Addressing the Next Major Pension Crisis: ERS and Related Pension Funds

January 22, 2021

Legislative News

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The Employees Retirement System Pension Trust Fund (ERS) provides retirement benefits for state employees and their beneficiaries. Employees of all State of Texas agencies, elected state officials and district attorneys are automatically enrolled in the ERS retirement program. Certified peace officers are also automatically enrolled in a supplemental fund known as the Law Enforcement & Custodial Officers Supplemental Retirement Fund (LECOSRF), which provides an additional benefit at an additional cost. Judges, meanwhile, are automatically enrolled in a system under the administrative control of ERS known as the Judicial Retirement System (JRS). Depending on the date a judge took office, they are enrolled in either JRS 1 or JRS 2. As of December 2020, ERS is only 66% funded, according to actuarial valuations found here. Currently, ERS, LECOSRF and JRS 2 are all projected to run out of money within 40 years. All three plans have an infinite amortization period and a projected depletion date: 2061 for ERS, 2041 for LECOSRF and 2059 for JRS 2.

ERS represents a shared responsibility model of retirement, meaning employees and the state contribute equal percentages to the ERS trust fund. The state retirement plan under ERS is a defined benefit (DB) plan, meaning that when an employee chooses to retire after reaching eligibility, the employee will get a monthly annuity from the fund for the rest of his or her life – regardless of how long that may be. A DB type of plan exists in contrast to a defined contribution (DC) retirement plan and DB plans generally provide the same or better benefits than 401(k)-type DC plans, at about half the cost. Under a DC plan, employees contribute a fixed amount or a percentage of their paychecks to an account. At times, the employer will match a portion of employee contributions as an added benefit. With a DC plan, much of the investment responsibility, and risk, rests with individual employees, who must select how to invest the funds from among plan options. A third type of retirement plan, known as a “hybrid” plan, typically involves mandatory contributions to both a DB and a DC plan, distributing the risk between employee and employer. The Texas County & District Retirement System (TCDRS) is an example of a hybrid retirement plan. TCDRS, while not funded at 100%, is one of the five statewide retirement systems that is funded at 80% or better.

The House Committee on Pensions, Investments & Financial Services and the House Committee on Appropriations were jointly tasked with reviewing and evaluating the actuarial soundness of ERS during the interim. The committees examined the cost of, and potential strategies for, achieving and maintaining the actuarial soundness of the funds. They also examined the effect unfunded liabilities could have on the state’s credit rating. The committees pointed out that a promise was made by the 86th Legislature: The Teacher Retirement System (TRS) was in the direst shape at the time and would be dealt with first and then, in the 87th session, the Legislature would tend to ERS (see the House Interim Report here). The Senate Finance Committee also studied the issue and recommended in its Interim Report that the Legislature should “[d]evelop a plan to improve the financial forecast of the ERS Pension Trust Fund to ensure benefits for members and preserve the state’s high credit rating.”

The 86th Legislature passed Senate Bill 12 by Sen. Joan Huffman (R-Houston), which increased contributions to TRS by the state, active employees and employers in order to return the plan to actuarial soundness. With TRS now shored up, ERS is now in need of a solution. The House committees studying the issue urged that “[a]ddressing the ERS issues is of paramount importance in the immediate future.” ERS contribution levels are set in state law, meaning adjustments happen in fits and starts. However, if contributions do not increase, benefits must decrease. It is a simple “money in, money out” equation. According to ERS actuarial reports, “doing nothing is no longer an option.” For ERS, LECOSRF and JRS 2, current contribution levels are not sufficient to sustain the system.

At this early point of the legislative session, it is unclear what path the Legislature will take to resolve ERS’s solvency issues; however, several bills have been filed already on the topic. The current state contribution rate for ERS is 9.5%, but in Section 815.403(a) of the Government Code, the statute still states that it is 7.4%. SB 321 by Sen. Huffman would codify the correct current contribution rate. House Bill 1028 by Rep. Gary Gates (R-Richmond) would require ERS to establish a DB retirement plan for certain employees, and Gates’s House Joint Resolution 56 would amend the Texas Constitution to provide for periodic transfers of money from the Economic Stabilization Fund to fully fund ERS. As we progress through this session, TAC will continue to monitor proposed solutions to ERS’s current state.

For additional information on this article, please contact Amy Befeld.