Texas Pension Reform Results in Higher Credit Rating
The State of Texas tackled pension plan reform for many of the Lone Star state’s first responders and municipal workers when Governor Greg Abbott signed H.B. 3158 into law on May 31, 2017. The recently passed legislation provides long-term funding relief for separate municipal pension plans sponsored by both the cities of Dallas and Houston.
Citing the pension initiatives, Fitch Ratings upgraded its outlook for Dallas general obligation bonds from “negative” to “stable” in early September.
The Dallas Employee Retirement Fund (ERF), which covers non-uniformed employees, adopted several cost-saving measures for employees hired on or after January 1, 2017. The changes, which were approved by both the Dallas City Council and a majority of voters, include the following:
• An increase in the retirement age from 60 to 65
• A 33 percent increase in the number of years served, from 30 to 40
• Removal of a health benefit supplement
• A decrease in the “benefit multiplier” from 2.75% to 2.5% of salary for all future service
Dallas projects a 36% reduction in ERF costs as a result of the pension plan adjustments.
Separate pension reforms for the Dallas Police and Fire Pension System included:
• An increase in the full retirement age to 58 (from 50 or 55, depending on hire date)
• Future cost-of-living adjustments (COLAs) tied to the achievement of funding goals
• Higher pension contributions by employees
• Increased employer contributions by the city (from 27.5% to 34.5% of payroll)
• Imposition of an annual $13 million contribution by the city until 2024
• Limits and reductions in the deferred retirement options (DROP)
The Dallas Police and Fire Pension System is now expected to be fully funded by 2056, or 39 years from now.
Houston, which is grappling with a $8.1 billion pension debt, is implementing similar benefit reductions in its three separate pension plans for municipal employees, police, and firefighters. Additionally, the Houston plan is decreasing its assumed rate of investment return from 8.5% to 7.25%.
The rate of return assumed in calculating future pension obligations plays a critical role in determining current taxpayer liabilities, even though the longer-term commitments remain fixed. As the assumed rate of return increases, current funding requirements decrease. Conversely, a lower assumed rate of return requires a higher current funding level in order to meet future obligations. By one industry estimate, each one-point reduction in the assumption rate means 10 percent more in current contributions.
A spate of police retirements in both Dallas and Houston is one outcome of Texas pension reforms. More than 350 officers eligible for retirement from the Houston Police Department chose to leave during the last fiscal year due to pension reductions, while more than Dallas 70 officers retired.
Overall, the Texas pension reform bill signed earlier this year followed a lengthy path with hard fought battles by all parties. Similar efforts are being pursued by many states across the country. The Pew Charitable Trust reports that state-level retirement plans are grappling with a $934 billion funding gap, as of fiscal year 2014, between actual pension funding levels and the promises made to municipal employees for future benefits.
ABOUT THE AUTHOR: Mark Johnson, Ph.D., J.D.
ERISA expert Mark Johnson, Ph.D., J.D., is a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 firm, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert 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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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.