Pension Reform Planned for Texas Retirement System

The Texas Governor recently signed into law a pension reform bill designed to improve the financial integrity of the Employees Retirement System of Texas (ERS), which manages benefits for employees and retirees of State of Texas agencies and some higher education institutions. There are three component funds through which benefits are accrued and paid. All three plans are single employer-defined benefit pension plans.

The Employees Retirement Fund (ERS) is the largest fund with 142,062 active members and 276,971 total retirement accounts. It has a 66.0% funded ratio as of August 31, 2020, according to state actuarial reports.

The Law Enforcement and Custodial Officer Supplemental Retirement Fund (LECOS) has 35,230 active members and 60,741 total retirement accounts. It has a 60.1% funded ratio.

The Judicial Retirement System Plan Two is the smallest fund with 570 active members and 757 total retirements accounts. JRS II is the best-funded of the three, with an 82.3% funded ratio.

The pension reform bill, Senate Bill 321, was signed by the Texas Governor on June 18, 2021, and takes effect on September 1, 2021. There are three key aspects to the reform package:

1. New employees hired after September 1, 2022, will be enrolled in a cash balance plan. A cash balance plan has many attributes and features of a 401(k), in that it is funded by employee contributions with some level of an employer match. But it is a defined benefit plan. The retirement benefits participants receive will be based on their contribution, rather than a specific promised amount. Every new state worker will be required to contribute 6 percent of their pay to the retirement account, which reflects a reduction from the current 9.5 percent deduction.

2. The state will make an annual payment of $510 million to the Employees Retirement System to improve the funded ratio and the state’s ability to meet future benefit obligations.

3. Financial management of the ERS will transition to an actuarial funding plan with a fixed payoff schedule.

Pension reform was needed in Texas due to the declining nature of the retirement system’s financial health, as reported in the 2020 Comprehensive Annual Financial Report for the fiscal year ended August 31, 2020. Unfunded liabilities now stand at $14.72 billion and up to this point were growing annually. All three plans were on a path to “total fund depletion” unless action was taken, with insufficient assets to meet the state’s future benefits obligations according to pension actuaries.

Despite the funding challenges with the ERS retirement funds, the ERS health plans are in a much better financial condition.

State Pension Funding Gaps Remain High Nationwide

The Pew Center for Public Sector Retirement Plans reported in June 2021 that the 50-state pension funding gap remains high at $1.24 trillion. Pension funding pressures will persist as states deal with the aftermath of the COVID pandemic.

Arizona is one of many states that are pursuing greater stability in pension funding. The 2021-2022 Arizona budget proposes a one-time appropriation of $300 million to strengthen the financial condition of the pension plan for state law enforcement officers within the Public Safety Personnel Retirement System (PSPRS). The goal of the payment is to reduce interest costs on pension debt over the long term, thereby saving Arizona taxpayers money.

We will continue to address this important topic of state pension reform in future articles.

About Pension and ERISA Expert Mark Johnson

Mark Johnson, Ph.D., J.D., is an experienced pension and ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP, and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long-term disability benefits; and cash conversion balances.

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