Employees Retirement System of Texas Lowers Expectations

Board of trustees votes to cut expected rate of return to 7.5%.

The $26.9 billion Employees Retirement System of Texas’ board of trustees has voted to lower its annual expected rate of return to 7.5% from 8%.

Some trustees initially wanted to cut the rate to as low as 7%, but decided on a the 7.5% by a 4-2 vote, according to the Texas State Employees Union (TSEU). The union said each board member received more than 900 emails from state employees and retirees opposed to the change. Union members from across the state also came to speak against the vote in person.

Retirees said they are worried the state legislature will compensate for the lowered assumed rate of return by shifting more financial burdens onto the system’s beneficiaries, either by forcing current employees to contribute more to their pensions, or by reducing benefits or closing the fund to future retirees.

ERS is currently 75% funded, and with an 8% expected rate of return, it was projected to be 100% funded in 35 years, according to the TSEU. However, with the expected rate of return lowered to 7.5%, the union projects the pension fund will run out of funds within a few decades. This means the pension will need more money from the state legislature to shore up its funding.

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The lowering of the expected rate of return could also mean retirees will not be able to get a cost-of-living adjustment. According to Texas law, pension funds can’t adjust for cost of living unless the pension has enough money to cover all liabilities, even after increasing retiree payments.

“Many anti-pension lawmakers will certainly use the situation to call for doing away with state employee pensions and switching new state workers into risky 401(k)’s,” said the TSEU in a statement.

Retirees who are worried about their benefits expressed their concerns publicly leading up to last week’s vote. 

“I have nothing to lose but retirement money,” said retiree Pamela Scott, who  worked at the Texas Commission for the Blind for 17 years, reported the Texas Tribune. “We were promised when I went to work: Yes, our salaries are low, but you’d have good benefits and good retirement.” 

The trustees said they were lowering expectations to protect the long-term health of the system. Investment manager I. Craig Hester, chairman of the ERS board of trustees said that a “perfect storm” of factors put pressure on the retirement system over the past two decades, including a national recession, an aging workforce, benefits changes and legislative underfunding, reported the Tribune.

The Texas ERS oversees benefits for approximately 240,000 active and retired state employees, elected officials, law enforcement officers, prison officers, and judges.

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