Pension Funds Are Not in Crisis

QR Interview with Pensions Chairman Bill Callegari

TRTA Members,

Below is a story that appeared on the Quorum Report web site. The Quorum Report is an online political column and is operated by Harvey Kronberg. Their web site is http://www.quorumreport.com/.

This particular story is a Q&A session with new House Pensions Committee Chairman Bill Callegari. The story is written by reporter John Reynolds and originally appeared on the Quorum Report web site on March 1, 2013.
TRTA has met with Chairman Callegari and we know that he is taking a good look at the state pension plans. In particular, we know he is very aware of the funding challenges that TRS has struggled with. TRTA knows that 15 out of the last 18 years, the Texas Legislature chose to underfund the TRS pension fund. If the state would have maintained its 7.31 percent contribution that it reduced to 6 percent in 1995, TRS would have approximately $7 billion more in pension trust fund. It would also be actuarially sound.
Now, TRTA continues to fight against the idea that there is a pensions crisis in Texas. We are also working to improve the actuarial soundness of our pension fund, get retirees an increase, and protect our health care.
It is clear from this interview with Pensions Chairman Bill Callegari that this is a person who respects facts over rhetoric. Thank you Chairman Callegari for your service in the Texas Legislature.

 

 

March 1, 2013      3:44 PM

 

A QR Q&A WITH HOUSE PENSIONS CHAIRMAN BILL CALLEGARI

 

The newly installed chairman tasked with one of the House’s more important legislative portfolios shares his thoughts on whether the state’s public pension systems are in crisis. Spoiler alert… he doesn’t think so.
House Pensions Chairman Bill Callegari (R-Katy) sat down this week with QR to talk about his steep learning curve as the new guy holding the gavel in one of the chamber’s most important standing committees.
In our talk, he said, for the most part, public pensions are in good shape and he discounts talk that they are in the type of crisis that has led towns in other states like California to declare bankruptcy.
The systems “I’ve seen thus far are in reasonably good shape,” Callegari said in our interview. “There’s some in not so good shape. None of them I would consider in crisis at this point. But my drive is going to be to try to get them to the point where they’re unquestionably not in crisis.”

And he pretty convincingly put the kibosh on speculation that lawmakers might look at moving the state’s employee and teacher retirement systems away from their current defined benefit plans this session.
We reprint below the entirety of our Q&A with Callegari:
Q: When Pensions was set up this session, there was a lot of reorganization because you split Pensions basically into two. And, of course, you’re new to Pensions. If you could just tell me a little about the learning curve from your perspective?

A: Well, it’s been very interesting because, you know, I didn’t know a whole lot about Pensions except kind of a nominal knowledge that most people have and having dealt with it to a small extent in my business in past years. I had a general feel for what it’s all about but a lot of the details about pensions, particularly state pensions, I just didn’t know. So it’s been a real steep learning curve. It’s been good on the other hand because it makes you dig into things … when you realize you don’t know anything, you dig a little deeper than you would otherwise. And I think it’s been very helpful. I find the same thing with the rest of the committee. The entire committee is new to Pensions and I think they’ve all tried to dig in and learn some things they didn’t have before and I think having a new group of people involved … anytime you look at anything with fresh eyes you see things that people before didn’t see or overlooked because they heard it so many times. So I think from that standpoint, it was probably … more positive than I would have thought if I had been asked before I was appointed.

Q: We’ve seen one of you bills now already in committee, HB 13, which you are basically carrying (Comptroller) Susan Combs’ transparency agenda for public pension systems. I was going to ask you aside from that, what you see as kind of the big components of your agenda for Pensions this session

A: Well, you know, one of the both problems and advantages of having been appointed to it more or less at the last minute is I don’t have any preconceived ideas of what I ought to do. It became apparent to me very early though that even though our pensions, most of our pensions, are in relatively good shape, there are some concerns. And it didn’t take long to pick up on some of the indicators. For instance, one of the main indicators that they use is fund ratio. And fund ratios, you know, the common thinking seems to be that if fund ratios is above 80 percent, it’s OK. Well, my observation after studying it a little while is that’s probably not the way it started. My observation is it probably started with the actuaries making a comment that if your fund ratio is below 80 percent, you may be in trouble. I think over the years that’s been kind of flipped around to say if you’re above 80 you’re OK. And it’s not the same thing. So I worry about pensions that, you know, think that if I’m at 80 percent, I’m OK. And particularly, one of the other great measures is amortization period. If my amortization period is 30 years or less, I’m OK. Well, you know that may be an OK position, but it’s not the desired position. So I have determined pretty early on that we want to drive to a couple of things. I want to get as many pensions as we can closer to or even above 100 percent and I want to get the amortization rates down to zero if possible but certainly well below 30 and, you know, again to ultimately get them to zero so that our pensions are healthy and they can do what they need to do. And then let the earnings give them the ability to get the cost of living adjustments or whatever they need to do.

