The coronavirus pandemic and recession are crushing local and state government budgets. Texas State Comptroller Glenn Hegar recently forecast a $4.6 billion budget deficit due to the loss of state revenue from the economic downturn and increased costs related to COVID-19 responses.
Even before this dire prediction Texas state leaders were asking government agency heads to draft plans to cut 5 percent from next year’s budgets. One exception to this 5 percent slash in spending: the public pension contributions made by government agencies.
The decision to continue making full pension contributions comes months after Texas increased its employer contributions to the Teacher Retirement System (TRS) and Employees Retirement System (ERS). Maintaining consistent pension contributions is necessary for the long-term viability of the pension systems serving Texas workers, especially when investment returns are subject to an increasingly volatile market.
In true Texas fashion, the commitment to maintaining what are all-time high pension contribution levels amidst the recession bucks trends in other states like Colorado, where lawmakers are choosing to reduce the state’s payments, which will result in underfunding the pension system, in exchange for temporary financial relief so they can spend that money in other places.
Prior to the recession, Texas’ two largest pension systems already had a combined $61 billion less than what is needed to fund the long-term benefits promised to teachers and workers. This is an especially troubling and weak financial position for pension systems to be in considering that Texas, and the country, just emerged from what was a historic 10-year bull market of large stock gains.
Initial indications show the recent stock market volatility and COVID-19 economic shutdowns could increase this pension fund deficit and make the need for future public pension contribution increases more likely. For example, if the Teacher Retirement System of Texas (TRS) earns a 4 percent return on its investments in the 2020 fiscal year an additional $6.2 billion in unfunded liabilities would be added to the system.
Texas lawmakers have a unique challenge as they think about how to fill this growing asset deficit. The state constitution caps the government’s pension contributions to 10 percent of payroll. For TRS, the state’s contribution was about 8.44 percent of total payroll in 2019, leaving little room for the legislature and local governments to adjust to future funding needs and pay down debt.
Right now, Texas seems to be making prudent decisions aimed at fully funding its retirement systems. Going forward, lawmakers should look at these exceptional times—pandemic, recession, stock market volatility, and more— as a sign that they need to make the state’s public pension systems more resilient and less vulnerable to changes in economic conditions.
Maintaining consistent pension contributions at appropriate levels and adopting more risk-averse plan assumptions, like lowering the state’s overly optimistic investment return expectations that rely on unrealistic stock market returns, would be a good start. Falling short of investment return assumptions has added over $30 billion in TRS debt over the last two decades.
If stakeholders can agree on the need to maintain current contribution levels in these tough times, they can also come together to strengthen Texas pension systems for long-term sustainability. By exempting pension payments from the 5 percent cut, state leaders have shown they understand how important these retirement systems are to the Texans depending on them.
But they’ll need to build on this commitment and make additional public pension changes to protect the retirement benefits promised to workers and to prevent future generations of Texas taxpayers from being stuck with massive debt.