Public Pension Plans:
How Taxpayers and Public Employees
Can Get the Most from Their Investments
Each year, Texas taxpayers spend millions of dollars to fund government employee' pensions. These taxpayer-funded benefits are paid to government employees at all levels, including law enforcement officers, teachers, inspectors, regulators, social workers and any other personnel employed by a governmental entity. As is the case with most private sector pensions, government employees contribute a portion of their annual salary to help fund their future retirement benefits. The taxpayers fund the rest.
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Today, many public employee pension plans are facing significant financial challenges. A significant number of public pensions owe their pensioners by more than the funds can afford to pay out in retirement benefits. Thus, this issue impacts both the government employees who are relying on a pension to fund their retirement - and the taxpayers who are ultimately financially responsible for funding public pensions. Both the taxpayers and public employees have a significant financial interest in public pensions that are solvent and wisely managed.
Taxpayers and Public Services on the Hook
Defined benefit plans pay benefits based on a public employee's final salary, years of service and retirement age. Because all of these variables are uncertain while the employee and employer actually make contributions to the fund, pension plan administrators must make calculated assumptions about the cost of future benefits.
State and local governments must carefully manage a public pension fund's projected investment assets to ensure they keep pace with the fund's estimated benefit obligations. Unfunded liabilities can have a devastating impact on future generations. Public pension plan shortfalls inevitably leave tomorrow's taxpayers to either reduce benefits already promised to current retirees, cut retirement benefits for new employees, or scale back on existing public services.
Finding Information on Public Pension Plans
To help public employees and taxpayers better understand financial issues facing the state's public pension plans, the Office of the Attorney General created this web page. The goal is increased transparency and improved accountability. However, the Attorney General does not have direct authority over public pension plans. Interested Texans should raise their questions with public pension plan administrators and the Texas Pension Review Board. Government employees and concerened taxpayers who want to learn more about public pensions should consider the following:
- Review plan information. All public employees should carefully read and become familiar with the retirement benefits provided by their pension plans. These materials can help pensioners determine whether their plan is a defined benefit or defined contribution plan. Plan administrators often distribute important materials to their members through mail, electronic mail, brochures and Web sites.
- Contact pension plan administrators. Public employees and taxpayers can contact pension fund administrators for additional information, including fund performance measures.
Questions to ask plan administrators:
- Who are the plan's current trustees or administrators and what is their individual and professional experience?
- What is the pension fund's current unfunded liability?
- Has the unfunded liability increased or decreased in recent years?
- How can public employees submit comments, opinions or questions to plan administrators for consideration?
- Contact the Texas Pension Review Board. The Texas Pension Review Board (PRB) oversees state and local government retirement systems and is a clearinghouse for valuable information about each public pension fund. Texans can contact the PRB by telephone or online to find a directory of public pension systems, a terminology index and other helpful information:
Texas Pension Review Board
- Is a particular pension fund on the PRB's watch list?
- When did a particular pension fund submit its last statutorily-mandated actuarial report to the PRB? Was the report on time?
- How are investment decision-making processes handled within a particular retirement system or pension plan?
- What role do active members and retirees have in the investment and administrative decision-making process?
Some questions Texans may want to ask the PRB:
The Texas Defined Benefit Pension System Financial Data chart provides an overall snapshot of the health of public defined benefit pension plans in Texas. The chart was compiled from each employer’s last report to the Texas Pension Review Board.
Determining the Stability of a Public Defined Benefit Pension Plan
All public pension plans in Texas must be reviewed by accredited actuaries who determine the future liability of the plan, which is known as actuarial liability. These reviews determine whether a plan is healthy and able to meet its future retirement benefit obligations.
Three measures that can reflect the health of a defined benefit plan are discussed below. It is important to look at the performance of a pension fund over time to determine whether these pension plan financial health indicators are improving:
- Liability Per Active Member — Dividing the actuarial liability by the number of active members who contribute to the plan, reveals how much each active pension member would have to pay today to sufficiently fund the plan's promised benefits.
- Funding Period — Also known as the amortization period, this time frame is the number of years it would take to fully fund the plan based on current contribution levels. The Texas Pension Review Board prefers an amortization period no longer than 25 to 30 years. Longer funding periods may be a sign of financial instability.
- Funded Ratio — The funded ratio compares the value of plan assets with the plan's liabilities. A 1.00 ratio means that the plan is fully funded. A lower number may mean the plan is currently under-funded. Funding ratios must be considered in combination with amortization periods. A plan with a high funded ratio may also have a long funding period, indicating that, although the plan is currently well funded, over time higher contributions may be required to keep that high funding ratio.