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Texas pension plans told to evaluate DB, other plan types


AUSTIN, Texas—Teacher Retirement System of Texas and three other pension funds in the Lone Star State have been ordered by the state Legislature to conduct separate studies evaluating defined benefit, defined contribution and cash balance and other hybrid plans, among other issues related to the type of plan and plan design the state might offer.

The studies are an outgrowth of bills introduced but not passed in the session that ended in June, proposing to move to a defined contribution system because of concern about the defined benefit systems' possible “drain on the Texas economy and Texas state resources,” said Brian Guthrie, executive director of the $109.9 billion Texas Teacher fund, Austin.

“But there wasn't really any stomach for that (change) on the part of elected officials,” Mr. Guthrie said. “But they did think (moving to a defined contribution system) was a valid enough issue that we should study it further before we decide to make any significant changes to what we are currently doing.”

Besides the teacher system, the legislative provision involves the $21.5 billion Texas Employees' Retirement System, the $17.5 billion Texas Municipal Retirement System and the $16.6 billion Texas County and District Retirement System, all based in Austin.

“So all four of us have been charged to look at this issue,” Mr. Guthrie said.

Under the legislation enacted effective Sept. 1, the systems have to submit their separate studies by next Sept. 1 to Texas Gov. Rick Perry and the Legislative Budget Board, a joint committee of the Texas Legislature that develops budget and policy recommendations for legislative appropriations for all state agencies and provides fiscal analyses for proposed legislation.

The Legislature asks the systems in their studies to examine the “actuarial and fiscal impacts from potential changes to the state” plans, the provision states.

“We (the systems) are each doing our own (study),” Mr. Guthrie said. “But we had a discussion just a couple of weeks ago where we agreed to keep each other in the loop of what we are doing. We are trying not to throw each other under the bus.”

Mr. Guthrie said the teacher system hasn't decided if it will hire a consulting firm to assist with its study.

“That will be a decision we will discuss at length” at the teachers fund's Nov. 4 board meeting and trustees will make a final decision at the Dec. 8-9 meeting “about how we want to proceed,” Mr. Guthrie said. “We think we have some good staff resources internally to help with that, but also have our actuarial firm, Gabriel, Roeder, Smith (& Co.), who can help us with that. We need to assess whether we need some help beyond those two resources.

“I think that our system as it's currently constructed is sustainable as a defined benefit plan,” Mr. Guthrie said. “I think that on the flip side there are other DB systems around the country that are not sustainable. So that is a worthwhile discussion” whether to move to defined contribution or hybrid system.

“Your answer depends on what problem you are trying to solve. I think there are varying responses to that question, which need to be answered before you get into the DB vs. DC debate.”

Cost-wise, “even if we move to a DC plan, the (state) constitution still has the ceiling and floor for the state contribution rate,” Mr. Guthrie said. Under the constitution, the state cannot contribute less than 6% or more than 10% a year. “So you are contributing (at least) 6% either way” with either DB or DC, Mr. Guthrie said.

“So really. what are you achieving in terms of budget saving?” Mr. Guthrie asked, also questioning whether there are other goals—other than state budget spending—to consider in making such a move.

“I think those type of questions will come out in terms of the study we are doing,” Mr. Guthrie said. “I don't think it's a budget-saving question here as much as it is a fairness question. I think there is a lot of concern (by people) in the private sector who don't have these (DB) plans looking at the public sector and saying, ‘Why do government employees get this (DB plan) and we don't?'”

“I think there is also a generational issue,” Mr. Guthrie said, saying the people hired today (for the state workforce) don't have the same commitment as the older generation of employees to stay in a job for more than a few years, much less than 20 or 30 years.

“There is almost an expectation that they change jobs every couple of years,” Mr. Guthrie said. “And so to meet the needs of that kind of population, you need to have more of a portable plan. So that (issue) needs to enter into the (study) discussion as well, not so much (as to) whether these plans are sustainable but whether they are meeting the needs of the population they are intending to serve.”

The study will look at the range of types of DB, DC and hybrid plans, ”evaluate them and provide a range of options that the Legislature can consider,” Mr. Guthrie said. “We aren't gong to recommend one path or the other. We are just going to lay out the issues and give them the information they asked for so they can make some decision during the (legislative) session next time.”

Barry B. Burr is the editorial page editor for Pensions & Investments, a sister publication of Business Insurance.