State Employee Unions Look Askance at Texas Lege’s Pension Changes
Unions give a hard pass on cash balance plan proposed in Senate Bill 321
The 87th Texas Legislature's proposal to shore up the state's pension fund is getting a hard pass from the unions representing many state employees, who say a so-called cash balance plan is one step shy of tossing out pensions in favor of 401(k) plans.
The unions have long argued that the guarantee of a monthly pension upon retirement is one reason why so many people stick with low-paying state jobs. You're a prison guard who tops out at a salary of $44,000? You can always depend on solid health insurance and a decent state pension under the defined-benefit plans of the state's major retirement systems.
"Our state employees do care very much about the state and the citizens they serve. They do want to see the people of Texas taken care of," Tyler Sheldon of the Texas State Employees Union told the House Appropriations Committee last week as he opposed the bill. "Anything that we do here in the Legislature is something that could potentially impact that."
The latest data, however, shows that the state's modest pensions are not keeping employees in the trenches: Annual turnover in state jobs is north of 20%, and most of those who leave say they do so for better pay than they can hope to receive, at least anytime soon, from state employment.
Meanwhile, Texas' pension fund liabilities have become a money pit within the state budget. Last session, lawmakers dedicated hundreds of millions to shore up the finances of the Teacher Retirement System; this session, lawmakers have agreed to pony up $510 million a year to cover a $14.7 billion liability hole in the Employees Retirement System.
If Senate Bill 321 stopped there – with an annual cash contribution to keep ERS solvent – all employee groups would be happy. Sen. Joan Huffman, R-Southside Place, however, goes further. She creates a fourth cohort of state pension beneficiaries who could enter the system under a cash balance plan that guarantees a 4% annual rate of return. Any excess, up to 7%, would be split between the employees and the state.
All the plusses Huffman sees to a cash balance plan – the employee vests in five years, the benefit is portable and can be left until retirement, the employee's monthly contribution is decreased substantially – are seen as negatives by TSEU and other employee unions. (One group, the Texas Public Employees Association, supports the bill.) "So, you prefer to see people vest in 15 or 20 years?" House Appropriations Chair Greg Bonnen, R-Friendswood, asked Sheldon at last week's hearing.
"That is part of the defined benefit plan," Sheldon replied. "It is to encourage longer employment – at the same age – with the state."
During Senate floor debate on her bill, Huffman rejected the idea that the state's pensions have incentivized longevity in employment. The new cohort – Group 4 – would see far more benefits than predecessor Group 3, Huffman said. "Most Group 3 members have already left state employment. And that group was created in 2013. That highlights the fact that the Group 3 retirement package is not incentivizing employees to remain working for the state of Texas."
The vast majority of people who come to work for Texas leave with no retirement benefit at all, because it takes so long for employees to vest in the system, said Keith Brainard, vice chair of the Texas Pension Review Board. "They get their contributions that they kicked in, and then maybe 2% interest, and they go away," Brainard said. "These people are effectively subsidizing a small group of employees who stay long enough to get a pension."
To Brainard, who supports the cash balance proposal, it makes more sense that employees get the benefit of compounding interest for the years they worked for the state, even if it's only five years. Brainard also rejects the idea that the cash balance plan is no different from a 401(k) defined contribution plan, where returns aren't guaranteed. "There is a minimum accrual rate of 4% and a maximum of 7%," Brainard said. "So, we can do the math and have a pretty good idea of how much your retirement benefit is going to be. And once you retire, it's fixed, defined. So that's a pretty thin reed for them to hold on to."