or steps are taken to reduce the gap, according to the teacher system report.

At least 44 states, including Texas, have adopted pension changes since the beginning of 2009 to lower unfunded liabilities, according to the Legislatures group in Denver. Texas placed 36th among states with unfunded liabilities in the Bloomberg Rankings report, while New York was the only one with no gap between assets and future obligations.

California Caps

California lawmakers passed measures last week to cap pension payments and to require new workers to pay half the cost of their benefits and to work longer before retiring. The changes omitted defined-savings plans sought by Governor Jerry Brown, a Democrat, and opposed by union leaders.

In Texas, there’s no cause to tamper with public pensions, although a fight can be expected when lawmakers take up the issue, according to Ted Melina Rabb, a senior legislative agent for the state’s American Federation of Teachers affiliate.

“The pension side is not in a crisis in Texas, and given the structure of our system and the very modest benefits, the constitutional protections, it’s just unreasonable to project that we are going to be in a difficult situation at all compared to other states,” Rabb said from Austin. The union says on its website that it represents more than 65,000 members statewide.

To contact the reporter on this story: Kathy Warbelow in Austin at kwarbelow@bloomberg.net.

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net.

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Texas Pensions Pan Steps Taken by Other States to Close Deficits

Marsha Miller/AP Photo

More than 19,000 Texas students, from kindergarten through high school, and their teachers participate in The University of Texas at Austin's annual open house.

More than 19,000 Texas students, from kindergarten through high school, and their teachers participate in The University of Texas at Austin's annual open house. Photographer: Marsha Miller/AP Photo

Attachment: Ranking of Pension Funds by State