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February 5, 2015
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Senator Kirk Watson of Austin argued the state hasn't funded its pension fund sufficiently 19 out of the last 20 years.

(AUSTIN) — Texas could face credit problems down the road if state pension funds are not dealt with, according to testimony before the Senate Finance Committee Thursday. Employee Retirement System Executive Director Ann Bishop told Senators that credit rating agencies consider the actuarial soundness of retirement funds for state employees when considering credit ratings, and state pension funds are not meeting their future debt obligations. "At some point this will impact our financial statements," she said.

Bishop said that the problem is not imminent, but every year the Legislature does not fund ERS to actuarial soundness, that is, the ability to meet its obligations over the next 31 years, the annual debt for that fund increases by half a billion dollars. "If this is not addressed one way or another, the debt is going to keep growing," she said. "The bond houses do consider this a debt." Her agency is asking for an increase in the state contribution rate to employee retirement from the current 7.5 percent to nearly 12 percent. This would allow the agency to begin paying down the debt accrued in the retirement fund.

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Georgetown Senator Charles Schwertner said that increasing healthcare funding is consuming budget resources that could go to state retirement funds.

Bishop offered some other ways to reach actuarial soundness aside from only increasing state funding. One way is to grandfather fewer people when making benefits and contribution changes. Another is to increase employee contribution rates, for example by increasing the state contribution half a percent to an eight percent and increasing the member contribution rate from 6.6 percent to eight percent, the fund would just meet actuarial soundness criteria over 29 years.

Senators on the committee reacted strongly to this issue. "We've been bragging, appropriately, about having a triple-A rating, but [bond rating house] Moody's is telling us 'Pay attention to what you're doing here'," said Austin Senator Kirk Watson. "The problem is the state is not funding what it ought to fund." Tyler Senator Kevin Eltife blamed the shortfall on past Legislatures not dealing with the issue when writing appropriations bills. "The problem has been, we have not made the tough decisions over the last 10 years to deal with these problems," he said. "Instead we've borrowed money to fill the gap. Instead we've shortchanged pensions to fill the gap." Georgetown Senator Charles Schwertner said that rising health care costs are restricting the flexibility of budget writers to deal with the pension funds properly, but added that ERS funding is close to actuarial soundness. "Compare that to states which have completely abdicated and quit funding their pensions," he said. "In general, Texas is doing much better than other states."

If nothing is done to fix the soundness of the state pension fund, the Legislative Budget Board projects the fund running out of money by 2064. Finance Chair Senator Jane Nelson of Flower Mound said Senate budget writers will confront this issue. Nelson told members that inaction on this issue is not an option. "We will do something," she said.

The Senate will reconvene Monday, February 9 at 2 p.m.

Session video and all other Senate webcast recordings can be accessed from the Senate website's Audio/Video Archive.