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Comptroller Pensions Report

Comptroller Pensions Report

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Published by: Texas Watchdog on Dec 05, 2012
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Keeping A Sharp Eye On Public Pension Obligations
Susan Combs
 Texas Comptrollerof Public Accounts
 Your Money andPension Obligations
A “Texas, It’s Your Money”report digging deeper intopublic pensions
 
2
PROTECTING TEXAS’ ABILITY TO PROSPER 
This report examines the effect of public pension
obligations on government nancial stability.Many local and state governments around theU.S. are burdened with public pension programs that are underfunded. A recent study by the PewCenter on the States, for example, notes that
states are
$757 billion
short in funding pension promises.Pension costs, by their very nature, are thornyissues to address. Public pension plans help fund the post-employment years of public servants.But the plans’ long-term obligations typicallyexceed their assets.
Texans aren’t ones to run from a challenge —
 we meet it head on. By recognizing early how public pension plans affect state and localnances around the country, state and
 local governments can act on this issue
 before it becomes a crisis in Texas.
Texas’ public pension
situation doesn’t
appear as alarming as
 the problems faced bysome other states. But
 the cost of these state
and local obligations aregrowing, and we shouldn’tassume that problems willnever arise. We encourage you to visit
www.TexasItsYourMoney.org
and to read this report for a detailed look at the conditionof state and local employees’ pension plans. You will also nd the other reports in this series thatshine light on the growth of taxing entities and public debt in Texas.
A
s Texas Comptroller, one of the most important duties of my ofce is to chart the probable course of the Texas economy, which affects the taxes that support state and local governments. We are committed to understanding the factors that inuenceour economy and sharing our knowledge with Texas taxpayers.One important issue is the health of public pension systems, which provide retirement security for millions of Texans — and whose investments, in most cases, took a major beating in the tough economic years of the Great Recession. Today, some of thenation’s largest public pension systems are in severe nancial dif 
-
culty, placing in peril both workers and government budgets,such as those funding public education and transportation.In Texas, many public pension systems appear to be stableand should be able to support the workers who have paid into them through retirement. But the challenges facing these systemsare signicant and will continue, calling for continuing vigilancefrom our leaders and our citizens.I hope you nd this report informative. As taxpayers, allTexans should be aware of the public pension issue.”
SUSAN COMBS
EVERY TEXAN’S RIGHTS
YOU HAVE A RIGHT
 to know who is taxing you and for what purpose. Your hard-earned dollars deserve the light of day,down to the penny.
YOU HAVE A RIGHT
 to know exactly how and where state and localgovernments spend your money.Through our Web resources such as Where the Money Goes, we’ve opened the state’s books for public inspection, and we’reencouraging all other levels of Texas government to make transparency their highest priority as well, by placing annual budgets, annual nancial reports and virtual “check registers”online.
YOU HAVE A RIGHT
 to expect that government obligations are funded transparently,and that government nances are managed soundly and prudently.Government should provide its citizens with an honestassessment of the nancial challenges it faces.
YOU HAVE A RIGHT
 to know about the public pension obligations thatare approved.
YOU HAVE A RIGHT — AND A RESPONSIBILITY —
 to be aware of and engaged in the affairs of your government.Our democracy depends on it.In short, you need to know, and have the right to know.
F
ollow the Comptroller’s“Texas, It’s Your Money” series of reports at
www.TexasItsYourMoney.org
 
 
 S u s a n  C o m b s
 T e x a sC o m p t r o ll e r  o f  P u b l i c A c c o u n t s
 Y o u r  M o n e y  a n d  T e   a x i n g   F a c t s
A T e x a s, I t ’s Y o u r M o n e y ” r e p o r t o n  w h o i s t a x i n g  y o ua n dw h y.
YOUR MONEY AND PENSION OBLIGATIONS
 
