87th LegislatureTaxes & SpendingState Employee Pension System Restructured by Legislature, Allows Longtime Members to Double Dip

The retirement system for state employees was restructured by the legislature to place it on steadier fiscal footing down the road.
June 18, 2021
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The state’s second-largest pension system — the Employee Retirement System (ERS) — has amassed $14.7 billion in unfunded liabilities, money promised but not financially accounted for. 

During the 2021 regular session, lawmakers took steps to place it on a more fiscally stable path, but also established a new potential route for abuse.

With just under 395,000 members, the ERS supplies state employees with a generous retirement plan. Public pension systems across the nation are struggling to stay afloat because, in short, they’ve promised more than they can provide.

On average, government jobs do not pay as well compared with their private counterparts. In order to attract employees, many entities have consistently offered generous retirement packages.

The employees agree to set aside near-term gains in potential lost earnings for a promise of long-term financial security — except the managers of those pension accounts have squandered the back-end promise.

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Most egregious is the State of Illinois’ pension systems that have collectively amassed $317 billion in unfunded liabilities through the end of 2020. Compare that to Texas’ $73 billion unfunded liability total across its state systems and therein lies a crystal ball forecast of financial turmoil to come.

Senate Bill (SB) 321 which passed this session is an attempt to avoid just that — restructuring the ERS, along with the smaller Law Enforcement & Custodial Officer Supplemental (LECOS) Retirement Fund, to place both on firmer long-term footing. Current ERS members, whether elected officials or staff with any state agency, will not see changes made to their plans.

LECOS has over 75,000 members with $641.5 million in unfunded liabilities.

The current pension structure offers “defined benefit” plans which sets a specific monthly allotment the beneficiary receives upon retirement. But SB 321 changes the default to a “cash balance” benefit plan which caps the total allowance that can be doled out. Upon retirement, beneficiaries can either opt for the lump sum or a monthly percentage of the total each month.

Average lifespans are lengthening well beyond original projections which means the grantor is now on the hook for larger sums of money than planned. This is the chief reason Social Security is facing insolvency in the not-so-distant future.

When an entity faces unfunded liabilities, it has two options: inject more cash to cover the discrepancy or restructure to try and regain ground over time.

Texas chose the first option in 2019 by increasing its and beneficiaries’ contributions to the Teacher Retirement System — the largest state retirement system in Texas which is currently awash in $50.6 billion in unfunded liabilities. The state took $6.5 billion from its “rainy day fund” to give teachers pay raises and buttress the pension system.

But that action cannot solve the underlying cause because over an indeterminate stretch of time, the pot of money promised will continue to grow under defined benefit plans. Additional tax dollars will continue to be necessary as band-aids as that grows. 

Meanwhile, the structural reform applied to ERS and LECOS this session caps the amount each beneficiary can receive — and the only way the pot of promised money can increase is if more beneficiaries are added. Financially, it’s much easier to plan for determinable sums of liabilities than sums that are entirely up in the air.

It will cost, however, a sizable sum in the short term to finance the transition. A $1 billion rider was placed in the state budget contingent upon the passage of SB 321, but lawmakers are banking on that being a drop in the bucket compared to the long-term solvency they hope to attain.

The default pension shift only applies to those who join the pool on or after September 1, 2022 and contains a $678 million cost through the 2022-2023 biennium, according to the bill’s fiscal analysis.

Also contained within the bill is a double-dipping opportunity that wasn’t in place before. Being a pension plan, ERS benefits are meant for when a beneficiary retires. But a section within the final version allows legislative representatives who meet certain qualifications to receive the pension benefits. Those are such that the given member is at least 60 years old and reached the maximum annuity amount available from the plan.

“Double-dipping” entails a pensioner nominally retiring, and receiving their respective pension, but continuing to serve in their position while still pulling in income.

Members of the legislature are not paid handsomely like other officials are — receiving $7,200 per year plus a $221 per diem for every day the legislature is in session. But taking advantage of this carve out would constitute double-dipping.

Most members will not be able to take advantage of this loophole, as they have neither reached the age limit nor accrued enough service time. But going forward, members that meet those stipulations could take advantage of the new law.

The language was tacked on to SB 321 as an amendment by Rep. Greg Bonnen (R-Friendswood) and it specifically precludes members from gaining additional retirement benefits.

Public pension systems across Texas and the nation are in precarious positions, but it didn’t develop out of nowhere. Elected officials made conscious decisions to create the systems now awash with unaccounted for debt and they have constantly kicked the can down the road despite bright neon warning signs.

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Brad Johnson

Brad Johnson is an Ohio native who graduated from the University of Cincinnati in 2017. He is an avid sports fan who most enjoys watching his favorite teams continue their title drought throughout his cognizant lifetime. In his free time, you may find Brad quoting Monty Python productions and trying to calculate the airspeed velocity of an unladen swallow.