LEGISLATURE FULLY FUNDS ERS PENSION PLAN!
In a surprise end to the 2021 legislative session, a bill to fully fund the ERS pension plan made it to the governor’s desk, which he signed on June 18, 2021.
Senate Bill 321, introduced by Senator Huffman, has two major parts. Part one obligates the state to pay down the pension plan’s $15 billion debt over 30 years by contributing an additional $510 million a year to the fund, while part two creates yet another Group of state employee category in the pension plan.
The legislature’s increase in funding of the ERS plan is a long-awaited shift from the chronic underfunding of the past 20 years that has led to our plan being now only 65% funded. By Texas law, the legislature is unable to give a COLA to retirees when the plan is underfunded.
Now, that we have gotten this far, we will need to follow up with ensuring the state continues to budget the payments in future years and working for a COLA. We know this is especially important to our members who have lost a third of the value of their monthly check over the past 20 years due to inflation.
Almost all current retirees belong to Group 1 of the ERS plan. But during the past 20 years, the legislature created Groups 2 and 3, resulting in reduced benefits for employees in those Groups, by requiring them to work until age 65 for a full benefit regardless of whether they had already reached the rule of 80, and increasing their contributions to 9.5% of their pay.
SB 321 creates a Group 4 for employees who start after August 2022 and reduces the vesting period from ten to five years. Currently, ERS members in Groups 1 – 3 enjoy the benefits of a classic defined benefit plan which calculates the retirement annuity based on average salary, years of service and a multiplier. However, Group 4 employees’ retirement annuity will be based on their final account balance.
Under SB 321, the rule of 80 is reinstated for full pension benefits. In addition, employees will contribute only 6% of their pay to the plan, instead of the current 9.5%. They are guaranteed a minimum of 4% earnings on their contributions, up to a maximum of 7%, depending on how well ERS’s investments perform. (When they retire, they will continue to participate in sharing on investment returns over 4%. The expectation is that this mechanism will increase their monthly annuity check without having to go to the legislature for a COLA). At the time of retirement, the state will match the accumulated cash balance in the employee’s account by 150%. From that amount, a guaranteed lifetime annuity will be calculated.*
Many factors came into your board’s decision to support this bill. Before, it appeared that the legislature was prepared to abandon the plan by allowing the debt to continue to increase by $1.5 billion a biennium. But now, the debt will begin to reverse course, eventually creating a stable fund for current and future retirees. Another factor in its favor is that a COLA now becomes a possibility as soon as the next legislative session.
A more difficult issue to evaluate was the impact on future employees of the creation of a Group 4 class. An ERS study shows that, in general, a current long-term Group 3 employee will have a higher monthly annuity than a long-term Group 4 employee. Group 4, when compared to Group 3, has advantages and disadvantages, but it nevertheless remains a defined benefit plan providing a lifetime annuity in retirement.
Finally, the board was required to make a political assessment about this bill. The board came to understand that our state’s leadership was offering a proposal with two inseparable parts: 1)money, and 2) a transfer of some risk on investment returns to Group 4 employees. While some state employees and retirees worked to defeat this bill because of opposition to Group 4, there was no alternative under consideration that would fund the plan. The board concluded that on balance, the primary goal of funding the plan would be achieved by this legislation, and it would be a disservice to our members had we not fully supported it.
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* This method is not new to Texas public retirement systems. The Texas District and County Retirement System has relied on it since 1967.
By Maura Powers, V-P
June 29, 2021