1. Presentation to the TLFFRA Educational Conference
Keith Brainard
Texas Pension Review Board
Amarillo, September 30, 2019

2. W. Edwards Deming
Best known as a statistician
and management guru
Helped restore Japan’s post-WWII economy through management improvements
Also helped Ford Motor Company redesign its manufacturing process: Quality is Job 1

3. Edwards Deming’s Teachings
Organizations and institutions are systems
System optimization requires coordination and cooperation of the parts
Everybody in the system needs to understand how their effort or output fits into the system
Interests of system participants must be aligned
Problems occur when the system’s parts are not communicating or operating in concert with one another

4. Edwards Deming’s Takeaways for TLFFRA
TLFFRA plan problems are mostly the result of a flawed system of governance
Governance needs to be modified to align stakeholder objectives and to optimize plan outcomes:
employer ability to recruit and retain
retirement benefits that are adequate and funded
benefits at a reasonable and predictable cost to plan members and taxpayers

5. TLFFRA Challenges Governance: Size:
Pension funds and cities function largely independent of one another
No legal requirement that plans be adequately funded, or that contributions be sufficient at any point
Benefit levels may be determined without consideration of cost or funding
Texas’ constitutional and statutory emphasis on amortization period creates a disproportionate focus on one actuarial metric
Other considerations should include funding level, cost, reasonableness of assumptions, employer ability to pay, etc.
Size:
Many TLFFRA funds are small and relatively inefficient

6. 2019 Legislation
Public pension plans must develop a funding policy that identifies how the plan will reach a funding level of 100 percent
Flaw: The legislation does not require employer involvement or commitment
Public pension funds must commission an independent firm to evaluate the fund’s investment practices and performance, and to report its investment fees
Funds with assets below $30 million are exempt

7. Latest Reported Amortization Periods and Funding Levels, TLFFRA Plans
TX Pension Review Board
09-19

8. Average Investment and Administrative Expenses Based on Fund Size, Texas Plans
TX Pension Review Board
09-19

9. Comparative Factors: TLFFRA vs. Non-TLFFRA
Funding level
ARC/ADC experience
Investment returns
Investment return assumptions

10. Latest Reported Actuarial Funding Level, All Texas Public Pension Plans
TX Pension Review Board
09-19

11. Latest Reported Actuarial Funding Level, Non-TLFFRA Plans
TX Pension Review Board
09-19

12. Latest Reported Actuarial Funding Level, TLFFRA Plans
TX Pension Review Board
09-19

13. Latest Reported Actuarial Funding Level, All Plans
TX Pension Review Board
09-19

14. 10-Year Average ARC/ADC Experience, All Texas Public Pension Plans
TX Pension Review Board
09-19

15. 10-Year Average ARC/ADC Experience, Non-TLFFRA Plans
TX Pension Review Board
09-19

16. 10-Year Average ARC/ADC Experience, TLFFRA Plans
TX Pension Review Board
09-19

17. 10-Year Average ARC/ADC Experience, All Plans
TX Pension Review Board
09-19

18. 10-Year Average Investment Return, All Texas Public Pension Plans*
*10-year ending period ranges from
12/31/17 to 12/31/18
TX Pension Review Board
09-19

19. 10-Year Average Investment Return, Non-TLFFRA Plans*
*10-year ending period ranges from
12/31/17 to 12/31/18
TX Pension Review Board
09-19

20. 10-Year Average Investment Return, TLFFRA Plans*
*10-year ending period ranges from
12/31/17 to 12/31/18
TX Pension Review Board
09-19

21. 10-Year Average Investment Return, All Plans*
*10-year ending period ranges from
12/31/17 to 12/31/18
TX Pension Review Board
09-19

22. Distribution of Investment Return Assumptions, All Texas Public Pension Plans
TX Pension Review Board
09-19

23. Distribution of Investment Return Assumptions, Non-TLFFRA Plans
TX Pension Review Board
09-19

24. Distribution of Investment Return Assumptions, TLFFRA Plans*
TX Pension Review Board
09-19

25. Distribution of Investment Return Assumptions, All Plans
TX Pension Review Board
09-19

26. Flexible Plan Designs: South Dakota Retirement System
Fixed employee and employer contribution rates
COLA linked to actual rate of inflation: minimum of 0.5 percent and a maximum of 3.5 percent
Calculated annually based on the percentage that, if assumed to be paid in all future years, results in a funded ratio of at least 100 percent
2018 COLA was 1.89 percent
If the funding ratio falls below 100 percent, the plan is required to recommend changes to restore the funding level to 100 percent

27. Flexible Plan Designs: City of Houston—Police, Fire, General Employees
Target contribution rates with a five percent corridor
If contribution rate goes outside the corridor, prescribed changes are made to:
amortization period
investment return assumption
benefit levels
contribution rates
Investment return assumption of 7.0 percent prescribed in statute

28. Flexible Plan Designs: Galveston Firefighter Plan
Effective in 2025, increases in the actuarially determined contribution rate are shared equally by employees and employers

29. Steps to Actuarial Soundness
Be realistic in setting actuarial assumptions
Enlist your city as a partner in your plan’s design and financing structure
Insist on payment of the full actuarially determined contribution
Consider flexible plan design and financing arrangements, to reflect future uncertainty
Challenge your consultants
Celebrate your retirement benefit !