Written by Keegan Shepherd, Policy Coordinator for the Texas Pension Coalition
Like clockwork, we can expect certain things to appear in a periodic fashion. Flowers show up in the spring, leaves cover the sidewalk in autumn––and every year, Truth in Accounting releases a shortsighted analysis of the financial health of state economies. This report starts from several deeply flawed premises in order to make you, a reader and a taxpayer, feel like you’re about to receive a heavy shakedown. In the process, the report is designed to make you feel like every public pension is on the verge of disaster. But, reports like these rely on deliberate misunderstandings of how pension systems work in order to give readers a needless sense of alarm.
According to Truth in Accounting, their annual report is designed to survey the financial well-being of each state’s economy. As they maintain, “39 states did not have enough money to pay all of their bills,” including Texas. Truth in Accounting asserts that this problem will only get more severe when “the states face varying and unpredictable effects from the global pandemic.” Truth in Accounting divides state debt “by the number of state taxpayers to come up with the Taxpayer Burden.” By this logic, when it’s finally time to reckon with the coronavirus-induced recession, you, the taxpayer, will be directly responsible for fixing financial mismanagement.
I’m quoting heavily because I want to make sure that I’m not mischaracterizing how ham-handed both this method and line of thinking truly are. Truth in Accounting follows a simple demonization path: many states are in debt; that debt is caused in part by unfunded pension liabilities; public employees and their pensions are directly responsible for the severity of the post-COVID economy; taxpayers need to stand up for their own money being used in such a fashion.
In reality, that’s not how pensions work. Pension math is simple––even when accounting for debt. By our own state law, a pension is actuarially sound when it has an amortization period below 31 years. In other words, pension debt in Texas is considered healthy if it can be paid off through investment returns and contributions within a 31-year period. Anything above that should require action, either from the legislature itself or from our Pension Review Board.
Ideally, the amortization period is as low as possible. We don’t want to saddle future generations with tremendous debts. However, if a system is properly maintained––by both investors and lawmakers––then it can handle a certain amount of debt. This management comes down to good investments, as well as an intervention when investors signal a lower anticipated rate of return.
Put another way: there is no repo man or bill collector who is going door to door to collect on our pensions’ unfunded liabilities. You are not going to get a call to pay up. You are not going to get a bill for $11,000. You are not going to have your car taken as collateral because, quite simply, that’s not how unfunded liabilities work. You, as a taxpayer, are not going to pony up some enormous amount of money out of the blue.
When unfunded liabilities do continue to grow, it’s legislators’ responsibility to act early. In the case of our Employees Retirement System, the unfunded liability is the size it is precisely because legislators refused to act early to restore the system to full health. This has only made the problem more expensive to fix, and unless they act during the next legislative session, that unfunded liability will only continue to grow.
Quite frankly, reports like these are designed to make you feel angry. “How dare they waste my money like that, for programs that I don’t benefit from!” This is written to make you feel that you, as a taxpayer, are somehow detached from the rest of your community and the state at large––that there are givers and takers. Nonsense. Our public employees keep our state and communities running, and they’ve earned pensions that will keep them secure in retirement. Our lawmakers have a responsibility to act accordingly so that we can keep our state vibrant and healthy after the pandemic.
