1. An Overview of Public Pensions: The U.S., Texas, and TMRS Texas Municipal Retirement System Board of Trustees May 20, 2011 Keith Brainard, Research Director National Association of State Retirement Administrators

2. Retirement Benefits Comparison Private Sector One-third of workforce has no access to an employer-sponsored retirement plan One-fourth of those eligible do not participate One-half are in an employer-sponsored plan Fewer than one in five have a traditional pension (DB) plan Universal Social Security Public Sector Nearly all have access to an employer-sponsored retirement benefit 85% participate in a traditional pension (DB plan) Three-fourths participate in Social Security

3. Distinguishing elements of public pension plans Mandatory participation Employee-employer cost-sharing A benefit that reflects the worker’s career earnings history Assets that are pooled and professionally invested A benefit that cannot be outlived

4. Key National Statistics Defined benefit plans for employees of state and local government in the U.S.: –$2.9 trillion in assets –15+ million active (working) participants 12 percent of the nation’s workforce –7.5 million retirees and their survivors –~$180 billion distributed annually in benefits –85% of state and local government workers participate in their employer’s pension plan –Of 2,500+ public retirement systems, the largest 75 account for 80 percent of assets and members –Aggregate funding level = 77% US Census Bureau, Public Fund Survey

5. Key Texas Statistics Defined benefit plans for employees of state and local government in Texas: –~$180 billion in assets –1.35 million active (working) participants –450,000 retirees and their survivors –95%+ of state and local government workers participate in their employer’s traditional pension plan –TRS, ERS, TMRS, and TCDRS account for 90%+ of assets and participants –Funding levels: TRS=83%; ERS=87%; TMRS=76%; TCDRS=92% US Census Bureau, Public Fund Survey

6. Distribution of public pension funding levels, FY 09 Size of bubbles is roughly proportionate to size of plan liabilities

7. Contribution Rates For employees in other plans who participate in Social Security: –The median employee contribution rate is 5.0 percent –The median employer contribution rate is 9.4 percent – Does not include firefighters and police officers TMRS –Employees contribute 5.0%, 6.0%, or 7.0%, based on employer election –Employers contribute based on election of benefits

8. TMRS benefits TMRS benefits can be tailored to the needs of individual cities A “full-featured” TMRS plan provides approximately the same benefit as a 2.26% multiplier in a defined benefit plan with 25-30 years of service COLAs are optional by city TMRS is unusual, if not unique, in providing the same benefit to civilian and public safety workers The TMRS benefit is higher relative to benefits for other civilian employees and comparable to benefits for other public safety workers

9. Investment return assumptions TMRS = 7.0%

10. Key reasons for opposition to public pensions Cost and unfunded liabilities –In FY 08, public pensions accounted for 2.9 percent of all state and local government spending; in Texas they were 1.9 percent –This figure is higher for most cities –Financial economists believe: public pensions understate their long-term liabilities by discounting them using their long-term expected investment return; public pension liabilities should be discounted at a “risk- free” investment return –Federal legislation has been introduced to require public pensions to report their market value of liabilities and assets to the U.S. Treasury Department

11. Key reasons for opposition to public pensions Contrast with private sector retirement benefits –Defined contribution plans have become the predominant retirement benefit among private employers –Some believe public employee retirement benefits should be no greater than what is provided to private sector workers –The primary causes of the decline in pension coverage among private sector employers are federal regulations and accounting standards, and do not pertain to the public sector –Linking public sector pensions to the private sector threatens a “race to the bottom”

12. Summary Observations Public pension funding levels vary widely Texas statewide plans, including TMRS, are in reasonably good condition and better condition than the national average Although the TMRS plan design is unusual, TMRS benefits are competitive with other public employers Changes made to the TMRS in 2008 ensured COLAs and Updated Service Credit are pre-funded, but increased cities’ required contributions Fund restructuring produces more efficient funding and lowers costs some The problems facing plans in many states are absent or less pronounced in Texas