SUSAN COMBS:
TEXAS COMPTROLLER OF PUBLIC ACCOUNTS
3
FUNDING PUBLIC PENSIONS: A GROWING ISSUE
PENSION TERMS - DEFINED
PENSION
 
is a retirement benetplan oered to employees by anemployer. The employee and/or em
-
ployer makes periodic payments, usu
-
ally monthly, towards the investmentfund. After retirement, the employeetypically receives a monthly payout.In Texas, contributions to local plansmay be specied in state law or setthrough agreements between planadministrators and the sponsoringlocal government.
ACTUARIAL ASSETS
 
are
 
the valueof pension plan investments andholdings as assessed by an actuary.Actuaries often use valuation methodsthat spread the eects of short-term market volatility on assets overtime, a process called “smoothing”that results in less dramatic annualchanges in assets and, consequently,less dramatic annual changes incontribution rates.
ACTUARIAL SOUNDNESS
 
is a
pension fund’s ability to pay cur
-
rent benets and cover the cost of promised benets over a given periodof time.
AMORTIZATION PERIOD
 
is
 
the length of time required topay o a plan’s unfunded liability,based on current employer andemployee contributions and actuarialassumptions.
ANNUAL REQUIREDCONTRIBUTION (ARC)
 
is therecommended annual combinedemployer and employee contributionthat covers the annual cost of theplan’s current earned pension benetsand a portion of the plan’s unfundedliability. The ARC is calculated to keepthe plan actuarially sound.
FUNDED RATIO
 
is
 
a plan’s currentassets as a share of liabilities.
UNFUNDED LIABILITY
 
is
 
theshare of all pension benets earnedby current and former employees thatcannot be covered by current planassets.
RATE OF RETURN
 
is
 
the ratio of money gained or lost on an investmentcompared to the amount of moneyinvested.
I
n summer 2012, several municipal bankruptcies in the United Statesfocused public attention on a growing nationwide problem: the increasinginstability of many state and local public pension programs.Public pension plans depend on
investment income
for roughly
two-thirds
of their funding; employer and employee contributions supported by taxes and fees comprise the remaining
third
. For many plans, contribu
-
 tions have not adequately funded promised benets. The dramatic nan
-
cial losses of the 2008 recession have further worsened pension under
-
funding to the point where investment gains may not fully fund plans.
More than
15 percent
of Texas workers are employed by state and localgovernment. Many of these workers are in traditional dened benet pen
-
sion plans that promise regular payments to retirees. Some employers havefailed to contribute enough to fully fund promised benets and/or experi
-
enced investment returns that fell short of assumptions, exacerbating thefunding gaps in their pension plan. While some of the largest plans, givencurrent contribution rates, promised benets and plan assumptions — in
-
cluding rates of return, retirement age and longevity — are projected torun out of money in the future, most others are on track to be fully funded within 30 years.State and local governments and their employees must maintain adequatecontributions to ensure their plans remain scally sound.
 
Public pension plans are supported by
tax and fee revenue
, in theform of employer contributions and public employee salaries, and
investment earnings
.
 
These contributions and investment returns must be sufcient tofund
retirement benets
promised to employees.
 
The adequacy of these revenue sources will depend upon specicelements of pension design and basic
actuarial assumptions
, or predictions of future events, including investment returns andaverage employee pay, length of service and life expectancy.
 
The accuracy of these basic assumptions can result in
large
dierences
in the plan’s costs over time, with serious implications for taxpayers and the plan’s members.
STATEWIDE PLANSLOCAL PLANS
NUMBER OF PLANS
881
NUMBER OF MEMBERS2,096,860183,807TOTAL NET ASSETS$165,881,743,166$28,146,868,760PERCENT OF PLANS AT OR ABOVE80 PERCENT FUNDED RATIO86%*19%PERCENT OF PLANS WITH 30 YEAROR LESS AMORTIZATION RATE50%67%
*Only 7 o the state’s 8 pension plans were included in this calculation, as Judicial Retirement SystemPlan One is a closed, pay-as-you-go plan. Funded ratio is calculated with actuarial asset value.(See more details on these public pension plans beginning on page 8.)Source: Pension Review Board
SNAPSHOT OF STATEWIDE AND LOCAL PENSION PLANS IN TEXAS
NOVEMBER 2012

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