A powerful Texas Senate committee on Monday unveiled and quickly voted out a major overhaul to the state’s employee pension plan.
Senate Bill 321 by state Sen. Joan Huffman, R-Houston, would enroll new employees eligible for the Texas Employees Retirement System in a cash balance plan — similar to a common 401(k) retirement account — instead of the traditional, defined benefit pension plan. The Senate Finance Committee approved the measure by a vote of 13-0, with Democratic state Sen. Royce West of Dallas voting present.
Traditional pensions are calculated based on a set formula that considers factors such as length of employment and salary history. Huffman’s proposed change would mean employees’ accounts would instead be credited with a set percentage of their annual compensation plus interest.
Huffman said the change is necessary to ease the financial burden on the state and create a sustainable retirement plan for state employees. Texas’ pension fund faces a $14.7 billion shortfall, she said.
“This is a financial problem that will not go away without legislative action,” Huffman said.
The proposal would only affect state employees hired after Sept. 1, 2022. New workers would be required to contribute 6% of their pay to the retirement account, down from the 9.5% required of current state employees. It would guarantee 4% annual interest with a gainsharing provision that could boost interest as high as 7%. Gainsharing is a method by which employees receive additional compensation if they meet certain, predetermined benchmarks. The current state pension plan has a return target of 7%, but senators pointed out that it has fallen short of that goal in recent years.
Law enforcement employees and custodial workers would contribute an additional 2% of their earnings to a separate fund, as current workers in those roles do. They would also be eligible for the 4% guaranteed interest.
At the time of retirement, Texas would match the value of an employee’s account at 150% of its value. The supplemental fund for law enforcement and custodial workers would be matched at 300%. Both matches are the same as are available under the current pension plan, Huffman said.
Joe Newton, an actuary at GRS Consulting, which advises governments across the country on issues including pensions, told lawmakers that the overhaul would be “very comparable” to similar reforms that have been implemented by other states.
Tyler Sheldon, legislative director for the Texas State Employees Union, said that maintaining the traditional pension plan is “the preferred method and has worked for decades.” Sheldon pointed to a 20% turnover rate among state employees and urged the committee to “take into account how this will impact state employees.”
“It’s more important than ever that we look into pay raises and increases and benefits and not change anything that will adversely affect our state workforce,” Sheldon said.
Joe Hamill, Texas political and legislative director for the American Federation of State, County and Municipal Employees, cautioned that “a pension plan that provides a modest and secure retirement is key to recruiting and retaining quality state employees.” AFSCME represents workers at the Texas Department of Criminal Justice and retired state employees.
Huffman’s proposal, as advanced by the committee, would require the state to pay $350 million per year to the retirement system to shore up its debt. But Huffman said she intends to introduce an amendment on the Senate floor that would increase those payments to $512 million per year.
State Sen. Jane Nelson, R-Flower Mound, the committee chair, praised Huffman for her work on the overhaul, but said that “we still have some kinks to iron out.”
Huffman acknowledged that the sweeping, 15-page overhaul to the state’s pension system that was unveiled on Monday will likely undergo additional changes on the Senate floor and referred to the process as “very transparent.” She said she has worked closely with state Rep. Greg Bonnen, R-League City, who is carrying the measure in the Texas House.
Huffman said she did not solicit input directly from state workers prior to the hearing. Huffman did reach out to employee unions, she said, and they “seem to be fine with” the changes.