Quintero: How long can Texas’ pension systems survive status quo?

The report suggests that, among all systems, unfunded liabilities, or the difference between what’s been promised to future retirees and what’s actually on hand to cover benefits, have grown to a staggering $57 billion, or $41,721 owed per active member. That fiscal chasm is, of course, in addition to the several hundred million dollars in outstanding debt already owed by state and local governments, or more appropriately the taxpayers who fund them.

What’s particularly alarming about the review board’s latest assessment is how quickly a bad situation became worse. In just the past year alone, there’s been a $4.4 billion increase in the overall gap between benefits earned and plans’ assets.

While many of Texas’ publicly funded pension plans appear to be in a less-than-desirable position, no plan, according to the report, has a bigger hill to climb than the Teacher Retirement System, which provides retirement benefits for public education retirees. As of December 2014, TRS was reported to have unfunded liabilities totaling $31.6 billion, or $36,902 per active member, while its funded ratio, or current assets as a share of liabilities, hovered just above 80 percent. Anything below the 80 percent threshold, according to the Texas comptroller, suggests “that a pension plan is not fiscally healthy” and could have trouble providing benefits without more tax dollars.

There are many reasons for the poor condition of Texas’ public pension systems, but at the root of the problem is the fiscally unsustainable defined benefit system, which guarantees retirees a lifetime of monthly benefits irrespective of the health of the pension fund. This type of pension plan was long ago abandoned by most in the private sector as it was deemed to be unsound.

That’s because defined benefit pension plans are effectively entitlement programs that run contrary to the criteria of sound budgeting principles. These principles dictate that tax-funded programs should be predictable, sustainable and not reliant upon actuaries, market conditions or lawmakers to be fiscally prudent.

Such plans create costs that are difficult to predict and limit the government’s fiscal flexibility. Inevitably, these types of programs lead to an untenable growth in government spending as more and more resources are needed to sustain them. Consequently, defined benefit plans cannot be considered sound policy.

The key to restoring Texas’ public pension systems is to stop offering defined benefit pension plans for new employees and transition the state’s workforce into a defined contribution system, which allows participants to contribute to individual investment accounts that are fueled by contributions and investment earnings. Defined contribution plans are already the norm among private sector employees because of their fiscally sound nature.

It’s yet to be seen whether the new Legislature will tackle this issue head-on or is content to tinker around the edges. In either case, the fact is that, at some point, Texas state and local governments are going to have to find a new way of providing retirement benefits. Because the status quo simply isn’t sustainable.