Texas Pension Situation Generally Good; ARC Underfunding and Oil are Concerns

Categories: Commentary |

February 17, 2015

This week we recap a Lumesis presentation from the Bond Buyer’s Texas Public Finance Conference regarding the condition of public pensions in Texas.

Texas State Pension Funding is Above Average, But For How Long?

Last week, Lumesis (Mike, Mark, and Steve) attended the Bond Buyer’s Texas Public Finance Conference.  Mike participated on a panel discussing the pension outlook in Texas.

At the State Level, Texas’s pension funding situation is better than the national average.  As of fiscal year 2013, the average funding level for Texas’s state pension funds was 80.5%.

By rough rules of thumb espoused by some analysts, a funding level above 80% is considered “fiscally sustainable”.  Mike and fellow panelist Les Richmond from BAM had some good discussion on the accuracy of this rule.  Les pointed out that this rule of thumb can provide false confidence and the single best goal for pension funding is 100%.


While Texas’s funding levels are better than average and above the 80% rule of thumb, they have been declining.  This decline is attributable to consistent underfunding by Texas of its Annual Required Contribution (ARC).

Over the years 2010 to 2013 Texas paid on average 75% of its ARC.  Over that same time period, the national average for States was 98%.  Texas has been one of the worst States for funding its ARC.

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 Texas Cities Benefited from Reforms at TMRS

Large cities in Texas generally have better pension funding levels than the national average.

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Cities in Texas provide for employee pensions in two ways:  a mix of single-employer and multi-employer plans.  The improvement in the funding ratio of Texas cities shown in the chart above is primarily due to improvements made at one of the multiemployer plans:  Texas Municipal Retirement System (TMRS).

State law established TMRS, which services 850 municipalities in Texas, in 1947.  TMRS was created with a unique 3 trust fund structure.  One of these trust funds (CSARF) was designated for retirees, and was required to be fully funded as workers retired (drawing funds from another of the funds).

This structure worked fine while the number of employees and payroll levels were growing, and the proportion of retirees was relatively low.  In the early 2000’s, employee and payroll growth slowed and retirements increased.  These demographic factors combined with a 100% fixed income investment policy pressured TMRS during the 2000’s.  In 2007, some member employers were facing an increase in their ARC of up to 50%.

In response to the crisis, several changes were made:

  • The 3 trust fund structure was eliminated,
  • TMRS’s investment policy was broadened
  • Actuarial assumptions were improved.

These changes (and the good luck of a portfolio still heavily weighted to fixed income during 2008 financial crisis) lead to immediate improvement in funding ratios for member municipalities.

Selected TMRS City Funding Levels

Old Structure             New Structure

Waco                          56%                            71%

Brownsville                65%                            75%

Arlington                    60%                            83%

Source:  CAFR

The chart below shows the change for pension funding ratios for the large Texas cities from 2011 to 2013.  The most improved cities tend to rely heavily on multi-employer systems (like TMRS), while the cities with declining ratios tend to use single-employer plans.

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Texas has Been Proactive Regarding Pension Issues; Oil Prices a Wildcard

Although the State has been underfunding its ARC, the Legislature has shown a willingness to address pension issues.  The reforms at TMRS and more recent changes to the Texas Teacher Retirement System were both highly significant.

Several years ago, the Legislature established an            a State Pension Review Board with a mandate to “oversee all Texas public retirement systems…. in regard to their actuarial soundness…” This is also a positive sign.

A key issue to watch in the future is whether the State improves its ARC funding.  As with many fiscal issues in Texas, this could be a difficult challenge if low oil prices continue (we tend to be more worried about this than most of the Texas politicians).  For the single-employer locals, the outcomes of legal challenges to reform are also important to watch.


Have a great week,

Michael Craft, CFA


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