During its legislative session this year, the Texas Senate confirmed Josh McGee as the Chairman of the Texas Pension Review Board. This should concern everyone who cares about the retirement security of public employees in Texas because McGee is also an employee of the Laura and John Arnold Foundation, an organization that has spent millions of dollars advocating to eliminate traditional pensions. This post is the second in a new series featuring the voices of those on the front lines in Texas fighting to protect retirement security for teachers, firefighters, nurses, and other public employees.
Arnold Foundation VP Josh McGee has filled the role of Texas Pension Review Board chairman for nearly two years now. He was appointed by Governor Greg Abbott in November 2015, gaveled in his first PRB meeting in February 2016, and this year was confirmed by the Texas Senate when Republicans used the absence of an opposed member to hastily cast a vote. While McGee has been unsuccessful in pushing legislation that would force Texas pensions toward defined contribution plans, he has been steadily working to undermine the credibility of defined benefit plans.
The evidence is most visible through his public comments as a member of the Board’s actuarial committee. Thankfully, McGee has worked alongside committee chair Robert May and fellow committee member Keith Brainard, two people much more familiar with how defined benefit plans function. May has decades of experience as an actuary and Brainard is the research director for the National Association of State Retirement Administrators and was manager of budget and planning for the Arizona State Retirement System. McGee’s lack of pension fund experience has been noted elsewhere on this blog.
To their credit, McGee, May and Brainard have improved some reports issued by the PRB. The effect has been to add to the evidence that defined benefit plans work well.
One improvement is a chart tracking the assumed rates of return of 93 state and local pension funds monitored by the PRB. A special report issued by the Texas Association of Public Employee Retirement Systems used the PRB’s assumed rate data to demonstrate how most Texas pension plans have, in fact, lowered their assumed rates of return. Critics of defined benefit systems have argued the 8 percent rate of return target is unrealistic given the current investment climate. In January, 36 systems reported rates at or above 8 percent. In the October report, twelve systems had reduced their rate so that only 24 systems still target 8 percent or more. Despite what the critics say, Texas pension funds have routinely met or exceeded that expectation in the critical 20- and 30- year time periods for pension funds.
One more observation should be noted. When pension systems decrease their target rates, other measures of pension fund health are affected. Unfunded ratios can worsen. Amortization periods for the time needed to pay all liabilities, a measure comparable to a house mortgage, can also worsen. This has not happened in Texas.
The Texas Association of Public Employee Retirement Systems has watched those measures using PRB data. Even as discount rates are pushed lower, the amortization periods of most Texas systems have been improving for the last seven years. It’s a testament to pension fund trustees and their city sponsors doing a great job matching benefits with contributions and investment returns. It’s good management. Excellent management in fact.
Despite data in the PRB’s own reports showing positive trends, McGee does not believe pension system managers do a good job. His long antipathy is neatly summed in his October 18 tweet: “The history of DB plans reveals that employers have generally done a poor job of managing retirement plans no matter the design.” His attempts at discrediting DB plans and city employers have not been confined to Twitter rants.
At the most recent PRB actuarial committee meeting in October, McGee asked May and Brainard to add a measure which would compare systems’ 10-year investment return average to their target rates. “What we would be capturing here is an element of this underperformance relative to discount rate in the past with some belief that that could be an indication of future underperformance. Now of course especially if they are close it would not be that big a deal. But if we see consistent 200 basis point underperformance from the discount rate then that’s a huge red flag.”
Brainard suggested instead a comparison of “real rate of return figure that measures the difference between the nominal and the rate of inflation assumption. That to me is better indication how aggressive a fund is being with regard to their future return expectation.” Brainard and McGee exchanged thoughts on how past performance is no guarantee of future results and how unforeseen market events tend to skew some return statistics for pension systems. May effectively broke the tie and tabled the idea for future discussion.
The takeaway here is simple: Josh McGee begins with a view that “employers have generally done a poor job” managing retirement plans of any sort. Using his role on the Pension Review Board he has tried to come up with ways to identify “red flags.” If he creates enough red flags that prove defined benefit plans are not “sustainable” – another of McGee’s favorite words – then the ultimate solution becomes removing public employers from the role of managing retirement plans. Instead, employees would be left to fend for themselves managing their 401(k)s, another hot topic he promotes on his Twitter page.