When evaluating the financial health and well-being of Texas’ public pension systems, the Pension Review Board (PRB), the state agency charged with overseeing state and local retirement systems, considers a plan’s amortization period to be best measure.
Here’s more from the PRB’s Summary: Study of the Financial Health of Texas Public Retirement Systems:
“After considering different measurements of public retirement systems’ financial health, the PRB determined that the most appropriate measure is a system’s current amortization period which measures the length of time, in years, needed to pay for the UAAL [unfunded actuarial accrued liability], and reflects a system’s ability to pay its normal cost plus its unfunded actuarial accrued liability.”
In addition to knowing what an amortization period is, it’s also important to know that the PRB suggests that a pension plan’s “recommended amortization period” remain between 15 -25 years, and that the “maximum amortization period” is no longer than 40 years (see below).
Source: Texas Pension Review Board
Armed with this knowledge, it is then illuminating to examine the PRB’s just-released actuarial valuations report for June 2015 that gives a status update on the health of Texas’ pension systems. As seen in the chart below, a majority of Texas’ public retirement systems have room for improvement.
Of the 93 plans monitored by the PRB, just 34 plans’ amortization periods are at or below the PRB’s “recommended” range of 25 years, while 59 plans’ amortization periods are outside the agency’s guidelines.
Worse yet, 24 state-local pension plans’ amortization periods are beyond the PRB’s “maximum” range of 40 years.
Source: Texas Pension Review Board
The idea that things “are in rough shape” is not only evidenced in the chart above, but also in the PRB’s aforementioned report: Summary: Study of the Financial Health of Texas Public Retirement Systems.
Based on the PRB’s report, from 2000 to 2013, the number of state-local retirement systems moving beyond the “maximum” amortization period of 40 years has grown sharply, from 8 plans to 25 plans. What’s more, the number of plans moving outside the agency’s “recommended” period has grown from 43 systems to 60 systems.
Source: Texas Pension Review Board
Things are clearly trending in the wrong direction on pensions, and it’s time that policymakers began considering other, more viable long-term alternatives, like defined contribution plans.