Texas public pensions under scrutiny in spite of protections

State set up laws and rules to protect taxpayers and workers, but looming budget gap could force Legislature to revisit system.

AMERICAN-STATESMAN STAFF

Updated: 2:53 a.m. Sunday, Dec. 12, 2010

Published: 7:13 p.m. Saturday, Dec. 11, 2010

Taxpayers in some states are waking up to the scary reality that their elected officials in recent years wildly overpromised and underpaid for the retirement obligations made to teachers, police officers and other public employees.

Pennsylvanians will eventually have to swallow a 700 percent increase in their contribution rate to their teacher retirement fund. And every household in Illinois is on the hook for at least $42,000 in public pension liabilities, a situation that has the state teetering on financial collapse.

Public pension critics are seizing on the states' dire financial situation as evidence that it is time to rewrite the social contract between public employers and their workers. They say it is unsustainable and unfair to taxpayers, most of whom don't enjoy such a guaranteed benefit.

But in Texas, taxpayers have been protected by the shared obligation and sacrifice that was long ago etched into state law and the constitution, which kept the Lone Star State from making many of the same mistakes that are sinking the others.

• A 1975 amendment to the Texas Constitution required the state — and active members — to contribute at least 6 percent of the relevant payroll to each of the Employees Retirement System of Texas and the Teacher Retirement System of Texas.

"Without strong constitutional safeguards, state officials facing a budget gap as huge as that which Texas now confronts might well choose to balance the budget through the politically expedient path of undermining public retirement plans rather than making tough decisions on taxes and spending," said U.S. Rep. Lloyd Doggett , D-Austin, who wrote the amendment as a state senator.

• Under Texas law, retirees cannot get a benefit increase unless the pension funds have the assets necessary to cover their long-term obligations.

Much to the frustration of current retirees, the last time they got a bump in their monthly checks was 2001 , before two recessions in a decade took their toll on the funds' investment returns.

• Unlike many states, Texas has never enacted an automatic yearly cost-of-living increase. Several other states, such as Colorado and Minnesota, are embroiled in lawsuits filed by retirees after lawmakers tried to roll back those annual increases.

The checks on both the state and the members have helped keep Texas' two biggest pension funds from falling into a deep, seemingly insurmountable hole.

Each of them has about 83 cents for every dollar needed to cover long-term obligations. It is not enough to give additional benefits to retirees but is considered a good, stable figure among other public pensions.

"Texas is actually in very good shape, and we were really ahead of the curve to take these matters into hand and deal with them," said Andy Homer , government relations director for the Texas Public Employees Association.

Calls to undermine the benefit, Homer said, are nothing but "pension envy."

Even so, there will be a "lively discussion" when the Legislature convenes in January about the future of pensions for state workers and public school employees, said state Rep. Vicki Truitt , chairwoman of the committee that oversees the state's pension funds.

"If people look at the system we have, it is going to be difficult to find serious fault with it," said Truitt , R-Keller.

The Legislature owes it to taxpayers to examine whether the guarantee of a lifetime retirement check is still affordable, said Talmadge Heflin , director of the Center for Fiscal Policy at the Texas Public Policy Foundation, a think tank that pushes for limited government.

The alternative is to convert to something akin to a 401(k) for new workers, in which the individual receives a set employer contribution and then bears the risk and responsibility to have enough money to retire.

That idea was kicked around at the Texas Capitol two years ago but never gained any momentum, particularly as the financial markets collapsed and took the value of everyone's 401(k)s down with them.

There was no compelling evidence to support such a change, according to a 2008 report by the Senate State Affairs Committee.

And the outside actuary for Texas' teacher pension fund recently told the board that moving away from the current system would not help the state's bottom line anytime soon. That's because the state is legally obligated to provide the lifetime benefit to its retirees as well as current workers, all of whom have contributed toward that benefit throughout their time with the state.

The pension commitment to teachers is doubly complicated because most Texas school districts do not participate in Social Security. The state's contribution to the teachers' pension is about the same as what would be required under Social Security.

But the angst among taxpayers about long-term public obligations — along with some help from conservative policy groups such as the American Legislative Exchange Council — has given the idea new legs.

State workers already face a tough legislative session next year as lawmakers confront a projected shortfall of $24 billion in the 2012-13 budget.

Layoffs are likely. Workers who remain on the payroll will probably have to chip in more for health insurance for themselves and their families.

Keith Bender , an economics professor at the University of Wisconsin-Milwaukee, warned that public employers should be careful about cutting benefits too deeply because they are already banking on people who are willing to work for less pay in the name of public service.

"There are limits to that, how much you can push that side of the envelope," he said.

It will be the highly educated, most productive employees — those who have other options — who will take this opportunity to leave, he added.

The State of Texas already pays its employees, on average, 17 percent less than their comparable counterparts in the private sector, according to a national analysis done by Bender and a colleague. Across the country, the average public-private wage difference is 11 percent .

Benefits such as pensions and health care help make up some of that difference — though far from all — so it would work against the state to send the signal that those benefits are endangered, particularly in Texas, where there is such a large pay gap for state workers, Bender said.

Given that people now often live for decades after they stop working, there are some fundamental questions that need to be answered about providing retirement security for those who serve the public, said Bryan Sanchez , who is organizing a conference next month on Texas' public pensions for Texas Lyceum, a nonpartisan, nonprofit leadership group.

"Is it all on a private individual, or is there some shared responsibility? And where's the balance?" Sanchez asked.

kalexander@statesman.com; 445-3618