Q: What would be the legislative tools available to the committee to do that?

A: Well, it varies with every type of pension quite frankly whether it be the employees pension or the teachers pension or whether it be firemen or, you know, the county system or the city’s TMRS (Texas Municipal Retirement System) … each one has its own characteristics, if you will. But for the most part, I think everybody needs to look more closely at the vesting period. Make sure that they’re broad enough to where the people who deserve the pensions get them but there was one, for instance, that allowed vesting in it at a certain age and with just five years’ experience at one time. Well, that’s too limited. So I think they need to look at that. But you look at vesting periods. You look at such things as, you know, who’s making contributions or are the contributions being made on a regular basis? And what can we do to level those out and make sure that the contributions match where they have to be in the future? And I think there’s some that are very healthy from that standpoint, particularly a lot of the municipal systems where there’s pretty good contributions from both the employees and the cities. I think in some of the areas like in teacher retirement, I think there is probably a need for us to increase our contributions from the state side for teachers. I think at the same time, though, and there’s been some discussion about that, I think, among the teacher groups. And they’ve talked about, you know, if we can get an increase … on the state side, maybe we would ask the teachers to contribute a little more, too, everybody contributing a little bit to the long range viability of those pensions.

Q: Well, that’s rather important and I guess I would ask, are you going to be carrying legislation on that?

A:  I am working very closely with, and understand that this has been just barely over three weeks. So we’re still getting our feet under us. But, yeah, I’m talking to those pensions, the employee pension, the state, you know, the teacher pension … talking to them about recommendations that they might want to make regarding those issues. There is some legislation that has been introduced by others that will increase state contributions. So we’re starting in that direction.

Q: One of the things that we constantly hear during the interim and we heard it as well in the hearing on Monday, the talk of pensions systems in crisis. Invariably you hear mention of out of state systems. Is it your perception that Texas pension systems are in crisis?

A: No, my perception is that for the most part those that I’ve seen thus far are in reasonably good shape. There’s some in not so good shape. None of them I would consider in crisis at this point. But my drive is going to be to try to get them to the point where they’re unquestionably not in crisis. And that means driving towards those key indicators – a 100 percent funding … 10 or less years amortization rate – to really make sure that we’re in a very healthy position so that if we have a market crash, we’re at a point where if we fall off, we don’t fall off very far. What you have to realize is that it only takes one day to lose 20 or 30 percent of any kind of fund, whether it is pension or anything else. It takes years to build it back. And that’s what we have to be prepared for. I would say that I don’t think we’re in crisis but I think we have to make sure that we start right now to be sure that we’re not in crisis. And there are two ways to do this. One is by legislation. We’ll do some legislation. But also just providing the leadership to tell them this is where you need to be. If you don’t get there, we’ll make you get there. We’ll give you a chance to get there first. That’s the way I tend to do things and what I want to strive for is give them the opportunity to do what they have to do. And if they don’t, I think we have to look at legislation.

Q: One final question keying off again on the crisis question. Outside groups have leveraged this idea of pensions systems in crisis to advocate some very fundamental changes to the way pensions are dealt with. Moving from, again, defined benefits to defined contributions. From your perspective, do those types of reform efforts have any legs this session?

A: Well, I don’t think they will this session. Some of the pensions, like the TCDRS (Texas County & District Retirement System) and TMRS, have already gone to a cash balance plan. That has some elements of both, you know, the 401(k) approach and permanent, I’m trying to think of the right word, amortized pensions. They’ve got kind of a two-tier system. In terms of the state ERS and TRS, I don’t think we’re ready to even think about doing that. You know, I think there’s a real desire to try to keep those pensions as they are now, which are defined benefit processes. We just need to make sure that we beef up on the other side, the contribution side, to make sure we get there. And that they continue to be and maybe even get more conservative on the discount rates that they’re using to be sure that we’re tracking what’s happened today. You know, you look at these things over a long term period. So you look over 30 years and the history may be good. But I’m going to encourage them to start looking more specifically at more recent years and be aware that things can change much more rapidly in today’s world than it may have, you know, 30 to 40 years ago. And we just have to be very cognizant of that. And watch it both, I mean you still have to look at long term because that’s the way you invest. But you’ve got to know what’s happening in the short term so that you’re using the right percentages and amortization rates.

Q: I think that should about cover it. Do you have anything else that you would like to add?

A: No, just that I think there’s a lot of interest in that subject. I think Texas has done a really good job. The pensions in Texas have done a pretty good job of trying to stay viable. I know a lot of them have made changes in the past few years that have helped their situation and we just want to make sure they keep looking and never forget that the long term viability of the pension is the most important thing.

 

By John Reynolds

 

Copyright March 01, 2013, Harvey Kronberg, www.quorumreport.com, All rights are reserved